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GSU ECON 2105 - Gross Domestic Product

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Gross Domestic Product Economy is like a giant factory producing different goods and services to satisfy the needs and wants of the country. In the factory are many different variables we can measure. Rate of production, cost of raw materials, market prices of finished goods. a) How would you measure value of different goods and services produced? o Add up how much people spend to buy them the total expenditures factory’s production would give a good idea of how much a factory produced. - When measuring size of economy we measure expenditures of the dollar value of all the factory services produced during a fixed period of time (1 yaer). This is nominal gross domestic product (GDP). We count only FINAL goods and services so we don’t count expenditures twice. - A final good or service is one sold to the end user and is not used to produce another product for sale. o Two new tires rolling to an assembly line, one ships to Ford motors to be put on acar before it goes out to dealerships. The other ships to a local tire stores available for us to buy and install on something you already owno The tired sold to ford motors is an intermediate good not a final good. - An intermediate good is a good that is used to build or make another product that will be sold. It is not part of GDP. If this tire were counted as part of GDP we would count it twice (when it was purchased by ford and again when a consumer buys the car. o The tire that is shipped to your local tire shop is final good.- We don’t use GDP on used goods. (it was already counted as GDP in another year). Or the sale of financial assets such as stocks and bonds. They represent transfer of goods not production. - When measuring GDP we classify them into 4 categorieso Consumption- purchases made by households.o Gross investment- purchases of capital goods made by firmso Government purchases- purchases made by local, state, and federal governmentso Net exports- difference between exports and imports.GDP = C + I + G + NX The largest areas of GDP are consumption and government purchase- Consumption includes clothing, food, electronics, and recreation. In economics, we classify each of these newly produced goods in one of three categorieso goods have an average useful life of three years or more are called consumer durables Appliances, cars, and furnitureo Goods with a useful life of less than three years are consumer nondurables.  Food and clothingo Services are outputs of direct activities of another person and intangible Haircuts, medical services, education and entertainment. - Consumer spending is the best way to know if economy is growing or shrinking. - Government Purchases calculates all final goods purchased by federal state and local governmentso Police cars, fire engines, tanks, and office supplies. o Services such as teachers, police officers, and security Gross Investment- Investment is the formation of productive capital within an economy. Investment occurs when firms use funds to buy goods and services that will enhance productivity and increase outputo Purchase of housing, tractors, tools and factories. 1/5 of GDP is used for investment. - Business fixed investment- purchases by firms of new capital goods (offices, factories, tools, machineries)- Residential investment- Firms build houses and sell to consumers- Inventory investment- Changes in inventory that firms hold on hand are included in GDP  Can be positive if inventories are growing, and negative. Counted as GDP when they were produced not sold.- To calculate gross investment, add up business fixed, residential, and inventory together.  Net Exports - Exports- manufactured domestically but sold abroad. o Airplanes, food, technology, and services (banking).o Since produced domestically they are part of GDP. - Imports- Goods and services made in other countries that we purchase o Japanese motorcycle, Chinese clothing, Columbian coffeeo Since not domestic, we subtract these from GDP NX = X – M  Real GDP- Measures constant dollar value of all final goods and services produced in a country overa fixed time.  To calculate real GDP, compare the market value of products in two years. First year is the base and every other year will be the compared year. - Real GDP- Multiply the quantities of each good produced in each year by base year prices.  GDP Price Index GDP price index = nominal GDP / real GDP x 100If larger, prices rose from one year to the next.  GDP imperfect- At-home parent is a service that’s neither bought or sold in maket, its not counted in GDP. GDP underestimates economic activity. Also underestimates underground economy(outside formal markets where trade happens). Goods and services are traded. - GDP doesn’t count intangibles (changes in product quality or depletion of natural resources)  Computers- you could have bought a desktop for $1000 yeas ago, and now you bought a laptop for $1000, GDP doesn’t recognize the quality improvements (laptopsare much more updated and useful but is labeled the same cost as a desktop from years ago) Every years cars will get better, computers are faster, it doesn’t account for depletion of natural resources. If resources priced are too cheaply, GDP wont reflect the true value of whats


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