Chapter10GrossDomesticProductNotes ThingthatdonotcountforcalculatingGDP1 IntermediateGoods2 UsedGoods3 FinancialTransactions4 TransferPaymentsEconomicsI A Microeconomics Studyofhowhouseholdsandfirms Makedecisions InteractinmarketsB Macroeconomics Studyofeconomy widephenomena Includinginflation unemployment andeconomicgrowth IncomeandExpenditureII A GrossDomesticProduct GDP Measuretotalincomeofeveryoneintheeconomy Alsomeasurestotalexpenditureontheeconomy soutputofgoodsandservices B Incomeequalsexpenditure Fortheeconomyasawhole Becauseeverydollarabuyerspendsisadollaronincomefortheseller C themarketvalueofallfinalgoodsandservicesproducedwithinacountryinagivenperiodoftime D Goodsarevaluedattheirmarketprices so Allgoodsmeasuredinthesameunits e g dollarsinU S Thingsthatdon thaveamarketvalueareexcluded e g houseworkyoudoforyourself III ActiveLearning1 Incomeequalsexpenditure NalahpaysJames 50tomowherlaw A Whathappenswithtotalexpenditure Wellthetotalexpenditurewillincreaseby 50B Whathappenswithtotalincome totalincomealsoincreasesby 50 IV TheCircular Flow TheCircular FlowDiagram Simpledepictionofthemacroeconomy IllustratesGDPasspending revenue factorpayments andincome Chapter10GrossDomesticProduct Preliminaries Factorsofproduction inputslikelabor land capital andnaturalresources Factorpayments paymentstothefactorsofproduction e g wages rent ActiveLearning1 IncomeequalsexpenditureV Thecircular flowdiagram 1The2mainagents1 MarketsforG S thisiswherepeoplebuythingstheyneedorwantandwherebusinessessellproductstomakemoney 2 MarketsforFactorsofProduction thisiswherebusinessesgetthethingstheyneedtomakeproductsorofferservicestopeople Households1 Buygoodsandservicesfrombusinessesorfirms 2 Spendtheirincomeonproductssuchasgroceries clothingandentertainment Firms1 Buyorhirefactorsofproduction usethemtoproducegoodsand2 Sellgoodsandservicesandreceiverevenuefromthesales MarkersforFactorsofProudctionVI WhatThisDiagramOmits Thegovernment Collectstaxes buysgoodsandservices Thefinancialsystem Matchessavers supplyoffundswithborrowers demandforloans Theforeignsector Tradesgoodsandservices financialassets andcurrencieswiththecounty sresident Chapter10GrossDomesticProduct VII Whichcountryisproducingmoregoods CountryA 100kpoundsorangesand1millioncarsCountryB 100kpoundsorangesand1millionchairsDotheyhavethesameincome VIII MeasuringGDP Finalgoods intendedfortheenduser Intermediategoods usedascomponentsoringredientsintheproductionofothergoods GDPonlyincludesfinalgoods theyalreadyembodyvalueoftheintermediategoodsusedintheirproduction GDPincludetangiblegoods likeDVDs mountainbikes beer andintangibleservices drycleaning concerts cellphonesservice GDPincludescurrentlyproducedgoodsnotgoodsproducedinthepast GDPmeasuresthevalueofproductionthatoccurswithinacountry sborders whetherdonebyitsowncitizensorbyforeignerslocatedthere IX TheComponentsofGDPA Recal GDPistotalspendingB Fourcomponents Consumptions C Investments I GovernmentPurchases G NetExports NX C FunctionofGrossDomesticProductis Y C I G NX export importsPositivetradesurplusexport importsnegativetradedeficitD E VariableFactors Consumption C Istotalspendingbyhouseholdsong s Chapter10GrossDomesticProduct Noteonhousingcosts Forrenters consumptionincludesrentpayments Forhomeowners consumptionincludestheimputedrentalvalueofthehouse butnotthepurchasepriceormortgagepayments Investment I Istotalspendingongoodsthatwillbeusedinthefuturetoproducemoregoods Includesspendingon Capitalequipment e gmachines tools Structures factories officebuildings houses Inventories goodsproducedbutnotyetsold Note Investments doesnotmeanthepurchaseoffinancialassetslikestocksandbonds GovernmentPurchases G Isallspendingontheg spurchasedbygovtatthefederal state andlocallevels Gexcludestransferpayments suchasSocialSecurityorunemploymentinsurancebenefits Theyarenotpurchasesogg s NetExports NX NX exports imports Exportsrepresentforeignspendingontheeconomy sg s ImportsaretheprotonsofC I andGthatarespentong sproducedabroad Note goodsproducedinChinaandimportedintotheUnitedStatesarenotcountedaspartoftheUnitedStates GrossDomesticProduct GDP TheGDPofacountryonlyincludesthevalueofgoodsandservicesproducedwithinitsownborders However thevalueoftheimportedgoodsisincludedinthecalculationoftheGDPwhentheyaresoldtoconsumersintheUnitedStates X U SGDPandItsComponents 2012 Chapter10GrossDomesticProduct Activelearning1 GDPanditscomponentsIneachofthefollowingcases determinehowmuchGDPandeachofitscomponentsisaffected ifatall A Debbiespends 200tobuyherhusbanddinneratthefinestrestaurantinBoston Consumption 200B Sarahspends 1800onanewlaptoptouseinherpublishingbusiness ThelaptopwasbuiltinChina Investmentrisesby 1800 netexportsfallby 1800 GDPremainsunchangedbecausethelaptopisnotproducedintheUnitedStates C Janespends 1200onacomputertouseintheireditingbusiness Shegotlastyear smodelonsaleforagreatpricefromalocalmanufacturer CurrentGDPandinvestmentdonotchange becausethecomputerwasbuiltlastyear D GeneralMotorsbuild 500millionworthofcars butconsumersonlybuy 470millionworthofthem Consumptionroseby 470million inventoryinvestmentroseby 30million andGDProseby 500million XI RealversusNominalGDP InflationcandistorteconomicvariablelikeGDP sowehavetwoversionsofGDP NominalGDP Valuesoutputusingcurrentprices Notcorrectedforinflation Chapter10GrossDomesticProduct RealGDP Valuesoutputusingthepricesofabaseyear IscorrectedforinflationComputenominalGDPineachyear 2011 10x400 2x100 6 0002012 11x500 2 50x1100 8 2502013 12x600 3x1200 10 800Increasefrom2011to2012is37 5 andfrom2012to2013is30 9 ComputetherealGDPineachyear 2011 10x400 2x100 6 0002012 10x500 2x1100 7 2002013 10x600 2x1200 8 400Note incalculatingtherealGDP onlyusetheoldprice whichinthiscaseis2011 Thenmultiplythequantityofeachoftherelativeyears SoitwillbelowersometimesfortherealGDP Increasefrom2011to2012is20 andfrom2012to2013is16 7 Percentageprice x100 Chapter10GrossDomesticProductXII TheGDPDeflator TheGDPdeflatorisameasureoftheoveralllevelofpricer Definition 0 12 10067 8 71 1 Onewaytomeasuretheeconomy sinflationrateistocomputethepercentageincreaseintheGDPdeflatorfromoneyeartothenext Chapter10GrossDomesticProductSampleProblemsandSolution
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