GDP is the total value of goods and services produced in a country in a year. It is calculated by adding consumption (C), investment (I), government spending (G), and net exports (X-M). Consumption makes up 66% of GDP and includes household spending on goods and services. Government spending makes up 25-35% and includes spending on military, education, and healthcare. Investment is business spending on capital goods like factories and equipment, making up 12-14% of GDP. The GPI is an alternative measure that adjusts GDP to account for economic factors not captured by GDP, such as the value of non-market work and costs of pollution.

1. Measuring Economic
Growth-GDP
Unit 3, Lesson 3

2. Gross Domestic Product
(GDP)
Definition: The market
value of all final
goods and services
produced in a
country in a year
– Current/nominal GDP
(measured for the given year,
reflects inflation )
– Real GDP
(set on a constant base year)

3. Gross Domestic Product
(GDP)
GDP is measured by
totaling money
spent on four
categories:
– Consumption (C)
– Investment (I)
– Government Spending
(G)
– Net Exports
• Exports (X) - imports (M)
– GDP= C+I+G+ (X-M)

4. Consumer and Government
Spending
• Consumer: The spending by
households on goods and
services.
– A new car, food, clothes,
college tuition, sporting
event, health insurance.
– Makes up 66% of GDP
• Government: Spending by
all levels of government on
goods and services
– Military, education, roads,
healthcare
– 25-35% GDP
www.irle.berkeley.edu/events/spring08/feller/

5. Spending GDP
(Consumer and Government)
• How Divided?
– Housing 24%
– Health 14%
– Food 12%
– Transport 10%

6. Investment
• Definition:
Spending by
businesses on
capital
– machinery, factories,
equipment, tools,
computers, new
buildings, inventory
– 12-14% of total GDP

7. Net Exports
• Definition: Spending by
people outside the United
States on US produced
goods and services (exports,
or X) minus spending by
people in the United States
on foreign goods and service
(imports, or M)
– (X-M) = Net Exports
– (X) Jonas Brothers sell CDs
in Japan
– (M) You buy a camera
made in China

8. Gross Domestic Product
How to Calculate
• GDP is calculated by multiplying
the quantity of each final good
and service produced (Q) in a
year by their estimated price (P)
to get the dollar value (DV), and
then adding all dollar values of
each to get the total GDP.
• GDP = C + G +I + (X-M)
Consumer Spending Q x P = DV
+
Investment Q x P = DV
+
Govt. Spend Q x P = DV
+
Net Exports (X- M)

9. Gross Domestic Product
How to Calculate
Calculation Example
# in the millions
Cons. Goods 6m cars x $20,000= $120,000m
Cons. Service 150m haircuts x $15= $2,250m
Bus. Invest. 2m buildings x $300,000= $600,000m
Govt. Spend. 1m roads x $5,000= $5,000m
Net Exports 40m apples (export) x $1= $40m(X)
50m apples (import) x $1= $50m (M)
GDP= $120,000m cars
$ 2,250m haircuts
$600,000m buildings
$ 5,000m roads
$727,350m
- 10m net loss in apple exports
$727,250m

10. Gross Domestic Product
What’s Not Included
• The GDP includes only final
goods and services that have
been purchased for final use.
• Not Included
– Intermediate goods
• (battery comes with computer,
wood to make paper)
– Resale goods
• (used car, selling your home)
– Financial assets
• (stocks and bonds)
– Public or Private Transfer payments
• (unemployment and social
security, $ from parents)
– Non-market service
• (babysitting, painting your own
house)
– Underground economy
• (illegal transactions)

11. An Alternative to GDP:
GPI - Genuine
Progress Indicator
• Developed in 1995
• Attempts to measure factors
not measured by GDP
• Adjusts for income
distribution
• Focuses on economic well-
being not monetary
transactions
• Adds for
– Increase in leisure and
vacation time
– volunteer and non-market work

12. Genuine Progress Indicator (GPI)
Subtracts for
• Crime = $40 billion/yr
• Pollution and loss of natural
resources
– Counts $1.2 billion in toxic
clean-up costs decrease
• Health care expenditures for
preventable illness
– Heart attacks
– High blood pressure
• Loss in infrastructure
– From natural disasters or war
• Foreign debt counts as
negative
– GDP can count as positive
government spending