APMacro: Gross Domestic Product

GDP image
The main measure of the size of a nation’s economy is its gross domestic product. GDP is an economic indicator that measures a country’s total economic output. Gross domestic product is the market value of all final goods and services produced within a country during a given period of time. A steadily growing GDP is generally considered a sign of economic health. The Department of Commerce’s Bureau of Economic Analysis has the job of measuring GDP.

Our economy produces a vast variety of goods and services. The Bureau of Economic Analysis attaches a market value to each product. Market value is the price buyers are willing to pay for a good or service in a competitive marketplace.

GDP is based on the market price of every final good or service that can be sold in a country. A final good is any new good that is ready for use by a consumer. Goods that are used in the production of final goods are known as intermediate goods. Their market value is not counted in GDP because it is included in the market value of the final good.

Goods and services must be produced within the country’s border to be included in GDP. The firms that produce the goods and services do not have to be American owned. Cars manufactured in the United States by foreign automakers are included in the United States’ GDP.

The Bureau of Economic Analysis calculates the GDP every quarter or three month period. Economists use the calendar year GDP to compare production from year to year or from country to country. This annual GDP includes all final goods and services produced between January 1st and December 31st. Goods do not have to be sold during that period to be included in GDP.

Economists calculate GDP by measuring expenditures on goods and services produce in a country. They divide the economy into four sectors: households, businesses, government, and foreign trade. Each sector’s sending make up one of the four components of GDP: household consumption (C), business investment (I), government spending (G), and the net of exports minus imports (X). Putting it together, the formula for calculating GDP is:

GDP = C + I + G + X

Household consumption, “C”, consists of goods and services bought by people in households for personal use. Household consumption ranges from food and fuel to movie tickets and medical care.

Business investment, “I”, consists largely of business investment in capital goods, such as buildings and machinery. It also includes goods produced but not yet sold.

Government spending, “G”, on the purchases of goods and services are also included in GDP. We do not count government transfer payments, such as welfare or Social Security benefits, as part of GDP. These payments do not create new production, nor do they involve the purchase of goods or services by the government.

In calculating the impact of trade on GDP, we focus on net exports, “X”. Net exports are the value of all exports minus imports. This makes sense because when a country exports goods and services, those exports bring money back home. The sale of these goods increases the exporting country’s GDP. However, the opposite happens when a country imports goods and services. The money used to pay for these imports leaves the economy, thus decreasing the importing country’s GDP. Net exports can be either positive or negative. When exports exceed imports, net exports are positive and increase GDP. When imports exceed exports, net exports are negative and decrease GDP.



Gov: Types of Government

Types of Government
All societies develop some form of government. These governments fall into three broad groups: rule by the one (monarchies and dictatorships), rule by the few (theocracies and single-party states), and rule by the many (parliamentary and presidential democracies).

Monarchies are one of the oldest forms of government still found in the world today. For monarchal government to have survived for thousands of years, it must have enduring attractions. One of those attractions is efficiency. A second advantage is a clear line of succession. A third is the unifying power of monarchy.

Dictators take and hold power by force. Dictatorships share some of the advantages of absolute monarchies. Power is centralized in the hands of a single military or political leader who can get things done efficiently.

A theocracy is a government headed by religious leaders. A single, state-supported religion encouraged political and social unity. It also ensured that political decisions were in line with the people’s moral values and beliefs.

In a single-party state, the constitution allows only one political party to govern. Power is exercised by the leading members of the party, who form the nation’s political elite, or a small group of people within a larger group who have more power, wealth, or talent than the others.

In the direct democracy citizens meet regularly as an assembly to make decisions. Each citizen had an equal voice in public affairs and decisions, once made, had widespread support. This form of government is time-consuming.

In a parliamentary democracy, voters elect lawmakers to represent them in the nation’s parliament. The party that wins a legislative majority forms a new administration. The legislative majority then selects a member of parliament to serve as the nation’s prime minister, or chief executive.

In a presidential democracy, voters choose a president to lead the government as the head of the executive branch. They also elect lawmakers to represent them in a national legislature.

In almost all nation-states, government power is exercised at a minimum of two levels: national and regional. Just how power is distributed between these two levels depends on which system of government a country has: unitary, federal, or confederal.

In a unitary system of government, the constitution concentrates power in the national or central government. The main advantage of unitary systems is that it promotes national unity by having all parts of a country follow the same laws and policies.

In a federal system of government, the constitution divides power between the national government and the regional governments. The main advantage of such a system is the flexibility it gives regional governments in meeting the needs of different language and ethnic groups.

In a confederal system, power resides in the regions, which are independent states. The regions grant only as much power to the national government as needed to maintain security and to coordinate activities among the regions. It allowed the states to unite for some purposes without giving up the power to run their own affairs.

Just as forms of government vary from one nation to the next, so do economic systems. An economic system is a way of organizing the production and consumption of goods and services. The way a society uses the factors of production is determined by its economic system. Three basic types of economic systems exist in the world today: traditional, market, and command.

In a traditional economy, people rely on time-tested customs to answer the three fundamental economic questions. People in traditional economies provide for themselves. Most people in a traditional economy live at a subsistence level, producing just enough goods to feed, clothe, and house their families.

In a market economy, individual producers and consumers answer the three basic economic questions. In a pure free-market economy, the government plays little or no role in economic affairs. Another name for a market economy is a free enterprise system. A free enterprise system relies on the profit motive, economic competition, and the forces of supply and demand to direct the production and distribution of goods and services.

In a command economy, the government answers the three basic economic questions. In a pure command economy, the means of production are publicly owned. Government planners decide what goods and services should be produced and how. They also determine how goods and services should be distributed to consumers and at what cost.

Pure forms of traditional, market, and command economic systems do not exist today. In the real world, most countries have mixed economies that fall somewhere in between. A mixed economy blends reliance on market forces with some government involvement in the marketplace. The degree of that involvement varies from country to country.