In this lecture we examine the output of the economy. Thus far, we have just referred to aggregate output to denote all the goods and services produced in the economy. Now we will look at this concept in more detail. We will investigate the concept of gross domestic product (GDP), including what goes into it and what is excluded from it. We will also look at the difference between real and nominal GDP and whether this is a particularly good measure of our standard of living. Upon completion of this lecture, you should understand and be able to answer these key questions:
1. How do we know how much the economy produces? When you hear about GDP on the news, what does it mean?
2. If you buy a new Dodge Viper, does it count toward this year's GDP? What about a new Porsche Boxster? How about a '57 Chevy?
3. Until fairly recently, the output of the economy was referred to as GNP rather than GDP. How do they differ?
4. One way to calculate GDP is to add up all expenditures on all new final goods and services. What are the four main categories of expenditures that are included?
5. One person's spending is another person's income. Can the incomes received by people in the economy be added up to measure GDP? Would any adjustments need to be made?
6. If GDP goes up, does that mean we are better off? What if inflation goes up, but the actual output of the economy does not? How can we tell the difference between nominal and real GDP?
7. How does GDP relate to our standard of living? What are some criticisms raised by environmentalists about the concept of GDP?