Macrow Exam 2 Lecture 1

Gross Domestic Product

The market value of all final goods and services produced within a country during a specific period of time

What does GDP exclude

intermediate and used goods and imports

What is the difference between GDP and GNP

GDP: where it is made

GNP: who sells

How to calculate net investment

gross investment- depreciation

Net investment

the change in the stock of available physical capital

Gross Investment

the total amount of physical capital produced in a year

Depreciation

the amount of physical capital that becomes unusable.

What are the two approaches to calculating GDP

income and expenditure approah

Expenditure Approach

Adds up the market value of all final goods and services produced within the economy by adding up spending on those final goods

AE=C-I+G+(X-M)

AE

Aggregate Expenditure (total spending)

C

Private Consumption 70%

Almost everything consumed by individuals and households except for used goods, intermediate goods, and the value of newly priced homes

I

Investment 17%

Includes fixed business investments made to expand their business, residential investments such as new homes.

Doesn’t include stocks and bonds

G

Government spending 20%

Includes federal, state, and local spending where the government gets something in return.

Does not include social security or unemployment benefits

NX (X-M)

Net Exports -7%

Exports-Imports: Removes imports because it is included in other components of aggregate expenditure

Income Approach

Adds up all income earned from producing the same final goods and services. Adds taxes and depreciation to get from factor prices to market value and to get from net to gross investment

What are the limitations of GDP

It misses household production and underground economic activity

Household productions

Production done in the household that doesn’t get observed (child care)

Underground economic activity

black market or hiring a family member to mow the lawn

Why isnt GDP a perfect measure of standard of living

Leisure time, pollution, and crime aren’t factors of production that influence standard of living