Chapter 2-ppt

Spending by the government on currently produced goods and services Government purchases were 20.6% of GDP in 2009 Government consumption includes government purchases for short-lived goods and services like health care and police Government investment includes spending for capital goods like buildings and computers. Pure government transfers (e.g., Social Security and Medicare) are excluded from G
To understand how to measure unemployment To understand different interest rates

Gross domestic product (GDP) is the total value of goods and services produced in an economy
◦ the broadest measure of economic activity
Measuring Economic Activity: National Income Accounting (cont’d)


National income accounting is an accounting system that measures economic activity and its components Fundamental identity of national income accounting:
where
Y = C + I + G + NX
Y C I G NX
= = = = = GDP = total production (output) consumption expenditure investment gov’t purchases of goods & services net exports = exports - imports


Total spending for currently produced consumer goods and services Consumption was 70.8% of GDP in 2009 Basic categories:
1. Consumer durables 2. Nondurable goods 3. Services


Inventory investment is the change in inventories (firms’ holdings of raw materials, unfinished goods and unsold finished goods) over a given period of time Inventory investment is included in GDP for the same reason that we include capital goods
Measuring GDP: The Expenditure Approach


GDP is the total spending on currently produced final goods and services in the economy National income identity:
Measuring Macroeconomic Data

To examine the different approaches to measuring gross domestic product
To understand real versus nominal GDP

To understand how to measure inflation
1. Fixed investment 2. Inventory investment 3. Residential investment


For non-economists, an investment normally refers to the purchase of common stocks or bonds For economists, investment spending refers to the purchase of physical assets, such as new machines or new houses—purchases that add to GDP


A capital good (e.g., a robot) is used in the production of other goods that is not used up in the stages of production New capital goods are classified as final goods because they are not included in spending on other final goods and yet their production is part of economic activity.


Value added is the value of a firm’s output minus the cost of the intermediate goods purchased by the firm By adding up the value added from each firm, we get the final value of the goods and services produced.


We calculate GDP over a fixed period of time, such as a quarter or a year GDP is a flow, which is an amount per a given unit of time By contrast, a stock is a quantity at a given point in time

Net exports (or trade balance) are exports minus imports Why subtract imports from GDP?
◦
Answer: Spending on imports is included in consumption expenditure, investment, and government purchases, but is not produced in this country


Spending on currently produced capital goods that are used to produce goods and services over an extended period of time Investment was 11.4% of GDP in 2009 Basic categories:




Is GDP the best measurement of national well-being? In 1972, the king of Bhutan proposed the replacement of GDP by ―gross national happiness‖ that incorporates factors such as spirituality and culture In 1990, the United Nations began to rank countries on a so-called human development index, which is a combination of life expectancy, education, literacy, educational participation, and GDP In 2008, a French economic commission led by Nobel Prize winner Joseph Stiglitz called for modifications to GDP with factors such as political freedom, physical safety, and work-life balance

GDP includes only goods and services that are newly produced in the current period If you buy a 3-year-old car from a car dealership
◦ ◦ The cost of the used car is not included in GDP The value of the services provided by the car dealership is included in GDP
In the case of apples and oranges, we multnd quantities, and then add them up:
GDP = (price of apples ✕ quantity of apples) + (price of oranges ✕ quantity of oranges)