Test 2 Ap Macro - GDP Basics

Gross

Totals before adjustments (inflation’s effect)

National Product

Production owned by US companies

Domestic Product

Production in the US, even if foreign owned

GDP Definition 

The dollar value of all final newly produced goods and services legally made, legally sold, in a market in the U.S. this year.

What is GDP measured in?

Quarters of years

Quarter 1

Jan, Feb, Mar

Quarter 2

Apr, May, June

Quarter 3

July, Aug, Sep

Quarter 4

Oct, Nov, Dec

What is this main form used?

Government Expenditures Approach (C + IG + G +Xn)

Another word for Expenditures

Spending

Personal Consumption in the economy (C)

The purchases of finished goods and services (but not houses) (~70%)

Gross Private Business Investment monies (Ig)

• Factory equipment maintenance

• New factory equipment

• Construction of housing (new)

• Unsold inventory of products built in a year

Government Spending (G)

Government purchases of products and services (ex: schools, roads, military, police, fire, ems)

Net Foreign Factor of Trade: Exports minus Imports

• Exports = Dollars in

• Imports = Dollars out

• Post WWII, Xn has usually been a negative number: Trade deficit

Trade deficit 

$ Imports > $ Exports

Is Xn usually negative?

Yes, since post wwii

Items that DO NOT count in GDP

• Used goods/ Second-Hand goods

• Stock/ equity/ securities purchases (places like the NYSE, NASDAQ)

• Unreported business activities conducted in “cash” (unreported tips)

• Illegal activities (underground markets)

• Financial transactions between banks and businesses (loans)

• Intermediate goods (no double counting)

• Non market activities like volunteer and family work

Alternate approach to GDP accounting - Income Approach

W+R+I+P+SA

Wages:

Money earned by workers

Rent

Money earned by those who lease land/ structures

Interest

Money earned by those who lend savings to firms & governments (debt kind of)

Profit

Money earned by firm owners that is not paid out in wages, interest or rent (no limit)

Statistical adjustment

• This approach does not match the CIGX approach and needs “adjustment”

• Depreciation

• Business Taxes

• Net Foreign Income

Depreciation

• Businesses set aside money (spending) of their own to account for declining value of goods such as equipment.

• This is a loss of income to them

Business Taxes

• When a consumer buys dinner at a restaurant, they pay sales tax. All of the money paid counts towards GDP when using the expenditure approach.

• But the restaurant doe snot keep the sales tax, instead passes it along to the government.

• This is a loss of income to the business.

Net Foreign Income

• If foreigners earn money in the US (savings account, investments) that money leaves the US so does not represent an increase in income in the US GDP.

• If US citizens earn money from investments in foreign places, then money flows into the US