Take Out Module 38 Notes

1. Take Out Module 38 Notes Open-Note Quiz When you are finished, take out the worksheet that was handed out yesterday

2. Today’s Agenda Objective: To be able to explain GDP, what it includes, and what it does not include. To be able to calculate both real and nominal GDP. Essential Skill: To explicitly assess information and draw conclusions.

3. Gross Domestic Product The total market value of all final goods and services produced within a country in a given time period • What are the essential parts of this definition? • GDP vs. GNP (Gross National Product)

4. Final vs. Intermediate Final good or service • A good or service that is produced for its final user and not as a component of another good or service • Example: goods bought by households Intermediate good or service • A good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service or is used up during the production. • Example: lumber or computer chips

5. Included Final goods and services only! Not Included Private transfer payments Cash gifts from one person to another Stock Market Transactions Public transfer payments Ex. Social Security, Welfare, Vet payments Secondhand sales Ex. Used clothes, used cars Underground economy What’s in GDP?

6. Calculating GDP Two Ways: 1) Expenditure Method- adds up all of the spending on goods and services from these four categories -Households- Consumption -Firms- Investment -Government- Government purchases -Rest of the World-Spending on US exports 2) Income method- wages + rent + interest + profit -less direct and not used as often as expenditure method

7. Income Method Wages: money paid to workers who supply their labor Rent: money paid to property owners who supply land, buildings, or equipment Interest: money paid to individuals who supply their personal savings for loans Profit: money earned by business owners who provide entrepreneurship

8. Personal Consumption- “C” Three categories of new goods and services • Durable Goods • Nondurable Goods • Services THIS IS THE LARGEST CATEGORY- Take a look at our consumption

9. Investment “I” • Gross Private Domestic Investment • All final purchases of machinery, tools, and equipment, factories, etc. • Investment=purchasing physical capital goods, NOT financial investment • All construction • Including residential • Changes in Inventories • We include ALL items produced even if NOT sold • The change in inventory is included in GDP.

10. Government Purchases “G” • Expenditures for goods and services • US Defense Dept buys weapons • State Dep’t buys travel services • Local gov’t buys cars for police • Expenditures for social capital • Roads, bridges, etc. • Post office

11. Net Exports “Xn” • Difference between Exports and Imports included in GDP (Exports minus imports) • Exports (X)- leaving the country • Imports (M)- entering the country • Why don’t we include Imports?

12. Practice: For the following slides, decide whether the scenario would be counted in GDP

13. GDP? Shami earns $7.50/hr working a the local grocery store Yes, wage

14. GDP? The US armed forces invade a small island and in the process spend $5 billion on machines, arms, and ammunition Yes, Gov’t purchases

15. GDP? A rancher receives a monthly check for the oil pumped off of his property Yes, rent

16. GDP? Intel spends $300 million building a semiconductor factory in San Jose, Costa Rica No, Not included- outside US

17. GDP? Lindsey buys a new John Deere tractor for her organic farming business in New Hampshire Yes, investment

18. GDP? Jim and Frank decide to start a boy band and purchase a used Volkswagon Euro Wan in which to tour No, Not counted, used van

19. What goes into GDP? Complete the front side of this worksheet

20. Calculating GDP Nominal v. Real

21. Formula = C +I +G +Xn (X-M) Which of these components accounts for the greatest portion of GDP? In 2005 for the US C=$8,742 +I=$2,057 +G=$2,373 +Xn=-$717 =$12.456 trillion ($12,456,000,000,000) Calculating GDP

22. Real v. Nominal GDP http://www.econedlink.org/interactives/index.php?iid=207&type=student

23. Nominal GDP A gross domestic product (GDP) figure that has not been adjusted for inflation. Also known as "current dollar GDP"

24. Real GDP An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price," "inflation-corrected" GDP or "constant dollar GDP".

25. GDP Year Production of X Price X 2000 20 $5 2001 20 $10 2002 20 $20 Nominal GDP (P x Q) Real GDP (current year Q x base yr P) $100 2000 $100 $200 2001 $100 $400 2002 $100

26. Economic Growth? What does it tell us when NGDP increases? Could be increase in production Could be increase in price Could be combination of production and price What does it tell us when RGDP increases? …b/c P is held constant to base year ….increase is due only to increase in Q ….= ECONOMIC GROWTH

27. Year Production of X Price X 2000 20 $5 2001 20 $10 2002 20 $20 Nominal GDP (P x Q) Real GDP (current year Q x base yr P) $100 2000 $100 $200 2001 $100 $400 2002 $100 Conclusions??? Economic growth? Price Levels? There was no economic growth. There was only an increase in price level

28. Complete the Back of the Worksheet -Start the second worksheet when you are finished