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Understanding GDP: Definition, Calculation, and Components of Economic Growth

This lesson provides a comprehensive overview of Gross Domestic Product (GDP), including its definition as the market value of all final goods and services produced in a country within a year. It covers the difference between nominal and real GDP, the calculation method (C + I + G + (X - M)), and the breakdown of consumer, investment, government spending, and net exports. The lesson also discusses what is excluded from GDP and introduces the Genuine Progress Indicator (GPI) as an alternative measure of economic well-being, considering factors often omitted from GDP calculations.

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Understanding GDP: Definition, Calculation, and Components of Economic Growth

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  1. Measuring Economic Growth-GDP Unit 3, Lesson 3

  2. Gross Domestic Product(GDP) Definition: The market value of all final goods and services produced in a country in a year • Current/nominal GDP (measured for the given year, reflects inflation ) • Real GDP (set on a constant base year)

  3. Gross Domestic Product(GDP) GDP is measured by totaling money spent on four categories: • Consumption (C) • Investment (I) • Government Spending (G) • Net Exports • Exports (X) - imports (M) • GDP= C+I+G+ (X-M)

  4. Consumer and GovernmentSpending • Consumer: The spending by households on goods and services. • A new car, food, clothes, college tuition, sporting event, health insurance. • Makes up 66% of GDP • Government: Spending by all levels of government on goods and services • Military, education, roads, healthcare • 25-35% GDP www.irle.berkeley.edu/events/spring08/feller/

  5. Spending GDP(Consumer and Government) • How Divided? • Housing 24% • Health 14% • Food 12% • Transport 10%

  6. Investment • Definition: Spending by businesses on capital • machinery, factories, equipment, tools, computers, new buildings, inventory • 12-14% of total GDP

  7. Net Exports • Definition:Spending by people outside the United States on US produced goods and services(exports, or X)minus spending by people in the United States on foreign goods and service(imports, or M) • (X-M) = Net Exports • (X) Jonas Brothers sell CDs in Japan • (M) You buy a camera made in China

  8. Gross Domestic ProductHow to Calculate • GDP is calculated by multiplying the quantity of each final good and service produced (Q) in a year by their estimated price (P) to get the dollar value (DV), and then adding all dollar values of each to get the total GDP. • GDP = C + G +I + (X-M) Consumer Spending Q x P = DV + Investment Q x P = DV + Govt. Spend Q x P = DV + Net Exports (X- M)

  9. Gross Domestic ProductHow to Calculate Calculation Example # in the millions Cons. Goods6m cars x $20,000= $120,000m Cons. Service 150m haircuts x $15= $2,250m Bus. Invest. 2m buildings x $300,000= $600,000m Govt. Spend. 1m roads x $5,000= $5,000m Net Exports 40m apples (export) x $1= $40m(X) 50m apples (import) x $1= $50m (M) GDP= $120,000m cars $ 2,250m haircuts $600,000m buildings $ 5,000m roads $727,350m - 10m net loss in apple exports $727,250m

  10. Gross Domestic ProductWhat’s Not Included • The GDP includes only final goods and services that have been purchased for final use. • Not Included • Intermediate goods • (battery comes with computer, wood to make paper) • Resale goods • (used car, selling your home) • Financial assets • (stocks and bonds) • Public or Private Transfer payments • (unemployment and social security, $ from parents) • Non-market service • (babysitting, painting your own house) • Underground economy • (illegal transactions)

  11. An Alternative to GDP: GPI -Genuine Progress Indicator • Developed in 1995 • Attempts to measure factors not measured by GDP • Adjusts for income distribution • Focuses on economic well-being not monetary transactions • Adds for • Increase in leisure and vacation time • volunteer and non-market work

  12. Genuine Progress Indicator (GPI) Subtracts for • Crime = $40 billion/yr • Pollution and loss of natural resources • Counts $1.2 billion in toxic clean-up costs decrease • Health care expenditures for preventable illness • Heart attacks • High blood pressure • Loss in infrastructure • From natural disasters or war • Foreign debt counts as negative • GDP can count as positive government spending

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