ECON 2105 1st edition Lecture 4 Outline of Last Lecture I. Module 7Outline of Current Lecture (Module 10) II. Why we measure GDP?III. What does GDP measure?a. Formal Definition:b. Goods and Services c. Final Goods and Services d. Domestic Soile. Newly produced IV. What does GDP not measure?V. What is in? What is out?VI. How to measure GDP?VII. Expenditure Approacha. How is GDP constructed? VIII. Product Approach Current Lecture (Module 10) II. Why we measure GDP? i. Fed  money demand ii. Government  idea about labor market, government budgetiii. Firms  sales iv. Invertors  stock market Year GDP ( billions of dollars)2005 13095.4These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2006 13857.92007 14480.32008 14720.32009 14417.92010 14958.32011 15533.82012 16244.6III. What does GDP measure?Measure of outputs-a) Formal Definition: GDP is the market value of all final goods and services newly produced on domestic soil during a given time period b) Goods and Services - New cell phone- good - Hair cut- service - Stock- neither (not marketable) - Smile- neither (not part of GDP) - Going to a movie- service - Volunteerism- neither - Working at McDonalds- neither (factor of supply) living in apartment- service- Living in your own house- service c) Final Good and Service Buyer$ Seller…Goods and ServiceBuyerSeller$ …Final Goods and Service- Ford Buys tires to be used in their latest car model – intermediate good - David buys fish from Publix to make sushi at home- final good - Don has a flat tire. He buys 2 pairs of tires from Tirestone- final good d) Domestic Soil- must be produced on domestic soil - Daniel buys a 2013 Toyota Camry manufactured in Ohio- YES- Daniels wife Diana buys 2013 Ford Focus manufacturedin Mexico- NO- U.S. Citizen provides consulting service to a company in Istanbul- US GDP and service export - Russian people watch the latest movie Anna Karenina (US made movie) in a theater in Moscow- counted in US GDP and service export - A Chinese tourist eats Chinese food in China town in San Francisco- Counted in US GDP and service export e) Newly Produced (being paid in current year) (made in current year) - Jennifer buys a house built in 2009- NO - Ethan lives in an apartment built in 2009- Yes, accommodation service Seller$ Buyer…produced on domestic soilBuyerSeller$ …newly produced- Buys new condo- Yes- Buys razor phone- NO IV. What does GDP not measure? - Doesn’t include home production- Doesn’t measure quality or leisure- Doesn’t include underground economy- Environmental damage or the value of clean environment- Doesn’t include second hand sale, transfer payments and financial transaction V. What is In? What is Out? - Include- domestically produce final goods and service including capital goods, new construction of structure, and change in inventory - Not included- intermediate goods/service, inputs, used goods VI. How to measure GDP?1. At the point of sale: expenditure approach 2. At the point of product: product approach (the sum of all value-added) what is “produced” has to be “purchased” by someone (including the producer) 3. Income Approach: If you pay $5 and get a sandwich, that money will be someone else’s income (wages, interest, rent and profit) VII. Expenditure Approach- GDP= C + I + G + X – IM- Household purchases of goods and services (C): total expenditures on goods and services by households - Government purchases of goods and services (G): total expenditures on goods and services by federal, state, and local governments. - Investment Spending (I): spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories. - Exports (X): goods and services sold to other counties.- Imports (IM): goods and services purchased from other countries. What is “produced” has to be “purchased” by someone (including the producer) - Sell it to some domestic customer (consumption) - Sell it to some business (investment) - Keep it in his stock room as inventory (investment) - Sell it to the city of Athens to use in their shelters (government spending) - Sell it to some foreign customer (export) VIII. Product Approach- The sum of all money and spent in buying the output - GDP= C + I + G + X – IM- Add up the value added of all producers - The value added per firm + Value of Sales – Cost of intermediate goods- Final goods and services: goods and services sold to the final, or end, user.- Intermediate goods and services: goods and services (bought from one firm by another firm) that are inputs for production of final goods and