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EC190 Chapter 15

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Jon Tomlinson

on 23 May 2014

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Transcript of EC190 Chapter 15

EC190 Survey of Economics
Chapter 15: Gross Domestic Product
UNOH Spring 2014
Jon C. Tomlinson, Ph.D.

Gross Domestic Product
GDP - The market value of all final goods and services produced in a nation during a period of time (usually a year).
Excludes production abroad by U.S. companies (i.e. outsourcing).
Includes production in the U.S. by foreign companies (i.e. Toyota).

Compiled by the Bureau of Economic Analysis (BEA)
GDP Counts Only NEW Domestic Production
2 Major Areas of Transactions are EXCLUDED
Secondhand transactions
Used car/home = no; commission on used car/home = yes
Nonproductive Financial Transactions
Transfer payments by the government such as Welfare, Social Security, Unemployment because they are not NEW or Current output
GDP Counts Only Final Goods
To avoid double counting, intermediate goods are not counted.
Measuring GDP
Circular Flow Model - a diagram showing the flow of products from businesses to households and the flow of resources from households to businesses ($ serves as the medium for exchange).
Flow versus stock - flows are rate of change in a quantity during a given time period (rather than an actual number)

See Exhibit 1, page 405
This hypothetical economy has no government, no financial markets, and no foreign trade
The Expenditure Approach
The national income accounting method that measures GDP by adding all the spending for final goods during a period of time.
Spending of households, businesses, government, foreigners

GDP = C + I + G + (X-M)
GDP = C + I + G + (X-M)
C = personal consumption of durable and nondurable goods, and services

I = gross private domestic investment, fixed investment (capital goods) and business inventories (unsold finished goods)
GDP = C + I + G + (X-M)
G = government consumption expenditures and gross investment, remember NO transfer payments

(X-M) = net exports, the U.S. has continuously been in the negative here

Exhibit 5, page 413: http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
The Income Approach
GDP = employee compensation + rents + profits + net interest + indirect taxes + depreciation

If done correctly, the numbers are identical to the Expenditure Approach
GDP Shortcomings
Because GDP is the basis of government economic policies, there is concern that GDP may be giving us a false impression of the nation's material well-being.
Nonmarket transactions - DIY services
Distribution, kind and quality of products - only quantitative not qualitative
Neglect of leisure time - 33 hours/week?
The Underground Economy - illegal gambling, prostitution, drugs
Economic Bads - negative externalities diminish quality of life
GDP Shortcomings
You're the Economist, page 416
Suppose there is a nuclear plant disaster. How could GDP be a “false beacon” in this case?

The national-income accounting system only measures the flow of dollars determined by market transactions in a period of time. On the other hand, GDP does not measure the value of destruction to a nation’s stock of natural resources. For example, GDP would be increased because of a nuclear accident because expenditures were required to clean up the damage. However, the damage to a geographic area rendered uninhabitable for present and future generations is not included in GDP.
Personal Income versus Disposable Personal Income
Taxes!!!!!!!!
Changing Nominal GDP to Real GDP
Nominal GDP - the value of all final goods based on the prices existing during the time period of production

Real GDP - the value of all final goods produced during a given time based on the prices existing in a selected base year.
Also called Constant Dollar GDP.
Changing Nominal GDP to Real GDP
Think Inflation!!!!

Current base year is 2005.
GDP Chain Price Index
A measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year.
A "deflator" index
See Exhibit 10, page 421
Questions or Concerns?
http://visual.ly/united-states-debt-percentage-gdp-1940-2012
Debt to GDP graph
Full transcript