GROSS DOMESTIC PRODUCT
The market (dollar) value of all final goods and services produced in the U.S. in a given year.
Not what was sold…what was produced
Output is valued at its selling price
If output remains constant, but prices increase, then nominal GDP will increase
Nominal GDP is influenced by changes in prices
The fact that nominal GDP increased does not prove that output increased.
FINAL GOODS AND SERVICES:
Goods and services produced for final use by final users
Example: New car
New tires for my current car
Apple that I buy to eat
Goods that are produced by one firm for use in further processing by another firm (purchased
as an input to use as a final good)
Apples purchased by a bakery to make a pie
Steel or tires used in producing a new car
PRODUCED IN THE U.S.
All goods and services produced inside the boundaries of the U.S count in GDP
Items produced in foreign countries by Americans or American owned firms do not count in
GDP IN A GIVEN YEAR
We can measure GDP on a monthly, quarterly, yearly basis
GDP is a flow over time
AVOID DOUBLE COUNTING THE VALUE OF INTERMEDIATE GOODS
VALUE ADDED = value of output at end of a stage of production MINUS the cost of inputs at
beginning of that stage of production
Example: When producing a NEW car, a tire is an intermediate good. It is part of the final good, the
car. To calculate the value of output, it would be incorrect to calculate the value of the tire and then
add that to the final cost of the car. The value of the tire is already included in the cost of the car, so
the value of the tire would have been counted twice.
ITEMS NOT COUNTED IN GDP
Sales of used goods
Purely financial exchanges
Government and private transfer payments
GOVERNMENT TRANSFER PAYMENTS: Cash payments made by governments to people who do not provide goods or services in
exchange for these payments
Social security benefits
Subsidies to farmers
Medicare and Medicaid payments to individuals
PRIVATE TRANSFER PAYMENTS
Gifts, inheritances, charitable contributions are not included in GDP
Some productive activities are omitted from GDP because there was no market transaction
Underground economy (babysitting, black topping driveways in cash so they don’t have to
GDP measured in current dollars
Example: NOMINAL GDP for 2008 measures the value of things produced during 2008 using 2008
The current prices that people pay for goods and services during any specific year Nominal GDP can increase because the quantity of output increased
Nominal GDP can increase because prices increased
Economic growth requires an increase in the quantity of output, not an increase in the dollar value of
GDP for any year measured using the prices that existed during some selected base year
BASE YEAR AND PRICE INDEX:
Any year can be chosen as the base year, and then prices in other years are compared to the
level of prices during the base year in order to create a price index.
Example: Suppose we select 1996 as the base year. The goal is to compare the level of
prices during any year to the level of prices during 1996.
INTERPRETATION OF A PRICE INDEX:
We arbitrarily always set the level of the price index during the base year to 100, so we set the
index value to 100 in 1996. Now we want to determine how much things would have cost
during other years if they cost $100 (or $1.00) during 1996.
Example: Suppose that things that cost $100 (or $1.00) during 1996 cost $62.37 (or $0.6237) during
1981. Then the value of the price index for 1981 would be 62.37. Suppose that things that cost $100
(or $1.00) during 1996 cost $111.90 (or $1.1190) during 2003. Then the value of the price index for
2003 would be 111.90. CALCULATION OF REAL GDP WHEN GIVEN A PRICE INDEX:
Real GDP = (Nominal GDP/Price index) x 100
Base year = 1983
Price index for 2001 = 177.1
This means that what cost $100 (or $1.00) during 1983 cost about $177.10 (or $1.7710) during
Assume Nominal GDP for 2001 = $10,082 billion
Real GDP for 2001 = 10,082/177.1 x 100 = $5,692.8 billion This means that output which cost $10,082 billion during 2001 would have cost $5,692.80 billion
DEPRECIATION AND NET DOMESTIC PRODUCT (NNP)
During the production process, firms typically use up or wear out lots of tools and equipment.
(Buying 10 pizza ovens and 3 wore out)
Sometimes we want to measure the value of the new output MINUS the amount of wear and tear on
the tools and equipment.
This would give us a measure of our NET new production.
The amount by which the value of an asset falls in a given period