Course Intro and GDP

Economics

the study of scarcity, the study of how people use resources and respond to incentives, or the study of decision making

Gross Domestic Product (GDP)

the market value of the final / finished goods and services produced in an economy over a certain period of time (long run and short run fluctuations in an economy)

Market value

the prices that goods / services are being offered and sold at

Services

the output of an economy includes both goods and services

intermediate goods

transformed and / or combined with other goods to create a new, different good in the production process or if it is included / consumed as a part of a service (are NOT capital)

final or finished good

good that is not an intermediate good

capital

goods that are used to produce other goods but are not directly transformed into a new good in the production process (example: machines in car manufacturing plants)

double counting (Simon Kuznets)

Argued for using “finished” goods instead of “intermediate” goods in the GDP calculation to avoid double counting

Expenditure measure of GDP (production = expenditures)

• = value of “total purchases” of final / finished goods and services in an economy

• Y = C + I + G + NX

Investment (“I”) ( Purchases of capital goods + inventory adjustments )

Purchases of capital goods, housing, and inventory adjustments by domestic residents

components:

• business fixed investment (non residential)

  • spending by firms on plants, equipment, machinery

  • Spending by firms on intellectual property products

• Residential Investment

  • Construction of new houses / apartments

• Inventory investment

  • Changes in inventories (of final or intermediate goods)

Inventory Adjustments (changes in inventories)

accounts for unsold final and intermediate goods

• inventory adjustments = monetary value of unsold goods in the current period - monetary value of unsold goods in the last period

Government Purchases ( “G” )

government purchases of final goods and services

• includes: national, state, local purchases (public schools, highways)

• excludes: transfer payments such as ss, Medicare, etc.

Consumption - 68% of GDP (“C”)

every other purchase of final goods and services by domestic residents

• consumption expenditure: spending by households on motor vehicles, food, housing services

Net Exports (“NX”)

Net Exports = Exports - Imports

• Exports: all goods and services produced domestically that are sold to foreign businesses

• Imports: All goods and services produced abroad in the given time period that are being sold domestically

Used final goods

possibility of resold goods, the money the reseller earns is usually set to be equal to the value of the good for accounting purposes (monetary value = 0)

Factor income approach to measuring GDP

GDP = Employee compensation + Rent + Interest + Profit

all goods and services produced are considered “purchased” or accounted for in some way

• when people spend money, the money is received by workers, landlords, and businesses

• unsold finished goods count as “income” (income = expenditures)

Production measure of GDP

GDP = production = expenditures = income

nominal GDP

a measure of GDP when prices and quantities have not been separated, using current prices

• nominal GDP = (price x quantity) .+ ….

Real GDP

Actual quantity of goods and services, using “base” year prices

• real GDP = nominal GDP / price level

Growth rate

= (end value - start value) / start value (percentage x 100)

GDP deflator

= (nominal GDP / Real GDP ) x 100

Limitations of GDP

NOT included:

• government transfer payments

• environmental conditions

• a measure of a nations health

• time spent cooking at home

underground / informal sector

GDP does now include illegal or informal transactions

Business fluctuations (cycles)

short term movements in real GDP around its long term trend