ECON 201 1st Edition Lecture 26Outline of Last Lecture I. About These NotesII. Other Measures of InflationIII. Income and Expenditurea. Definition of GDPb. Definition of market valuec. Definition of final goodsOutline of Current Lecture I. Gross Domestic Product (GDP)a. Definition of GDPb. Definition of consumptionc. Definition of investmentd. Definition of government purchasese. Definition of net exportII. Example GDP ProblemsIII. Real vs. Nominal GDPa. Definition of real GDPb. Definition of nominal GDPCurrent LectureI. GDPGross Domestic Product, or GDP, is the market value of all final goods and services produced within a country in a given period of time. There are four components to the GDP expenditure approach: consumption (C), investment (I), government purchases (G), and net exports (NX). These components add up to the GDP, which is denoted Y and shown in the equation below.Y =C +G +I +NXConsumption is the total spending by households on goods and services. These include durables, non-durables, and services. Consumption will be responsible for approximately 60-70% of the GDP. Investment is the total spending on capital equipment, structures (such as factories or houses), and inventories (goods produced but not yet sold). Inventories do not include the purchase of financial assets, such as stocks or bonds. Government purchases are purchases spent on goods and services by the government at all levels: federal, state, and local. However, government purchases exclude transfer payments, such as social security or UI These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.benefits which are transfers of income. Net exports are equal to exports minus imports and represent trade balance and surplus or deficit. This is the only component that can be negative. II.Example GDP ProblemsFor each of the statements below, identify how it will affect the GDP and its components.1. Debbie spends $200 to buy her husband dinner. 2. Sarah spent $1800 on a new laptop built in China.3. Jane spends $1200 on a computer that is used.4. General Motors builds $500 million worth of cars, but consumers only buy $470 million.Answers:1. Consumption will increase by $200 so the GDP will increase by $200.2. Investment will increase by $1800 and net exports will decrease by $1800, so there is no effect on the GDP.3. Purchasing used products does not have an effect on the GDP.4. Investment increases $30 million, while consumption increases $470 million, so GDP increases $500 million.III. Real vs. Nominal GDPReal GDP values output using the prices of a base year and is corrected for inflation. Nominal GDP values output using current prices and is not corrected for inflation. Look at the example below for more information about real and nominal GDP.Year Cost of Pizza Quantity of Pizzas Cost of Latte Quantity of Lattes2002 $10 400 $2 10002003 $11 500 $2.50 11002004 $12 600 $3 1200To calculate nominal GDP, first multiply the product price by the quantity for each year. Choose the value of a year, then subtract from it the value of the previous year, divide by the value of theprevious year, and multiply by 100. To calculate real GDP, first multiply the product quantity of this year by the price of the base year. Choose the value of a year, then subtract from it the value of the previous year, divide by the value of the previous year, and multiply by 100. The first calculations are shown in the first table below; the actual GDPs are calculated in the table below it.Year Total Value of Basket – Nominal Total Value of Basket – Real 2002($ 10 × 400)+($ 2 ×1000)=$ 6,000($ 10 × 400)+($ 2 ×1000)=$ 6,0002003($ 11× 500)+($ 2.50× 1100)=$ 8,250($ 10 × 500)+($ 2 ×1100)=$ 7,2002004($ 12 ×600)+($ 3 ×1200)=$ 10,800($ 10 × 600)+($ 2×1200)=$ 8,400Year Nominal GDP Real GDP2002 - 20038250−60006000× 100= 37.5 %7200−60006000× 100= 20 %2003 - 200410800−82508250× 100=30.9 %8400−72007200× 100= 16.7 %In the example above, the change in nominal GDP reflects both prices and quantities. The change in the real GDP is the amount that GDP would change if prices were constant (i.e. zero inflation). Real GDP is corrected for
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