Chapter Gross Domestic Product

• Gross Domestic Product 

  • What is it?

    • The market value of all final goods and services produced in a country during a period of time, typically one year

  • Components of GDP: 

    • Consumption Spending: spending by households on goods and services, not including spending on a new house

      • Services

        • medical care, education, and haircuts

      • Nondurable goods

        • Food and clothing

      • Durable goods

        • Automobiles and furniture

      • The largest subcategory within consumption is services

      • When our economy struggles, we first cut out spending on durable goods

    • Investment Spending: spending by firms on new factories, office buildings, and additions to inventories, plus spending by households and firms on new houses

      • business fixed investment

        • New factories, office buildings, machinery and research and development

      • Residential investment

        • New single-family and multi-unit house

      • Changes in business inventories

        • Goods that have been produced but not yet sold

      • The largest category of investments is business fixed investments

    • Government Expenditure: spending by federal state and local governments on goods and services

      • Teachers salaries, highways, and aircraft carriers

      • Government expenditures do not include transfer payments since those do not result in immediate production of new goods and services

      • Transfer payment: free money given by government to households or firms

      • Examples of transfer payments: medicaid, medicare, social security payment

      • The largest category of spending in government expenditures is state and local government

    • Net Export: The value of exports minus the value of imports

      • More often negative

  • Consumption is the backbone of US spending

• Shortcomings of GDP as a measure of total production

  • Measure of total production

    • Does not measure → household production or the underground economy

  • Measure of wellbeing

    • Does not reflect the value of leisure, Pollution and other negative effects of production, Crime and other social problems, The distribution of income

• Real GDP vs. Nominal GDP

  • Nominal GDP: The value of final goods and services evaluated at current-year prices

  • Real GDP: The value of final goods and services evaluated at base-year prices

• GDP Deflator

  • What is a GDP Deflator

    • A measure of the price level, calculated by dividing nominal GDP by real GDP

    • GDP Deflator formula: Nominal GDP/Real GDP x 100

  • Inflation Rate using GDP Deflator

    • (New-OLD)/OLD x 100 = % change formula

• GNP vs. GDP

Gross national product (GNP): Production performed by citizens of a nation, including overseas production