GDP Powerpoint 2011-2012

GDP and Economic
Well-Being
•

•

GDP is the best single measure of the
economic well-being of a society.
GDP per person tells us the income and
expenditure of the average person in
the economy.


GDP
• IS THE MARKET VALUE OF ALL FINAL GOODS
AND SERVICES PRODUCED WITHIN A COUNTRY IN
A GIVEN PERIOD OF TIME
• ( IN OTHER WORDS IT PUTS A DOLLAR VALUE FOR
AN ECONOMIES PRODUCTION)
• Example-Fords made in Michigan go towards GDP
• Hondas made in Michigan go towards GDP-even though
the company is from Japan.
• As long as it is in our borders it counts towards GDP


INVENTORY IS A FINAL GOOD
• Goods that are placed into inventory are
considered to be “final” and included in
GDP as a firm’s inventory investment.

GDP-FINAL AND
INTERMEDIATE GOODS
• MEASURES THE FINAL GOOD
• IF A PAPER COMPANY MAKES PAPER AND
SELLS IT TO HALLMARK WHICH THEN
SELLS THE GREETING CARD ONLY THE
FINAL PRICE OF THE GREETING CARDS IS
MEASURED BY GDP
• INTERMIDIATE GOOD-THE PAPER
• FINAL GOOD-THE CARD.


GOODS AND SERVICES ARE
MEASURED WITH GDP
• GOOD-CD OF MIKE
JONES YOU BUY
• SERVICE- CONCERT
OF MIKE JONES


WITHIN THE COUNTRY
• IF TOYOTA MAKES
A CAR IN THE US
THAT GOES
TOWARDS THE US
GDP
• IF EXXON SELLS
GAS IN CHINA
DOES NOT COUNT

TOWARDS GDP


IN A GIVEN PERIOD OF TIME
• THE GOVT WILL
TAKE THE GDP
DATA AND AJUST IT
FOR SEASONALITY
• FOR EXAMPLE
XMAS IS A BIG
BOOST TO GDP


• If a Canadian citizen works temporarily in
the United States, the value of his output is
included in GDP for the United States. If
an American owns a firm in Haiti, the value
of the production of that firm is not
included in U.S. GDP.


GDP
• GDP-GROSS DOMESTIC PRODUCT

• GDP MEASURES TWO
THINGS AT ONCE
• TOTAL INCOME OF EVERYONE IN
ECONOMY
• AND
• TOTAL EXPENDITURE ON THE ECONOMY’S

OUTPUT OF GOODS AND SERVICES


GDP
• IT CAN MEASURE BOTH AT ONCE
BECAUSE INCOME MUST EQUAL
EXPENDITURES
• BECAUSE IF SOMEONE BUYS SOMETHING
FOR 10 DOLLARS THEN THEY HAVE SPENT
10 DOLLARS(EXPENDITURE) AND
SOMEONE HAS RECEIVED 10
DOLLARS(INCOME)



GNP – Ownership

All goods/services produced

legally for pay by citizens of a country.
[Citizenship mattered, not geography]

China
Plano, TX

GDP - Location

All goods/services produced

legally for pay in a country’s borders.

[Geography matters, not citizenship]

Provo,UT

BMW in Waco

Europe
Nike in
Indonesia

in Chicago

Honda in Ohio

The difference between GDP & GNP is about 2/10 of 1%.


PROBLEMS WITH
CALCULATING GDP
• NONMARKET
TRANSACTIONSSERVICES OF STAY
AT HOME MOMS
OR A MECHANIC
WHO FIXES THEIR
OWN CAR NEVER
GET COUNTED IN
GDP


PROBLEMS WITH

CALCULATING GDP
• DISTRIBUTIONDOESN’T SHOW
THAT 90 PERCENT
OF THE WEALTH IN
THIS COUNTRY IS
WITH LESS THEN
10 PERCENT OF
THE PEOPLE


PROBLEMS WITH
CALCULATING GDP
• KIND AND
QUALITY OF
PRODUCTS- A
CRAPPY PRODUCT
IS COUNTED JUST
A MUCH AS ONE
THAT LAST A LONG
TIME.


1. Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.

B. KFC buys chickens to eventually sell to customers.


Only Final Sales($20) Count [to prevent

Value of Output($)

Intermediate Good

Value Added – increase in the
market value at each stage
Final Good
Retail Shirt
$8

Wholesale
Shirt
$7

$12

8

$7

7
Cloth

$5

$4

$1

Cotton

0

$1

$1

Cotton
Farmer

Textile
Mill

Sum = $38

$4
$1

Shirt
Manufacturer

$4
$1

Retail
Store

Value Added ($)

$20 “Wife-beater”

Shirt from Kohls
$20

“multiple counting”($38)]

4
1

$20 = sum

So, to avoid “multiple counting”, we count the $20 final price, not $38.


2. 2nd Hand Sales
– no current production.
A. 1957 Chevy bought in 2007
This falls under the rule of

“Do Not Double Count”.
Count”

57 Chevy [Gas was 30¢ gallon.]

Salesman

[It has not been produced again in 1963 & would not count.]
The salesman is doing productive work. His commission would count.
B. Boots produced in 1980 are bought in a Thrift Store in 09.

They also have not been produced again.

Salesman’s commission would count.
You are buying his services.
Shoe salesman


• So again, second hand sales, let’s say
from Salvation Army, do not count.

The salesman’s commission does count.


3. Pure ly Financ ial Trans ac tio ns – stocks, bonds, CDs.
There is no current production.
production
Ex: If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm. Buying bonds is making a loan.
I’m not buying a Dell computer
but part ownership of Dell.
Exchanging one financial asset for another
[swapping bits of paper]


4. A. Public Transfer Payments–welfare, unemployment, social
security.
security [There is no contribution to final production]
production
“Now that I’ve gotten my
welfare check, I can get an
iPhone 3G”

B. Private Transfer Payments,
Payments like your
parents giving you $250 cash for Christmas,
Christmas
or - $100 for making an “A” in economics.
economics
[Just transferring funds from one private
individual to another private individual]


Unreported “legal” business activity [tax avoidance[ does not count.
This is two-thirds of the “underground economy.”
Before LASIK Surgery

Then he has LASIK but the
surgeon doesn’t report
$500 of his $3,400 bill?

And what if this
waitress doesn’t
report all tips?
tips

And what if the
dentist doesn’t
report $400 for
teeth whitening?
whitening

Illegal business activity, because it goes unreported, also does
not count. Making up 1/3 of the “underground economy,” also
called the [“black market”]
market” it includes murder for hire,
gambling, drugs, prostitution, and money laundering.
“Give me the money in
your purse, but at least it
will not count in GDP.”

Money Laundering
Making money illegally (drug money)
and making it look like it was legally
earned (like buying a laundry mat
or car wash that deal in cash) and
report it as legally earned.


Ille g al

Le g al

$300 B

$600 B

Dr
ug
B ri
be r s $

y$
1
35 20
Ga m b li

lin g a n d
Lo a n S h a rkin
g $10

$3
5

ds

Go
o

St
o le
n

is the “Underground”

Re
Co n ts & Ro y a ltie s $ 3 0
r
rp
or
at
eP

ro
fi t
s

and
S alarie s $185

55
t$

What doesn’t get reported

pl
m
E
f
l
Se
25
Oth e r Le g a l $

es
er
In t

20
$
y
h
p

a
r
P o rn o g
3 0 $20 0
$
u d e g a l $3
a
r
F
n
Ill
r
o
ti
he
t
u
O
it
t
Wag e s
os
r
P

5
5
2
$
lo y e d

$5
0

What gets reported is
the “Above Ground”