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GDP and Its Components

• GDP (Gross Domestic Product) measures total economic activity.

  • Calculated by who buys goods: consumption (C), investment (I), government spending (G), net exports (NX).

• Interaction of components:

  • Total spending equals total output.

  • Income generated from goods supports consumption, investment, and government expenditures.

Income Distribution

• Government takes a portion of income through taxes.

  • This funding is used for public goods.

• Income affects both consumption and savings:

  • Disposable income (after taxes): influences spending.

  • Households generally consume a large portion of their disposable income.

Import and Exports

• Net exports contribute positively to GDP:

  • Foreign purchases boost GDP.

  • Importing goods does not negatively impact the economy; often, it provides cheaper alternatives for consumers.

Measuring GDP

• Two main approaches:

  • Expenditure approach focuses on spending.

  • Income approach emphasizes how income is generated from production.

• Real GDP adjusts for inflation to allow year-to-year comparison.

Consumption and Savings

• Most Americans use disposable income for consumption after taxes.

  • Money not spent becomes savings.

• The consumption function shows that disposable income directly affects consumption rates.

  • Generally, lower-income households spend a higher percentage of their income.

Economic Relationships

• Historically, there's a consistent relationship between consumption and disposable income.

  • Consumers tend to spend 90% to 95% of their income.

  • Economic downturns (like the Great Recession or COVID-19) can temporarily affect spending habits, but the overall trend remains stable.

Key Concepts to Remember

• Consumption = Disposable Income - Savings

• Higher disposable income usually equals higher consumption, but the correlation is not perfect.

• Economic activity is driven by the interaction of consumption, income, and gross investment.