ACTIVITY 1

GROSS DOMESTIC PRODUCT 


NAME: _____________________________
 
     Gross Domestic Product (GDP) is a statistic that shows the value of goods and services produced in a country in a particular year.  All of the goods and services that are sold each year have to be counted.  Every new car and truck, every egg laid by every hen, every CD, every doughnut, burger, and taco has to be included.  Services must be counted, too.  Barbers, nurses, lawyers, computer programmers, and basket ball players sell their services and these services are part of GDP.  Suppose all of these things and many more besides were stacked up in one big pile.  It would still be hard to know the value of all the goods and services produced by the economy, yet this is what the Gross Domestic Product (GDP) tries to measure.

     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:

  • consumption:  spending by ordinary consumers,
  • investment:  spending by buysinesses on new equipment,
  • spending by all levels of Government, and
  • spending by foreigners who buy American goods (our exports) minus spending by Americans on foreign goods (our imports.
     Of course, no way of adding up the Gross Domestic Product can be entirely accurate.  But the two ways discuessed here give a rough estimate of the total value discussed here give a rough estimate of the total value of what the economy produces in a given year.  Better still, measuring the Gross Domesti Product each year can show if the economy is growing or shrinking, healthy or sick.  It is a standard by which the economy as a whole can be judged.  It can be used to compare one economy with another. It can also be used to compare an economy with itself over time.

     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.

Consumer Spending 4,390.6
Investment Spending 892.0
Government Spending 1,157.1
Exports 660.1
Imports 725.8
Source:  Economic Report of the President, 1994

     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

Places and Production: Economics Lesson