Output: 1/11/2011
Measuring Gross Domestic Product
Big World: The scale of economic activity is enormous
We aggregate output into Gross Domestic Product, and measure its components. Lecture 2, Thursday, January 13
Millions of companies, billions of consumers and employees, thousands of governments To make government and business policy decisions, we must understand it as a whole
Small Brains: How to understand it all?
Humans can comprehend only so much detail
GDP
A summing up and averaging out of all economic activity.
Gross Domestic Product
Product because it measures what is produced Domestic because it measures what happens within a nations borders Gross because it does not net out or subtract depreciation of equipment and structures
Gross Domestic Product
The value of all final goods and services produced in a year
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Value
Cant add egg rolls and diamond rings, can add their dollar values Egg Rolls Rings 2010 Output 500 2 2010 Price $1 $1,000 2010 Value $500 $2,000 GDP: $500 + $2,000 = $2,500
GDP, 2010
Value of all final goods and services produced in a year
$14,662 billion, in 2010
Problems with Measuring Value
Some things dont have prices, like
Services of housewives & husbands Illegal activities/underground economy Clean air
Problems with Measuring Value
Government Services Solution: Count the value of inputs: wages of employees, purchases of equipment and materials, construction or rent of buildings
One solution: IGNORE THEM
Produced a in Year
Include only what is produced this year, not what is produced in earlier years, even if it was sold this year.
Final
$1,000 in corn $3,000 in sweetener $7,000 in cola $11,000 added to GDP? But the price of the cola includes the value of the corn and sweetener. Weve double (and triple) counted Final means count only the sale of the cola: $7,000
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Components of GDP
C = Consumption
Purchases of goods and services by households
GDP = C + I + G + (X - M)
$10,325 billion, in 2010
I = Investment
Purchases of long-lasting goods used to produce other goods and services
G = Government Purchases
Purchases of goods and services by Federal, state and local governments--no transfers
$1,875 billion, in 2010
$3,007 billion, in 2010
X=Exports; M=Imports
Exports: Goods and services produced in U.S., sold elsewhere Imports: Goods and services bought in the U.S., but produced elsewhere Net Exports= X - M X = $1,833 billion M = $2,378 billion X-M = -$545 billion, in 2010
70% of GDP: more than two-thirds Reporters favorite economic fact
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Nominal vs. Real
Nominal dollar figures: in current prices, not adjusted for inflation Real dollar figures: in constant prices, adjusted for inflation
Nominal vs. Real
Changes in nominal GDP measure both the changes in the quantity of goods and services AND the changes in prices Changes in real GDP measure ONLY changes in the quantity of goods and services
Recessions
2010: 2.8%
Growth offsets recession
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