Slide 1Questions of the YearSlide 3OVERVIEW2013 Current Gross Domestic Product20 Largest Economies, 1961GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?GDP: WHAT DOES IT MEAN?CALCULATING GDPExpenditure ApproachGDP Components: C, I, G, NXGDP Components: Consumption (C)GDP Components: Investment (I)GDP Components: Government (G)GDP Components: Net Exports (NX)Slide 19Components of U.S. Nominal GDP 2013GDP Expenditure Components, 2009Calculating GDP using expenditure approachMEASURING GDPNominal vs. Real GDPCalculating GDP: ExampleCalculating GDP: Nominal GDPCalculating GDP: Real GDP (2007=base)Calculating GDP: ObservationsBIG IDEA IN ECONOMICSCalculating GDP: The GDP chain price indexGDP Chain index: Calculation and InterpretationGDP Chain Price Index: Annual InflationGDP Chain price index: ObservationsINCOME AND EXPENDITUREPractice – GDP ComponentsKey Terms and IdeasMACROECONOMICSModeling things in the aggregate1Questions of the Year•What do we mean by ‘The Economy’?•Exactly what kind of a mess are we (still) in?•What is a “recession”?•Did the stimulus plan work?•What is the best way to “stimulate” the economy?•Tax cuts for businesses?•Extending unemployment benefits?•When will the job market improve?•What should the unemployment rate be?•Is inflation around the corner?•Does a small amount of inflation even matter?•Macroeconomics is controversial, and unfortunately, there is often no consensus between economists for answers2TOPIC X:GROSS DOMESTIC PRODUCT (GDP)Measuring a Nation’s Total Output, Income, and Standard of Living All at Once!3OVERVIEW•2013 U.S. nominal GDP: $16,800,000,000,000•What does that number even mean? How is it calculated?•U.S. began officially keeping track of GDP during the 1930’s•Used to track the total output of a country or economy•Today, GDP is one of the most closely watched macroeconomic variables around the world•Together with inflation and unemployment•Policymakers use GDP as a type of barometer to track the overall “health” of an economy42013 Current Gross Domestic ProductU.S.ChinaJapanGermanyFranceBrazilUKItalyRussian FedIndiaMexicoLuxembourg$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,0005Source: World Bank; World Development Indicators; numbers in billions$16.8 Trillion$60 BillionTop 10 World’s Largest Economies plus Mexico and Luxembourg20 Largest Economies, 1961U.S.UKFranceJapanChinaItalyCanadaIndiaAustraliaSwedenBrazilMexicoSpainNetherlandsBelgiumSwitzerlandVenezuelaTurkeyS. AfricaAustria$0$100$200$300$400$500$6001961 GDP6Source: World Bank, World Development Indicators; Numbers in billions, nominalGDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductGDP is the market value of all final goods and services produced within a country during a given time periodMarket Value •GDP is measured in dollars, not amount of “things”•It is the value of what is produced, measured in dollars in the US•not 100 cars and 50 haircuts, but rather the price of 100 cars and 50 haircuts•Goods that don’t have a market value (cleaning your own house) AREN’T included in the GDP7GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodFinal•GDP does not count everything produced, but only final goods (goods sold to their final users)•When Ford buys a car battery from Die Hard, this is NOT counted•When you buy a Die Hard battery from Sears, it is counted •Intermediate Goods: goods used up in production along the way in the production of other goods 8GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodGoods and Services •GDP includes tangible •Shoes, hamburgers, beer•GDP also includes •haircuts, car repair, dry cleaning 9GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodWithin a country•GDP includes only goods and services produced inside a country’s borders, no matter who owns the factory• Cars produced from a Honda plant in Indiana counts towards U.S. GDP•Cars produced from a Ford plant in Tokyo count towards Japanese GDP10GDP: WHAT DOES IT MEAN?GDP: Gross Domestic ProductThe market value of all final goods and services produced within a country during a given time periodDuring some time period•GDP includes only those goods and services during that time•Only counts new goods and services•Purchase of a new car counts towards GDP•Purchase of a “certified previously owned vehicle” does NOT•Measured quarterly (every 3 months) and yearly 11CALCULATING GDPHow do we measure the value of output exactly?•GDP is measured/calculated by the Bureau of Economic Analysis under the Department of Commerce (www.bea.gov) •calculated and reported on a quarterly and yearly basisIt is measured in several different ways1. Value-added approach2. Expenditure approach3. Sum of factor payments approach12Expenditure ApproachExpenditure Approach: calculating GDP by adding the value of all final goods and services purchased by each type of final user•The Expenditure approach works by simply adding up how much is spent on U.S. produced goods•Theory: if the world spent $16 trillion on new U.S. goods and serviced, then the U.S. must have produced $16 trillion worth of goodsWho buys our stuff?• U.S. household•U.S. businesses •The government •Foreign buyers13GDP Components: C, I, G, NXC: Comsumption (spending by US households)I: Investment (spending by US firms)G: Government (spending by US government)NX: Net Exports (spending by foreign buyers)Adding up all components yields GDP (given as Y):14GDP = Y = C+I+G+NXGDP = Y = C+I+G+NXGDP = Y =C+I+G+(X-M) GDP = Y =C+I+G+(X-M) orGDP Components: Consumption (C)C: Consumption SpendingIncludes spending by US households on all new goods and services, regardless where the good is produced 1. Durables: goods that typically last longer than 2. Non-durables: goods that typically last less than 3. Services•This is the largest component of GDP •About two-thirds - meaning about 2/3 of all final goods and services produced in US are purchased by US households15GDP Components: Investment (I)I: Investment SpendingInvestment in economics means purchasing a good