5: Gross Domestic Product

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Page ID: 287934

Martin Medeiros
Chabot College

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Learning Objectives

Upon completion of this unit, you will be able to:

Realize that GDP does not account for all economic activity.
Distinguish between output and spending when examining GDP.
Recognize how economic indicators are used to represent an economic framework.
Recognize the role market expectations play in predicting economic activity.
Understand the importance of controlling for changing prices when measuring economic activity.

5.1: Making Sense of the Data
This page outlines the shift from individual economic choices to macroeconomics, highlighting their impact on overall economic health. It introduces the business cycle, depicting fluctuations in economic activity, and discusses the goals of macroeconomic policy aimed at reducing volatility and fostering long-term growth.
5.2: Gross Domestic Product
This page discusses economic indicators, emphasizing the importance of GDP as the broad measure of economic activity, which excludes used and intermediate goods to prevent double counting. It highlights that U.S. Real GDP has consistently grown over the past decade, reaching around $22 trillion in 2023, suggesting a strong economy.
5.3: Missing Output
This page explains that the $22 trillion U.S. GDP does not capture all economic activities, excluding non-market actions like homemaking and illegal underground economy transactions. The underground economy, which involves unreported income and illegal activities, constitutes about 8.3% of GDP, smaller than in Mexico. Factors like rising taxes and regulations in OECD countries are driving the growth of the underground economy, resulting in unaccounted economic activities.
5.4: GDP and Spending
This page explores the relationship between spending and income in relation to GDP, which encompasses the market value of a nation's final goods and services. It identifies four spending categories: Consumption (household expenditures), Investment (future production), Government (excluding transfers), and Net Exports. The text discusses how unsold goods influence inventory and GDP, and concludes by noting that existing home sales do not impact GDP, as it only accounts for new production.
5.5: The Relationship between Expenditure Components and Economic Indicators
This page discusses GDP as a key measure of economic health, highlighting its expenditure components (C+I+G+NX) that enable tracking of economic changes. It emphasizes economic indicators like retail sales for monitoring consumption and predicting economic activity. Market participants utilize these indicators to inform their investment strategies, particularly before significant announcements that may affect market positions.
5.6: Real GDP vs Nominal GDP
This page outlines the distinctions between nominal GDP and real GDP in assessing economic health. Nominal GDP measures total production at current prices without considering inflation, while real GDP corrects for price changes using constant base-year prices. This adjustment provides a more accurate representation of economic output.

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