Gross Domestic Product


Is a basic measure of a country's overall economic output.


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If the GDP is high, then the standard of living is also. The photo shows the family smiling, owning a large house and a nice car. Their standard of living is high.


The gross domestic product (GDP) or gross domestic income (GDI) is a basic measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living,[1] though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose.[2] GDP can be determined in three ways, all of which should in principle give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.[3]
Example: the expenditure method:



Summary:

It's the sum of the country's economic output.




The Expenditures Approach


The expenditure approach involves counting expenditures on goods and services by different groups in the economy.


The four main components are consumption expenditures by households (C), gross private investment spending principally by firms (I), government purchases of goods and services (G), and net exports (exports minus imports EX - IM).
Here is an equation that sums it up(
what we spend):[1]
GDP = C + I + G + (EX - IM)



GDP=C+I+G+X
C= Household consumption I= Investments by firms G= Government Purchases X= Next exports (exports- imports)


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GDP= C+I+G+X

The largest is personal consumption spending by households on final goods and services. Households can buy durable goods, those that last for some period of time, such as motor vehicles and furniture, as listed in the table. In addition, households can purchase nondurable goods, which are goods not intended for long-term use, such as food, clothing, and gasoline. Households also purchase services, which are actions rather than physical items. Examples of services range from medical care, car repairs and other transportation expenses, to haircuts and tax preparation services.
The second largest component of GDP consists of purchases by federal, state, and local governments on final goods and services. These purchases include spending on schools, roads, and military hardware. In addition, the wages of government employees are included because such employees are performing services in exchange for those wages. This category does not include income transfers, such as Social Security payments to retired persons, unemployment compensation, or welfare payments.
Investment spending comprises the third largest component of GDP. The table shows that there are also three main types of investment spending. The first is nonresidential investment spending by firms on machines, factories, tools, office buildings, and similar expenditures. Residential investment consists of expenditures by households on new houses, condominiums, and apartment buildings. Business inventories are goods that firms produce in one time period with the intent to sell later. You will see later that it is very important to note that inventories count as part of business investment!
It is also important to distinguish between gross investment, which is the total value of all newly produced capital goods produced in a given period, and net investment, which is gross investment less depreciation. Depreciation is a measure of how much of the existing capital stock has been used up.
REALITY CHECK: Here’s an example. Suppose you were buying a used car, and suppose that there were two cars available for sale that were the same in every way, except one had much more mileage on it. Wouldn’t that one sell for a lower price because it was more “used up?” That’s what we mean by depreciation, that assets get used up. They can also become obsolete.
The smallest component of GDP is net exports. The expenditure approach includes the value of exports, goods produced in the United States and purchased in other countries. The value of imports, the purchases by United States citizens of foreign-produced goods, is subtracted from the value of exports. Notice in the table above that the result is a negative number; this means that imports must have been greater than exports.[2]




  1. http://wps.prenhall.com/bp_casefair_econf_7e/31/7936/2031704.cw/index.html
  2. http://wps.prenhall.com/bp_casefair_econf_7e/31/7936/2031704.cw/index.html


The Income Approach


The Sum of the total income to come up with GDP


Income approach- what we make-No matter what is produced, just enough income should be generated to equal the value of what was produced example: consider a toaster that sells for $15 dollars labor- 6$ so.. workers made 6$ materials- 3$ the guy who sold the materials 3 $ overhead- 1$ the utilities company made 1$ 10$ 5$ profit becomes income for owner.- So by adding up income---> we can come up with the GDP


The Income Approach is one of three major groups of methodologies, called valuation approaches, used by appraisers. It is particularly common in commercial real estate appraisal and in business appraisal. The fundamental math is similar to the methods used for financial valuation, securities analysis, or bond pricing. However, there are some significant and important modifications when used in real estate or business valuation.
While there are quite a few acceptable methods under the rubric of the income approach, most of these methods fall into three categories: direct capitalization, discounted cash flow, and gross income multiplier.


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Income approach = add all income earned by households and firms in a year.




Other Things Not Counted in GDP


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Garage sale/ yard sale is one example of second hand sales
Second hand Sales
( wana buy my truck??)
Purely Financial Transactions(buying stock)
Intermediate Sales(zippers)

Second Hand Sales

It doesn't include non-original sales nor personal activities like mowing the yard or selling drugs, etc.

Purely Financial Transactions
stocks, bonds, CDs. There is no current production . Ex: If 100 shares of Dell stock is bought I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another [swapping bits of paper] Buying stock is not buying a product but buying ownership of the firm . Buying bonds is making a loan . GDP - what is not counted[1]

Intermediate Sales



  1. http://www.slideshare.net/knorman31/gross-domestic-product-what-is-not-included