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

What is GDP a measure of?

Quantity of goods and services produced in a country

What can we also think of GDP as a measure of?

Total value of expenditure within a country

Why are we able to think of GDP as a measure of expenditures within a country?

Since goods that are produces are also purchased

What 4 categoies do economists divide purchasers into?

Households, firms, government, and the foreign sector

What are household purchases called?

Consumption expenditures or consumption

What are consumer expenditures subdivided between?

Consumer durables, nondurables, and services

What are consumer durables?

Long lived consumer goods

What are examples of consumer goods?

Washing machines, automobiles, and furniture

What are consumer durables sensitive to changes in?

Interest rates

Why are consumer durables sensitive to interest rates?

Consumers may have to use credit to purchase them

Where are expenditures on households included in?

Investement

What are consumer nondurables?

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

What are services?

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

What is investment comprised of?

Spending by firms on final goods and services, along with household purchases of new houses

What is business fixed invesrment or capital investment?

Business purchases of factories, offices, machinery, and equipment

What is the purchase of new homes and apartment buildings called?

Residential fixed investment

What are inventories?

The final category of investment which consists of additions of unsold goods to company inventories

Why is the traditional use of investment not right when talking about economics?

Such purchases of stocks or bonds transfer ownership of existing financial assets but do not create a new asset

In economics what is the term investment reserved for?

Purchase of new capital goods, such as buildings, or equipment

Why is capital investment sensitive to interest rates?

Often it involves borrowing money from banks to make large purchases

What do firms prefer to invest in vapital?

Lower interest rates on business loans

What are government purhcases?

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

What payments do government make?

Transfer payments such as social security benefits

Are government transfer payments included in government purchases of goods?

No

Is interest payed on government debt included in government purchase of goods?

No

What are Net exports?

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

If a country runs a trade surplus the number for Net exports is what?

Positive

If a country runs a trade defecit the number for net exports is what?

Negative

What is the equation for the relationship betwen GDP and various categories of spending?

GDP = C + I + G + NX

What else can GDP be thought of as?

Income

Why can GDP be thought of as income?

Whenever a good or service is sold, revenue is distributed between workers and owners of the capital used to produce it

The combined income of labor and capital equals what?

Expenditures

What do expenditures equal?

Production

Labor and capital equaling expenditures which equals production creates what identity?

GDP = Production = Expenditures = Income