Gross Domestic Product (GDP) is the market value of final goods and services produced in a country in a given period of time.
➜ GDP can be measured in 2 ways:
1) market value
2) total spending for final goods — value of imports
Final goods and services are consumed by the ultimate user
➜ End products of production
4 users of final goods:
➜ Household ➜ Firms ➜ Government ➜ Foreigners
Intermediate goods and services are used up in the production of final goods
➜ Not included in the calculation of GDP to avoid double-counting.
A capital good is a long-lived good used to produce other goods and services.
➜ Houses, apartments ➜ Renting
➜ Cars ➜ Uber, taxis, delivery vehicles
*** Money is not a capital good
Value added is the { market value of the product } — the { cost of input purchased from other firms }.
“Domestic” in GDP means the activity is measured within a country’s border.
The nationality of owners or companies is irrelevant.
Consumption Expenditure
It is the spending by households for goods and services
Consumer durables are long-lived consumer goods
➜ Cars ➜ Furniture ➜ Appliances
*** House is not consumer durable.
Consumer non-durable goods shorter-lived goods
➜ Clothing ➜ Food ➜ Bedding
Services are the largest component of consumer
➜ Education ➜ Ubers ➜ Haircuts
Investment is spending by firms on final goods and services
Business fixed investment is purchases of new capital goods
== Purchase for further production of goods and services
Examples:
➜ Equipment (computers and machines)
➜ Structures (such as plants, shopping malls, or warehouses)
➜ Intellectual property (such as software and R&D)
Residential Investment is the construction of new homes and apartment buildings
Inventory investment is the change in unsold goods to the company’s inventory
➜ These goods are produced but not yet sold
➜ This entry can be positive or negative
Financial Investment
➜ Stocks, bonds, and other financial assets
Government Purchases
➜ final goods and services bought by federal, state and local government
*** Exclude transfer payments: made by the government, but the government receives no current goods or services
➜ Social Security ➜ Food Stamps
Spending by recipients is included in the GDP
Exclude interest paid on government debt
Net Exports = exports — imports
GDP Expenditures Equation
Y = C + I + G + NX
Y : Gross Domestic Product / output
C : Consumption Expenditure
I : Investment
G : Government Purchases
NX : Net Exports
Income Approach to GDP
When a good is sold, its proceeds are distributed to workers or business owners
GDP = labor income + capital income
Labor income is wages, benefits and incomes of the self-employed
➜ 2/3 of GDP’s composition
Capital income pas for physical capital and intangibles
➜ Rent for land➜ Royalties
➜ Measuresd before taxes
Real GDP values output in the current year using the prices from the base year
➜ Real GDP measure the physical volume of production
Nominal GDP values output in the current year using prices from the current year
➜ Nominal GDP is the current dollar value of production
If nominal GDP goes up and real GDP goes down
➜ Fewer goods and services produced
➜ Prices increase faster than output decreases
If real GDP rises and nominal GDP falls, it is rare
➜ Prices are falling faster than output is increasing
Limitations of GDP
- GDP does not value Leisure
➜ Leisure produces no goods for market
➜ Opportunity cost of an hour of leisure is your hourly wage - GDP omits services that are not traded in markets
➜ Household production
➜ Volunteer services - Underground economy is omitted
➜ Casual labor is paid in cash which failed to report transaction reduces taxes - Environment Quality
- Poverty and Economic Inequality
Unemployment (the U.S.)
Labor force = employed + unemployed
Unemployment rate = unemployed / labor force
Participation rate = labor force / population 16+
Long-term unemployed = out of work for 6 months or more
Short-term unemployed:
➜ Job searching
➜ Leaving labor force
➜ Short-term or temporary job that leads to unemployment
