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, Professor of Finance & Economics, Southern New Hampshire University 2008 South-Western
In This Lecture..
Gross Domestic Product Expenditures Computing GDP Measurements Other Than GDP Real GDP Economic Growth and Business Cycles
Self-Test Questions
Identify and explain the three approaches to computing GDP. Suppose the GDP for a country is $0. Does this mean that there was no productive activity in the country? Explain your answer.
Consumption
The sum of household spending on: Durable goods Nondurable goods Services
Durable Goods
Durable goods are goods that are expected to last for more than three years, such as refrigerators, ovens, or cars.
Nondurable Goods
Nondurable goods are goods that are not expected to last for more than three years, such as food.
Services
Services are intangible items such as lawn care, car repair, and entertainment.
Investment
The sum of all purchases of: Newly produced capital goods Business purchases of capital goods, such as machinery and factories Changes in business inventories Changes in the stock of unsold goods. Purchases of new residential housing
Government Purchases
Includes: Federal, state, and local government purchases of goods and services and gross investment in highways, bridges, and so on. Excludes: Government transfer payments to persons that are not made in return for goods and services currently supplied.
Net Exports
Exports (X) - Total foreign spending on domestic (U.S.) goods Less Imports (M) - Total domestic (U.S.) spending on foreign goods
Expenditure Approach
GDP 2006
National Income
Total income earned by U.S. citizens and businesses, no matter where they reside or are located. National income is the sum of the payments to resources (land, labor, capital, and entrepreneurship).
COMPENSATION OF EMPLOYEES
Compensation of employees consists of wages and salaries paid to employees plus employers contributions to Social Security and employee benefit plans plus the monetary value of fringe benefits, tips, and paid vacations.
PROPRIETORS INCOME
Proprietors income includes all forms of income earned by self-employed individuals and the owners of unincorporated businesses, including unincorporated farmers.
CORPORATE PROFITS
Corporate profits include all the income earned by the stockholders of corporations.
NET INTEREST
Net interest is the interest income received by U.S. households and government minus the interest they paid out.
From NI to GDP
GDP = National income - Income earned from the rest of the world + Income earned by the rest of the world + Indirect business taxes + Capital consumption allowance + Statistical discrepancy
Self-Test Questions
Describe the expenditure approach to computing GDP in a real-world economy. Will GDP be smaller than the sum of consumption, investment, and government purchases if net exports are negative? Explain your answer. If GDP is $400 billion and the countrys population is 100 million, does it follow that each individual in the country has $40,000 worth of goods and services?
Real GDP
The value of the entire output produced annually within a countrys borders, adjusted for price changes (inflation).
Economic Growth
Economic Growth is measured by increases in Real GDP.
Business Cycle
Recurrent swings (up and down) in Real GDP.
Self-Test Questions
Suppose GDP is $6 trillion in year 1 and $6.2 trillion in year 2. What has caused the rise in GDP? Suppose Real GDP is $5.2 trillion in year 1 and $5.3 trillion in year 2. What has caused the rise in Real GDP? Can an economy be faced with endless business cycles and still have its Real GDP grow over time? Explain your answer.
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