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Gross Domestic Product (GDP)‏

Gross Domestic Product (GDP)‏. Definition: market value of all final goods and services produced in a country in a given year market value: excludes goods/services not sold for money final goods: excludes intermediate goods (goods used to make final goods)‏ in a country:

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Gross Domestic Product (GDP)‏

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  1. Gross Domestic Product(GDP)‏ • Definition: market value of all final goods and services produced in a country in a given year • market value: excludes goods/services not sold for money • final goods: excludes intermediate goods (goods used to make final goods)‏ • in a country: • Includes production by foreign firms • Excludes overseas production by domestic firms • in a given year

  2. Components of GDP • Y = C + I + G + NX • Y = total GDP • C = consumption • I = investment • business investment • residential housing • G = government purchases • excludes transfer payments (Social Security etc.)‏ • NX = net exports = X – M • X = exports • M = imports • Net exports often ignored in beginning classes (“closed economy”)‏

  3. Problems with GDP • Generally acknowledged • Excludes production not compensated with money (child care, home improvements, etc.)‏ • Excludes production of illegal goods • Excludes intermediate goods • Not widely acknowledged • Difficult to deal with new and better products • Includes government purchases which are coercively financed • An excuse for politicians to try to manage economic behavior

  4. Rate of GDP growth • Economists are more concerned with the rate of change of GDP than with its absolute level. • Rates of change are expressed as annualized percentage • Annualized: multiply one quarter’s change by 4 • Convert to percent • Recent U.S. GDP figures • Q1, 2011: 0.4% • Q2, 2011: 1.3% • Q3, 2011: 2.5% (preliminary)‏ • Typical economic recover has much higher rates

  5. Correction for inflation • Comparing GDP figures from different years is subject to distortion due to changing (usually declining) purchasing power of money. • Solution: divide by an appropriate price index to get “real GDP”

  6. Comparison of GDP between countries • Convert to common currency • Divide by population to get per capita GDP

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