E 11) Stay-at-home mothers create community garden. E 2) Honda purchases steel for producing new cars. I 12) Chevrolet purchases a new factory.

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1 Lecture (6.2.2) Is This Part of GDP? GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an I in the blank. If you think it is excluded, place an E in the blank. Copyright 2013 N.S. Is This Part of GDP? GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an I in the blank. If you think it is excluded, place an E in the blank. 1) Hair cut is purchased. Show Answers 11) Stay-at-home mothers create community garden. 2) Honda purchases steel for producing new cars. 12) Chevrolet purchases a new factory. 3) Dell Computers sells computers to Japan. 13) Ben & Jerry s purchases milk for making ice cream. 4) McDonald s purchases a brand new grill. 5) Macy s pays its employees an hourly wage. 14) Wall Street traders purchase stocks. 15) Ford Motor Company pays for the land it uses in production. 6) Students purchase airplane tickets to Hawaii. 7) Pepsi donates money to the Susan G. Komen Foundation. 8) A stereo is purchased on e-bay. 16) U.S. citizens purchase oil from Saudi Arabia. 17) Wells Fargo Bank gives a student loan. 18) Wells Fargo Bank is paid interest for the loan it made to Wal-Mart. 19) Owner of NFL team makes millions in profits. 9) Citizens pay property tax. 10) Government buys supplies for the military. 20) Lemonade is sold at a neighborhood lemonade stand by 8-year olds. Is This Part of GDP? GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an I in the blank. If you think it is excluded, place an E in the blank. I 1) Hair cut is purchased. E 11) Stay-at-home mothers create community garden. E 2) Honda purchases steel for producing new cars. I 12) Chevrolet purchases a new factory. I 3) Dell Computers sells computers to Japan. E 13) Ben & Jerry s purchases milk for making ice cream. I 4) McDonald s purchases a brand new grill. E 14) Wall Street traders purchase stocks. I 5) Macy s pays its employees an hourly wage. I 15) Ford Motor Company pays for the land it uses in production. I 6) Students purchase airplane tickets to Hawaii. E 16) U.S. citizens purchase oil from Saudi Arabia. E 7) Pepsi donates money to the Susan G. Komen E 17) Wells Fargo Bank gives a student loan. Foundation. I 18) Wells Fargo Bank is paid interest for the loan E 8) A stereo is purchased on e-bay. it made to Wal-Mart. I 19) Owner of NFL team makes millions in profits. E 9) Citizens pay property tax. E 20) Lemonade is sold at a neighborhood 10) Government buys supplies for the military. lemonade stand by 8-year olds. I Knowledge 3 Reasoning 1 Skill 2 GDP Targets Understand the various components of Gross Domestic Product (GDP). Explain why sustained growth in GDP per capita is desirable. Calculate data regarding GDP. 1

2 2) Useful for making comparisons over time or between countries. 2) Useful for making comparisons over time or between countries. 3) GDP only measures final products, not intermediate ones. 2) Useful for making comparisons over time or between countries. 3) GDP only measures final products, not intermediate ones. 4) Intermediate products are used up when producing a final product. (Like steel for a car.) 2) Useful for making comparisons over time or between countries. 3) GDP only measures final products, not intermediate ones. 4) Intermediate products are used up when producing a final product. (Like steel for a car.) 5) Counting only final products eliminates double counting. 2

3 3) Anything not produced within the country s borders. 3) Anything not produced within the country s borders. 4) Household production or subsistence farming, such as fixing your own car, mowing your own lawn, cleaning your own home, growing your own food (you don t need to write ever example) 3) Anything not produced within the country s borders. 4) Household production or subsistence farming. 5) Underground markets or unreported economic activity. 3) Anything not produced within the country s borders. 4) Household production or subsistence farming. 5) Underground markets or unreported economic activity. 6) The amount or distribution of wealth in a country. 3

4 wheat that costs. a) VA = - $0 = wheat that costs. b) A miller buys the wheat for to turn into flour, which costs. a) VA = - $0 = b) VA = - = wheat that costs. b) A miller buys the wheat for to turn into flour, which costs. c) A baker buys the flour for to turn into bread, which costs $5. a) VA = - $0 = b) VA = - = c) VA = $5 - = $3 wheat that costs. b) A miller buys the wheat for to turn into flour, which costs. c) A baker buys the flour for to turn into bread, which costs $5. d) A grocer buys the bread for $5 to sell it to consumers for $9. a) VA = - $0 = b) VA = - = c) VA = $5 - = $3 d) VA = $9 - $5 = $4 $3 $3 $4 4

