GDP and the Expenditure Approach – Key Concepts (Lecture Notes)

Flashcards cover GDP basics, nominal vs real, final vs intermediate goods, the expenditure approach (C, I, G, NX), government spending, transfer payments, inventories, and why GDP matters.

What does GDP stand for, and what does 'domestic' mean in this context?

GDP stands for Gross Domestic Product; domestic means within a country's borders.

What does 'nominal GDP' measure?

The current year's production valued in the current year's prices.

Why can nominal GDP be misleading over time?

Prices change over time, so nominal GDP can distort true production; real GDP adjusts for price changes.

What is the difference between final and intermediate goods?

Final goods are sold to the end user; intermediate goods are used to produce other goods and are not double-counted.

Are used goods counted in GDP?

No; used goods are not counted because they were counted when they were first sold.

What are the four components of the expenditure approach to GDP?

Consumption (C), Investment (I), Government spending (G), and Net exports (NX = exports minus imports).

What does 'C' (consumption) include, and what is excluded?

Household spending on final goods and services, including durable goods, nondurable goods, and services. New homes are not included in consumption.

What are the three subcategories of consumption?

Durable goods (>3 years), nondurable goods (<3 years), and services.

What does 'I' (investment) include in GDP?

Business purchases of new capital goods and changes in inventory.

What counts as a capital good in investment?

A good used to produce other goods, such as a welding machine, table saw, or company trucks.

What are the subcategories of investment?

Business-based investment (capital goods), Residential investment (new homes), and Changes in inventory.

What is included in 'G' (government spending)?

All federal, state, and local government purchases of goods and services, including public salaries; transfer payments are not included.

What are transfer payments, and why aren’t they included in GDP?

Money transferred from the government to individuals (e.g., stimulus checks, unemployment benefits, Social Security) that do not produce goods or services; counting them would double-count.

What is 'NX' (net exports) in the GDP formula, and how is it calculated?

Net exports equal exports minus imports; exports are domestically produced goods sold abroad, and imports are foreign goods bought domestically and subtracted to reflect domestic production.

Why are imports subtracted in the net exports calculation?

To cancel out foreign-produced goods that were counted in consumption, ensuring GDP reflects only domestic production.

What is the role of the Bureau of Economic Analysis (BEA) in GDP estimation?

BEA collects receipts/logs for the expenditure categories and revises GDP estimates as better data become available.

Why is GDP important for individuals and businesses?

It signals overall economic health, helps assess whether issues are economy-wide or sector-specific, and informs forecasts and business decisions.

What is the purpose of changes in inventory in the investment category?

To account for goods produced but not sold in the period, ensuring production is captured even if not sold yet.

Are financial investments like stocks counted in GDP?

No; buying stocks or bonds does not produce goods or services, so it is not included in GDP (income measures capture related activity).