Chapter 7- Gross Domestic Product (GDP): the market value of all final goods and services produced within a country during a specific period (usually a year)-Market Value: Goods are weighted according to the purchase price of the good and service Product Price Contribution to GDP5 apples 5 cents $0.255 oranges 10 cents $0.50$0.75-The dollar is the common measure for the value of the good/service produced-Goods that are worth more add more to GDP-Total spending on all goods and services produced during the year is summed to obtain annual GDP -Final Goods and Services: Final goods/services: goods and services purchased by their ultimate user-Intermediate goods/services: Goods purchased for resale or for use in producing another good or service EX. If you buy bread and make sandwiches to sell. The bread does not get counted into the GDP, only final products get counted into GDP-Avoid double counting: we don’t count intermediate goods because their value is contained within the final good EX. Cannot count all the apples when making apple juice because then you are double counting (count 2 apples and 3 apples juices)EX. Producer Revenue Cost Value AddedFarmer (Wheat) $0.30 $0.30Miller (Flour) $0.65 $0.30 $0.35Baker (Bread) $0.90 $.065 $0.25Grocer $1.00 $0.90 $0.10X X $1.00 GDPEX. Are tires and intermediate good or a final good? Depends, tires bought buy car manufacture are intermediate, but if you buy a tire separately (like a tire swing or to replace a busted tire) then it is a final good. -Produced: Only goods and services that are produced are included in the GDP, transfers are not.EX. Not counted-$100 graduation gift (jut transferred from grandma to you)-Welfare payment, Social Security, and unemployment (did not have to produce anything to get that money)-Financial Transactions, Buying Stock (note: sales commission would be counted in GDP) But, what you pay the stockbroker for his/her services is included in GDP-With in a Country: GDP counts only goods and services produced with the geographic borders of a country EX. Production of a Japanese car factory in the U.S. is included in the U.S. GDPEX. Production of an U.S. Nike Shoe factory in Indonesia is not included in U.S. GDP (even if U.S. owns factory in Indonesia, it does not count to U.S. GDP because it is being produced in Indonesia) -During a Specific Period: Only goods produced in 2014 are included in the figure for 2014 GDPEX. How will a house produced in 2003 and resold in 2013 affect 2013’s GDP? None at all, unless you added something to the house to make it worth more (difference is added to 2013’s GDP), and the only the sales commission that the realtor makes will be added to 2013’s GDP. - 2 Ways to measure GDP1. Expenditure Approach: Y= C+I+G+NXY= GDPC=Consumption-Household spending on goods and services during the current period-Consists of:o Durable goods: microwave, refrigerator, washing machine, ect.o Nondurable goods: food, toilet paper, paper towel, plastic bags,ect. o Services: Doctor, lawyer, landscaper, ect. *Consumption is the largest component of GDPI= Private Investment-Production or construction of capital goods that provide future service -Consists of:o Fixed Investment: new conveyer belt (to help enhance production)o Inventory Investment: (Ending Inventory – Beginning Inventory = Inventory Investment)EX. $1,000 (fixed inventory) + ($800 - $300) (Inventory Investment) = $1,500*Investment – depreciation = Net InvestmentG=Government Consumption and Gross Investment -Included spending on:o Goods and Serviceso Capital goods: missals, aircrafts, highways -Does not include transfer payments -Government expenditures are counted at cost (not value) to tax payersEX. The government hires a police officer and pays him $30,000 a year, that gets included in the Government Expenditures GDP NX= Net Exports (X=Exports – M=Imports = Net Export)-Exports: domestically produced goods and services sold abroad -Imports: foreign produced goods and services purchased domestically; Clothing, sporting goods2. Resource cost-income approach: GDP (Expenditure approach) = GDP (Resource cost-income approach)o Employee Compensation (54.9%): income you make for working for someone o Proprietors’ income (7.1%): income you make for working for yourself o Rent (2.4%)o Corporate profits (12.4%)o Interest income (3.9%)o Indirect business taxes (7.7%)o Depreciation (12.9%)o Net Income of Foreigners (-1.3%) o =GDP- Gross National Product (GNP): total market value of all final goods and services produced by the citizens of a country o Counts the income Americans earn abroad o Ignores the income foreigners earn in the U.S. o EX. Toyota factory run by japs in the U.S. will increase Japans GNP, andthe Nike Factory in Indonesia run by U.S. citizens will increase U.S. GNP. If Nike opens a factory in Oregon run by U.S. citizens, both U.S. GDP and GNP will increase- Adjusting for price changes o Nominal Values: values expressed in current dollarso Real Values: values that have been adjusted for the effects of inflation -EX. Movies: Avatar was #1 then when adjusted for inflation (because back in the day movie tickets were cheaper) Gone with the Wind was #1 and Avatar was#14-EX. Gas prices seem higher now then back in the day, but that is because the price that gas used to be has not been adjusted for inflation -EX.Year Cost of Coke Cokes in an hour1930s $0.05 $0.30 62014 $1.25 $7.50 6- What is a Price Index?o Price Index: measures the cost of purchasing a market basket of goodsat a point in time relative to the cost of purchasing the identical market basket during an earlier reference period o PI= cost of bundle in current year/cost of same bundle in base year -EX. Beer and liquorQuantity Price in 20142014 Total Price in 2000:2000 Total:Beer 10 $3.00 $30.00 $2.00 $20.00Liquor 5 $20.00 $100.00 $16.00 $80.00Total: $130.00 $100.00PI= 130/100= 1.3- 2 key Price indexes o Consumer Price Index (CPI): Indicator of general level prices. Compares the cost of a typical market basket in a specific period tothe cost of the same basket in a different period o Boarder than CPI, includes capital goods and other goods purchased by businesses and government -EX.CPI: Beer Liquor Toothpaste Birth Control Trash Bags GDP Deflator: Beer Liquor Toothpaste Birth Control Trash Bags Highways Missals Fork lifters - Which should we use?o Depends:-How do rising prices
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