Gross Domestic Product

Is measuring the performance of the economy an important part of life?

WHY? Suppose one candidate for President of the United States proclaims that the economys performance is the best in a generation, and an opposing candidate argues that the economy could perform much better. What statistics would you seek to tell how well the economy is doing?
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What is gross domestic product?

The market value of all final goods and services produced in a nation during a period of time, usually a year
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GDP
Measures our nations (and others around the world) total economic performance (INDICATOR) Excludes production abroad by US business 1991govt. switched from GNP to GDP
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What is gross national product (GNP)?

the market value of all final goods and services produced by a nations residents, no matter where they are located
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Whats the difference?

Politicians want to know whats going on in OUR country
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GDP counts only NEW domestic production

Secondhand transactions-the sale of USED products *commission on the sale of USED products counts-b/c salesman performed a SERVICE in the present day
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GDP counts only NEW domestic production

Nonproductive financial transactions-the giving of gifts or buying/selling stocks or making transfer payments *transfer payments - govt. payment to individuals NOT in exchange for goods or services currently produced
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GDP counts only final goods

Final goods - Finished goods and services produced for the ultimate user (end consumer) To avoid double counting intermediate goods must be excluded

Intermediate goods
Goods and services used as inputs for the production of final goods
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Suppose a wholesale distributor sells glass to an automaker. Is this transaction included in the GDP?
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Which of the following are final goods or services?

a haircut from a barber a new automobile an oil filter purchased in the new auto crude oil Explain you answer

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There are four components of GDP

Consumption Investment Government Foreign (X - M)

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GDP = C + I + G + (X - M)

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How much does Mario add to GDP?

Mario works part-time at Pizza Hut and earns an annual wage plus tips of $15,000. He sold 4,000 pizzas at $10 per pizza during the year. He was unemployed part of the year, so he received unemployment compensation of $3,000. During the past year, Mario bought a used car for $1,000. Determine how much has Mario contributed to GDP?

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GDP downfalls
Non-market transactions GDP excludes unpaid activities difficult to collect data & assign dollar value to services people provide themselves or others without compensation which non-market activities to include and to exclude?
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GDP downfalls
Distribution, Kind, & Quality of products GDP is blind to whether consumption is evenly divided or not. Country A GDP consists of military goods only; Country B GDP is made up of houses, tractors, wheat, milk, etc. only a small group of people consume the goods in A, but B has more even consumption GDP is a quantitative, rather than qualitative, measure of the output of goods & services
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GDP downfalls
Neglect of Leisure Time The wealthier a nation becomes, in general, the more leisure time its citizens can afford. GDP understates national well-being because no allowance is made for people working fewer hours than they once did.

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GDP downfalls
The Underground Economy illegal gambling, prostitution, loansharking, illegal guns, and illegal drugs meet the requirements for GDP all are final products, but GDP does not include unreported criminal activities If the underground economy is sizeable, GDP will understate an economys performance
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GDP downfalls
Economic Bads Air, noise and water pollution impose costs on society GDP does not account for the diminished quality of life from the bads of production of goods and services

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