Understanding What GDP Means---> Yet Another Way to Measure GDP

When was the conceptual basis for the measurement of GDP developed?

In the 1930s

Who made the earliest effort of measuring national output?

Sir William Petty

Why did Petty attempt to measure national output?

As part of the British governments effort to asses the ability of the Irish people to pay taxes to the crown

Who commissioned a system to measure national output in the U.S.?

The U.S. Department of Commerce

Why did the Department of Commerce commission a system to measure national output?

Due to the lack of comprehensive data on national economic activity that hampered the efforts to respond to the Great Depression in 1932

Who did the Department of Commerce commission to create a national output measuring system?

Simon Kuznets

Who did Kuznets present his system to?

The U.S. Senate

When did Kuznets present his system to the Senate?

1934

How did WW2 help the U.S. develop their measurement of national output?

It provided an impetus for perfecting techniques of measuring output, and established necessary data collection tools

What prize did Kuznets win for his system?

The Nobel Prize in Economic Science

When did Kuznets win the Nobel Prize in Economic Science?

1971

What limitations are there to GDP?

• It is not always easy to determine what constitutes a final good or service

• GDP excludes goods not bought and sold in markets

• GDP ignores activities that may increase our GDP but do not make us better off

What is an illustration of how its not easy to determine final goods and services?

National defense

Conventionally, is national defense included in GDP?

Yes

What does Kuznets point out about national defense being included in GDP?

It might equally be viewed as an intermediate good that enables citizens to enjoy other final goods and services

What is an important example of GDP’s exclusion of goods that are not bought and sold in markets

Unpaid household work

When is childcare and housekeeping counted in GDP?

When it is purchased in a market

What has happened over the last 60 years and women have increasingly entered the paid labor force?

The amount of commercially provided childcare and housecleaning has increased

How has the amount of increased commercially available childcare and housecleaning affected GDP?

It caused GDP to rise

Some of the GDP increase of childcare and house cleaning is simply what?

A shift from non-market to market activity and does not reflect an increase in total production

What is the underground economy?

People provide others with goods or services without reporting the transaction to the government

Which market exists within the underground economy?

The black market

What are examples of activities that increase GDP while not making us better off?

Natural disasters and crime

True or False, GDP doesn’t take into account production that may deplete a countries stock of natural resources or pollute the environment

True

What is GDP a measure of?

the quantity of goods and services produced in a country

What can we also think of GDP as?

A measure of the total value of expenditures within a country

What categories do Economists divide purchasers into?

Households, firms, government, and the foreign sector

What is the foreign sector?

Foreign purchasers of domestic goods

What are household purchases called?

Consumption expenditures, or consumption for short

Consumption expenditures are subdivided between what?

Consumer durables, nondurables, and services

What are consumer durables?

Long lived goods such as automobiles, washing machines, and furniture

What are some characteristics of consumer durables

Planning for the purchase, and sensitivity to changes in interest rates

Why are consumer durables sensitive to changes in interest rates?

Because many consumers use credit to purchase them

Where are expenditures on new houses included in?

Investment

What are consumer nondurables

Goods that are used up more quickly than durable goos such as food or clothing

What are services?

Intangible goods such as education, legal services, insurance, and financial services

What comprises investment?

Spending by firms on final goods and services, as well as household purchases of new houses

What falls under business fixed investement?

Purchases of factories, offices, machinery, and equipment

What is business fixed investment also known as?

Capital investement

The purchase of new homes and apartment buildings is called what?

Residential fixed investment

What category do inventories fall under?

Investement

What are inventories?

Additions of unsold goods to company inventories

Capital Investment is sensitive to changes in what?

Interest rates

Why are shares of stock and bonds not considered an investment to economists?

Such purchases transfer ownership of an existing financial or physical asset, but do not create new assets

What do government purchases include?

All of the goods and services purchased by federal, state and local governments

What transfer payments does the government make?

Social Security benefits

Are transfer payments by the government and interest paid on government debt counted in government purchases of goods and services?

No

What are net exports?

The difference between the value of domestically produced goods sold to foreigners and the value of foreign produced goods purchased by domestic buyers

What does it mean if a country has a trade surplus?

Exports exceed imports

What does it mean if a country has a trade deficit

Exports are less than imports

What equation can the relationship between GDP and the various categories of spending be summarized by?

GDP = C + I + G + NX

What does each part of the equation GDP = C + I + G + NX

C - Consumption
I - investment
G - government spending
NX - net exports

What two ways can GDP be measured?

In terms of production or spending

True or False, GDP can be though of as income

True

When a good or service is sold, the revenue is distributed between what?

The workers and owners of the capital used to produce it

What does the combine income of labor and capital equal?

Expenditures, which equals production

If the combined income of labor and capital equal expenditures and production, what can we say?

GDP = Production = Expenditures = Income