ACTIVITY 1GROSS DOMESTIC PRODUCT
How is it done? First, instead of counting the actual goods made and sold and all the of the services performed, economists add up what these things sold for in dollars and cents. In otherwords, they are using money as a measure of value. So, if people buy 2,000,000 bushels of apples at $1 per bushel, and 2,000,000 books at $1 per book, then these purchases add $4,000,000 to the Gross Domestic Product.
Second, not everything made and sold during hte year can be counted. For example, the paper in your math book was once part of a giant roll of paper in a paper mill. Some people worked hard to make your book. Both the roll of paper and the books are goods. But if the money paid for both the roll of paper and the book were counted, the value of hte paper would be counted twice. So to avoid this problem of double counting, economists only count a product in its final form. They count the paper, for example, in its final product form as a book, newspaper, a magazine, or a shopping bag. They refer to these as final goods and services.
There are two different ways of counting the value of goods and services, but they both give the same answer. The first way, the flow of product approach, is by counting all the money spent by the buyers of goods and services. The second way, the earnings and cost approach, is by counting all the money received by those who produce the goods and services. Each of these ways looks at different sides of the same economic activities. If a person makes a chair and sells it for $50, both seller and buyer have helped increase the Gross Domestic Product by $50. In figuring out what the Gross Domestic Product is, an economist might count the $50 the buyer spent for the chair, using the flow of product approach. But he might count the $20 that went to the lumber yard owner, the $5 that went to hte paint store owner, the $5 for wear and tear on tools used in making the chair, and the $20 for the cost of labor, instead. These are the payments that were made for the resources that were used to produce the chair, and this example of the earnings and cost approach also adds up to $50.
If the Gross Domestic Product is computed using the flow of product approach and counting what people spend, four different kinds of spending must be taken into account. These are:
Symbolically, GDP is represented by the equation:
GDP = C + I + G + (X - M)
The letters in this equation represent the four kinds of spending mentioned above. C is for consumer spending, I is for business investment spending, G is government spending, X is the spending by foreigners on the nation's exports, and M is the spending on imported goods from foreign nations. The figures below show the levels of spending in billions of dollars for the United States economy in 1993.
1. Using the GDP equation above, calculate the United States GDP for 1993. __________________________
Gross Domestic Product per capita is the amount of GDP that would be available for each person to use if a country's production of goods and services were divided equally among its people. Capita is the Latin word for head, so GDP per capita means GDP per person. GDP per capita is one way to determin how well-off the average person is in a country.
2. Calculate the United States GDP per capita by dividing the GDP obtained above by the 1993 population. The population of the United States in 1993 was 258,233,000. _______________________
GDP does not show the types or quality of goods and services that a country produces. GDP per capita shows an average standard of living, and it does not show how many people in a country are richer or poorer than the average. People in countries that have similar levels of GDP per capita may share goods and services in very different ways.
GDP has other limitations as a measure of economic well-being. It does not include items such as goods and services not sold in the marketplace such as cooking, reparing one's own car, mowing the lawn, painting the garage, and other unapid work done at home. The value of leisure time, and illegal goods and services are not added to GDP, and negative goods, such as pollution, that detract from well-being are not subtracted.
Despite its limitations, GDP is a powerful measure of economic welfare. It can be used in combination with other measures to assess hte welfare of people throughout the world.
From Geography: Focus on Economics, Lesson 7 © Council for Economic Education, New York, NY