CHAPTER 7 GDP A MEASURE OF OUTPUT 1 gross domestic product the market value of all final goods and services produced within a country during a specific period usually a year a Most widely used measure of economic performance b flow concept i Ex a water gauge measures the amount of water that flows through a pipe each hour aka GDP measures the market value of production that flows through the economy s factories and shops each year or quarter 2 What counts toward GDP a Only final goods and services count i All goods and services produced during the year must be counted once and only once ii To avoid double counting differentiate between 1 Intermediate goods goods purchased for resale or for use in producing another good or service 2 Final market goods and services goods and services purchased by their ultimate user iii Sales at intermediate stages of production are not themselves counted in GDP because the value of the intermediate goods is embodied within the final user good b Only transactions involving production count i if a financial transaction involves a sales commission the commission is included in GDP because it involves a service rendered during the current period ii The purchases and sales of stocks bonds and US securities are not included in GDP iii Private and public sector income transfers aren t included in GDP 1 EX aunt sends you 100 to help pay for college expenses she has less wealth and you have more but the transaction adds nothing to current production iv Government income transfer payments such as Social Security welfare and veterans payments are also omitted c Only production within the country is counted i When foreigners earn income within US borders it adds to the GDP of the US d Only goods produced during the current period are counted i Production of goods are counted at the time they were produced and initially purchased ii Resale of items produced during earlier years merely changes the ownership of iii the goods or assets It does not add to current production As in the case of financial transactions sales commissions earned by those helping to arrange the sale of used cars homes or other assets are included in GDP because they reflect services provided during the current period 3 Dollars are the common denominator for GDP a The production of each good or service is added together by the market value the purchase price of the good or service b Each good produced increases output by the amount the purchaser pays for the good The total spending on all goods and services produced during the year is then summed in dollar terms to obtain the annual GDP 4 GDP as a measure of both output and income 2 ways to measure GDP a Expenditure s approach market value of all final goods and services produced in an economy in one accounting period mainly use this approach i When derived by this approach GDP has 4 components 1 personal consumption expenditures household spending on consumer goods and services during the current period a flow concept b c most are for nondurable goods or services largest component of GDP i EX food clothing recreation medical and legal services and fuel ii Consumed in relatively short time d Durable goods constitute approximately 1 10 of all consumer purchases i EX appliances and automobiles ii Consumed over a longer period of time but fully counted when they are purchased 2 Gross private domestic investment the flow of private sector expenditures on durable assets fixed investment plus the addition to inventories inventory investment during a period These expenditures enhance our ability to provide consumer benefits in the future a Not immediately used b Includes expenditures for 1 the replacement of machinery equipment and buildings worn out during the year and 2 net additions to the stock of capital assets c EX business plants equipment houses and increases in business inventories d Net investment gross investment minus an allowance for depreciation and obsolescence of machinery and other physical assets during the year i Important indicator of the economy s future productive capability ii Substantial amount indicates growth of the capital stock of the economy shift PPF outward iii Low rate aka negative net investment implies a stagnating or even contracting economy 3 government consumption and gross investment a government component includes 1 expenditures on items like office supplies law enforcement and the operation of veterans hospitals which are consumed during the current period and 2 the purchase of long lasting capital goods like missiles highways and dams for flood control b governments total expenditures are higher than its total consumption and investment expenditures 4 net exports to foreigners a add exports and subtract imports b can be positive or negative ii Consumers investment government exports imports 1 GDP C I G X M b Income y cost approach income that s generated from selling resources or the cost of paying for those resources i Rent wages interest profit 1 GDP r w i ii Indirect business taxes taxes that increase a business firm s costs of production and therefore the prices charged to consumers 1 EX sales excise and property taxes 2 Boost the market price of goods when GDP is calculated by the expenditure approach 3 When looked at from the factor cost viewpoint taxes are an indirect cost of supplying the goods to the final consumers iii Depreciation the estimated amount of physical capital that is worn out or used up producing goods during a period 1 Sometimes called capital consumption allowance iv Net income of foreigners 1 The sum of employee compensation proprietors income rents corporate profits and interest yields national income income of Americans whether earned domestically or abroad If depreciation and indirect business taxes the two indirect cost components are added to national income the result will be gross nation product GNP whether generated in US or abroad 2 a Gross national product GNP the total market value of all final goods and services produced by the citizens of a country either produced domestically or in another country aka who produces b Counts the income that Americans earn abroad but it omits the income foreigners earn in the US c GNP GDP minus net income of foreigners i Net income of foreigners the income that foreigners earn by contributing labor and capital resources to the production of goods within the borders of a country minus the income the nationals of the country earn abroad
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