Macro Book Notes Chapter 6 I production and gross domestic product A the nation s gross domestic product gdp is the total value of all final goods and services produced for the marketplace during a given period within the nation s borders 1 the total value a gdp is the combined dollar value of every good or service 1 this gives us a common unit of measurement for different things 2 however if prices rise gdp also rises a therefore gdp needs to be adjusted for inflation 2 of all final a does not count every good or service produced only considers things to final b users to avoid over counting intermediate products when measuring gdp we add up the value of final goods and services only the value of intermediate products is already included in the value of final products 3 goods and services a a good is something tangible b the effects of a service are tangible but the service itself is used up once it is produced 1 services have become increasingly important to our total output in recent decades grown from 1 3 of output in 1950 to 2 3 today 2 includes services by internet providers health care banking retail education entertainment etc 4 produced a gdp only counts things that are produced during the period being considered b although people buy land or financial assets these aren t included in the gdp because they aren t produced 5 for the marketplace a does not include all final goods and services only those produced with the b intention of being sold this allows us to exclude services you provide for yourself like when you clean your house 1 however if you hire a housekeeper that service is included in gdp because it is now a market transaction 6 during a given period a only goods produced during a given period are counted b for example even though used goods secondhand cars previously owned homes used furniture were all produced but not necessarily in the desired period 1 and even if they were produced in the desired period they only count when they were sold the first time 7 within the nation s borders within US borders tracking and reporting gdp B a US gdp does not include output by Americans in different countries only output 1 annualization a gdp is a flow variable it measures a rate of production production per period of b time the government reports gdp as an annual rate but it is measured each quarter 1 in order to do this the government takes the production during the three month quarter and annualizes it 2 real vs nominal gdp a nominal variable measured without adjustment for the dollar s changing value ie inflation real variable adjusted for the dollar s changing value b c when comparing variables measured in dollars over time it is important to translate nominal values to real values d growth rate 1 no one really cares about the gdp on its own the focus is on the annual growth rate of real gdp from one quarter to the next 3 expenditure approach to gdp a GDP C I G NX where 1 C represents consumption goods and services purchased by households a includes total value of food produced on farms and consumed by the farmers themselves how much the food could have been sold for b also includes total value of housing services provided by owner occupied homes how much the house could have been rented for c does not include new home construction 2 I represents private investment goods and services purchased by businesses a includes i purchases of buildings equipment and software ii changes in inventories goods that have been produced but not sold iii new home construction b private investment spending adds to the nation s capital stock i i so when a company buys a new building or computer or software it is regarded as part of the capital stock because it provides benefits for several years into the future this is why new home construction is included in private investment c additions to inventories also contribute to the nation s capital stock stored goods become part of the nation s wealth because it is held to be consumed later d does not include i government investment or government capital 1 ie courthouses fire stations police cars schools highways bridges etc ii consumer durables iii human capital agencies 1 ie furniture cars washing machines computers 3 G represents government goods and services purchased by government a includes purchases by federal state and local governments b includes goods ie fighter jets police cars schools etc and services ie police officers legislatures military personnel c does not include transfer payments funds transferred usually from taxpayers to another group 4 NX represents net exports purchased by foreigners a equal to the difference between exports and imports 4 other approaches to gdp a value added approach 1 the sum of the values added by all firms in the economy 2 value added the revenue a firm receives for its output minus the cost of all the intermediate goods that it buys b factor payments approach 1 factor payments payments to the owners of resources that are used in production made by that firm 2 in any year the value added by a firm is equal to the total factor payments 3 in this approach gdp is measured by adding up all the income wages salaries rent interest and profit earned by all households in the economy C how gdp is used 1 short term a notifies us of a recession b notifies us of too rapid expansion c used to design policies to control the sudden recessions or expansions long term a measures growth rate of economy s output b measures standard of living which is equal to real gdp per capita 2 D problems with gdp 1 does not account for quality changes a example if a new pen is developed that lasts as long as four old pens then each b new pen should count as four old pens because it offers the same writing services as four old ones the bureau of economic activity does account for quality changes in things like tech buildings and computers but it doesn t have the resources to account for things like razor blades that last longer or improved healthcare c because of this the gdp understates the actual growth in output from year to year 2 does not account for the underground economy a production that is illegal ie gambling drugs prostitution etc or done under the table is not included in gdp b bureau of economic activity attempts to estimate the production of legal but unreported activity things done under the table but does not estimate illegal activity c again causes gdp to understate the actual output 3 does not account for