- "domestic" production vs. production by American
"nationals" or citizen
How would the value of output produced at an American-owned factory in the U.S. be treated in GDP accounting?
- The value of output produced at an American-owned factory in the U.S. would be treated as part of domestic output in GDP accounting.
How would the value of output produced at a foreign-owned factory in the U.S. be treated in GDP accounting?
- The value of output produced at a foreign-owned factory in the U.S. would be treated as part of domestic output in GDP accounting.
How would the value of output produced at an American-owned factory in Japan be treated in GDP accounting?
- The value of output produced at an American-owned factory in Japan would NOT be treated as part of domestic output in GDP accounting.
B. Definition: GDP
1. definitionthe total market value of a final goods and services produced in the economy in one year
2. market value: unit of measure for real domestic output
3. final goods: avoid double counting
a. final goods
b. intermediate goods4. produced in one year
a. secondhand sales are not included
b. financial transactions not included
REVIEW: (Textbook Question 7-13)
Which of the following are actually included in this year’s GDP? Explain your answer in each case.
a. Interest on an AT&T bond.b. Social security payments received by a retired factory worker.
c. The services of a family member in painting the family home.
d. The income of a dentist.
e. The money received by Smith when she sells her economics textbook to a book buyer.
f. The monthly allowance a college student receives from home.
g. Rent received on a two-bedroom apartment.
h. The money received by Josh when he resells his current-year-model Honda automobile to Kim.
i. Interest received on corporate bonds.
j. A 2-hour decrease in the length of the workweek.
k. The purchase of an AT&T corporate bond.
l. A $2 billion increase in business inventories.
m. The purchase of 100 shares of GM common stock.
n. The purchase of an insurance policy.
C. Shortcomings of GDP (pp. 125-126)
GDP is often used a a meassure of Economic Well-Being in a country, but there are problems:
1. GDP doesn’t measure some very useful output because it is unpaid (homemakers’ services, parental child care, volunteer efforts, home improvement projects). Called non-market transactions2. GDP doesn’t measure improvements in product quality unless they are incuded in the price.
3. GDP doesn’t measure improved living conditions as a result of more leisure.
4. GDP makes no value adjustments for changes in the composition of output. Nominal GDP simply adds the dollar value of what is produced; it makes no difference if the product is a semiautomatic rifle or a jar of baby food.
5. GDP makes no value adjustments for changes in the distribution of income. Per capita GDP may give some hint as to the relative standard of living in the economy; but GDP figures do not provide information about how the income is distributed.
6. GDP does not include output from the Underground Economy. Illegal activities are not counted in GDP (estimated to be around 8% of U.S. GDP). Legal economic activity may also be part of the “underground,” usually in an effort to avoid taxation.
7. GDP and the environment:
- The harmful effects of pollution are not deducted from GDP (oil spills, increased incidence of cancer, destruction of habitat for wildlife, the loss of a clear unobstructed view).
- GDP does include payments made for cleaning up oil spills and the cost of health care for cancer victims.
- Resouce depletion could result in lower future output
8. Noneconomic Sources of well-being like courtesy, crime reduction, etc., are not covered in GDP.
9. GDP does not account for a possible future decline in output due to resource depletion.
10. Per-capita income should be used to compare the economic well-being of different countries.
Which country has a higher GDP, Switzerland or India? Which has a higher level of economic well-being:
- Switzerland:
- GDP: $239.3 billion (2003 est.)
- Population: 7,450,867 (July 2004 est.)
- GDP per capita: $32,700 (2003 est.)
- India:
- GDP: $3.033 trillion (2003 est.)
- Population:1,065,070,607 (July 2004 est.)
- GDP per capita: $2,900 (2003 est.)
GDP per capita = GDP / population
REVIEW:
Do each of the following cause GDP to OVERSTATE the economic well-being of a country or UNDERSTATE it?
1. non-market transactions (Does GDP OVERstate or UNDERstate economic well-being?)
not included so, GDP UNDERstates well-being.
2. improved product quality (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being.
3. more leisure (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being.
4. the composition of output (Does GDP OVERstate or UNDERstate economic well-being?)
if "bad" things are being produced, then GDP OVERstates well-being.
5. the distribution of income (Does GDP OVERstate or UNDERstate economic well-being?)
an unequal distributin of income would result in GDP OVERstating the well-being of most of a country's population6. the underground economy (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being
7. GDP and the environment (Does GDP OVERstate or UNDERstate economic well-being?)
harmful effects of pollution and costs of pollution reduction are not deducted from GDP, so GDP OVERstates well-being.
8. Non-economic sources of well-being (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being
9. per-capita income (Does GDP OVERstate or UNDERstate economic well-being?)
GDP OVERstates well-being in countries with large populations and UNDERstates well-being in countries with small populations
P this year x
Q this year
Q this year ) or
is it because the Price Level increased (
x Q this year
