lecture 2 GDP

# lecture 2 GDP - Gross Domestic Product Gross domestic...

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Gross Domestic Product Gross domestic product (GDP) is used by economists to measure the level of spending on final goods in a given period, and to gauge how aggregate demand is changing over time. 1 More specifically, GDP in a quarter/year = the \$ value of the final goods produced in the country in that quarter/year OK, but what are final goods? Final goods are goods not used in the production of other goods that period. This definition implies that a specific quantity of a given good, such as milk, may or may not be a final good. Think about that. In 2006 the dollar value of the milk produced in the U.S. was \$29.6 billion. Would the entire \$29.6 billion be included in 2006 GDP? The answer is no. Why? Because a lot of that milk was used to produce other goods that year, e.g. cheese, ice cream, yoghurt, etc. So only a part of that production would be included in GDP. Only that part that wasn't used to produce other goods. Therefore, use determines if a good is a final good or intermediate good (good used in the production of another good) , not the good itself . (Be aware that GDP is also referred to as nominal GDP, or GDP in current dollars/prices.) Note that this definition of final good means that any good produced and then put into inventory would be considered a final good. Think about that. Say a metal stamping plant stamps out 120,000 automobile fenders one year, but only 105,000 are put onto new cars by auto manufacturers that year. The rest end up in inventories (it doesn't matter whose inventory, the metal stamping company or an auto manufacturer). Well, the dollar value of the fenders going into inventories that year and staying there would be included in GDP. So, algebraically, GDP in a quarter/year = price of good 1 x quantity of good 1 that's a final good + price of good 2 x quantity of good 2 that's a final good + . . . . . . . . . . . . . + price of good last x quan. of good last that's a final good Now let's think about measuring changes in the economies output over time. Could we use GDP for this purpose? Obviously not. When we look at the formula for GDP we realize that its determined by two things: the quantities of final goods produced = the economy's output, and the prices of final goods. So output is in it. 1 Aggregate demand refers to the demand for all final goods in a given period.

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It's going to go up and down as output goes up and down. But it's also going to go up and down as prices go up and down. Think about what that implies. Suppose we observe that GDP in the U.S. in 2000 was \$10 trillion and in 2001 it was \$10.3 trillion. Therefore, GDP increased by .3/10 x 100% = 3% in 2001, i.e. it was 3% greater in 2001 than in 2000. On the basis of that observation could we conclude that output was 3% greater in 2001 and 2000? Of course not. What if output was exactly the same in 2001 as 2000 but prices were 3% higher? Then 1) output did not increase in 2001, but 2) GDP would be 3% higher in 2001 than 2000. The fact is, prices have the
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## This note was uploaded on 03/03/2011 for the course ECON 2020 taught by Professor Mukherjee during the Spring '08 term at Western Michigan.

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lecture 2 GDP - Gross Domestic Product Gross domestic...

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