5 wheat that costs. b) A miller buys the wheat for to turn into flour, which costs. c) A baker buys the flour for to turn into bread, which costs $5. d) A grocer buys the bread for $5 to sell it to consumers for $9. 3) All sales total 7. But GDP is only value added, which is $9. a) VA = - $0 = b) VA = - = c) VA = $5 - = $3 d) VA = $9 - $5 = $4 $3 $4 $9 1) Consumption Consumer spending on final goods and services is the largest category. 1) Consumption Consumer spending on final goods and services is the largest category. 2) Investment This describes the fact that firms also spend money on final products. It does not mean financial investment. C C I 1) Consumption Consumer spending on final goods and services is the largest category. 2) Investment This describes the fact that firms also spend money on final products. It does not mean financial investment. 3) Government The government also spends money on final products. 1) Consumption Consumer spending on final goods and services is the largest category. 2) Investment This describes the fact that firms also spend money on final products. It does not mean financial investment. 3) Government The government also spends money on final products. 4) Net Exports Some products get bought by other countries, but we must subtract products we buy from other countries. C I G C I G (X - M) 5

6 GDP: Income Approach GDP: Income Approach 1) Wages gets paid to workers as wages. W GDP: Income Approach 1) Wages gets paid to workers as wages. 2) Interest must get paid to the people who have lent the firm money. GDP: Income Approach 1) Wages gets paid to workers as wages. 2) Interest must get paid to the people who have lent the firm money. 3) Rent Some of the money must be paid to rent the land used for production. W I W I R GDP: Income Approach 1) Wages gets paid to workers as wages. 2) Interest must get paid to the people who have lent the firm money. 3) Rent Some of the money must be paid to rent the land used for production. 4) Profit Once wages, interest, and rent have been paid, all of the remaining income is considered profit. Nominal vs. W I R P 6

7 Nominal vs. 1) tells us how much a Nominal vs. 1) tells us how much a sold for apiece. Nominal vs. 1) tells us how much a sold for apiece. Nominal vs. 1) tells us how much a sold for apiece. Calculate Nominal vs. 1) tells us how much a sold for apiece. $ 20 Nominal vs. 1) tells us how much a sold for apiece. d) What is the GDP for each year if we only use the price from Year 1? $ 20 Calculate 7

8 Nominal vs. 1) tells us how much a sold for apiece. d) What is the GDP for each year if we only use the price from Year 1? $ 20 $ $ Nominal vs. 1) tells us how much a sold for apiece. d) What is the GDP for each year if we only use the price from Year 1? 3) What do you notice about this graph of nominal and real GDP? per Capita per capita is the key statistic used for tracking the health and growth per Capita per capita is the key statistic used for tracking the health and growth per capita = Population See Sample per Capita per capita is the key statistic used for tracking the health and growth per capita = RGDPC of U.S. = Population 5,681,0,000, ,439,3 per Capita per capita is the key statistic used for tracking the health and growth 2) U.S. real GDP per capita has steadily grown over time. RGDPC of U.S. = $49,713 8

9 per Capita per capita is the key statistic used for tracking the health and growth 2) U.S. real GDP per capita has steadily grown over time. 3) The U.S. has almost three times as much purchasing power per person as it had in 19. per Capita per capita is the key statistic used for tracking the health and growth 2) U.S. real GDP per capita has steadily grown over time. 3) The U.S. has almost three times as much purchasing power per person as it had in 19. 4) Other countries, however, continue to have low real GDP per capita rates. Calculating GDP DIRECTIONS There are different stations set up around the room. Each station contains a set of cards for calculating GDP. There are cards for the production approach, the expenditure approach, and the income approach. Begin at one station and make sure the cards are shuffled. Place the cards in the four appropriate piles face down. Draw one card from each pile, and calculate the GDP using the data on those four cards. An example of how to calculate each of the different methods is provided under each heading below. PRODUCTION APPROACH In order to find GDP using the production approach, add together all of the value added amounts. EXPENDITURE APPROACH In order to find GDP using the expenditure approach, add together the values of consumption, investment, government spending, and net exports. To find the value of net exports, subtract imports from exports. INCOME APPROACH In order to find GDP using the income approach, add together the values of wages, interest, rent, and profit. Knowledge 3 Reasoning 1 Skill 2 GDP Targets Understand the various components of Gross Domestic Product (GDP). Explain why sustained growth in GDP per capita is desirable. Calculate data regarding GDP. Resources Data regarding growth rates and Data on GDP pre Capita provided by the International Monetary Fund (IMF) via wikipedia. Data regarding real GDP per capita in the U.S. Data for U.S. population (March 5, 2013) 9