Chapter 8 homework

• Numbers 4, 6, 8, 16 and 18

Chapter 9

GDP and the Business Cycle

Calculating GDP (cont’d)

• GDP uses dollars as a common denominator to value the goods and services produced in the economy. The market value of a good is found by

multiplying the quantity of each good produced by its price.

GDP is the sum of the market values of all goods and services produced in the economy.

New Goods and Services

• To avoid double counting, only newly produced goods and services are counted in GDP. GDP counts the production of a good

or service only once, in the year it was produced.

If you bought a car for $3500 in 1999 and sold it this year for $2000 in what year and how much will be counted towards GDP?

• $3500 in 1999 only!!

Final Goods and Services

• GDP includes only final goods and services. Final goods are used by the ultimate

consumer and are not used in the production of other goods.

Intermediate goods are inputs that are “used” up in the production of a final good.• Inputs used in production

• Not included in GDP.

Goods and Services Produced in a Given Country

• Only goods and services produced within a country’s borders are included in GDP. For example, a Toyota produced in the U.S. would

be counted in U.S. GDP.

A Ford produced in Canada would not be counted in U.S. GDP.

Goods and Services Produced in Given Period of Time

• Because the production takes time we must specify the period over which GDP is measured. Usually measured annually.• Smoothes out random fluctuations

• Accounts for regular, predictable swings in production

• Many governments provide quarterly estimates of expected yearly production.

The Expenditure Approach to GDP

• The market value of output is determined only when it is purchased. The dollar value of the quantity supplied by

producers = dollar value of the quantity demanded

Demanded by who???

• households, firms, the government, and foreign countries.

GDP = C + I + G + (X-M)

Consumption Expenditures by Households

• Consumption spending (C) refers to the purchases of goods and services by households for their own use. Durable Goods Non-Durable Goods Services Rental Expenditures on Housing

• Consumption accounts for more than two-thirds of all U.S. expenditures.

Investment Expenditures

• There are three categories of spending that are included in investment expenditures (I): Spending on capital goods such as

machinery and equipment

• Capital goods are man-made inputs used—but not used up—in the production of final goods.

Investment Expenditures (cont’d)

All private construction• Includes factories, rental property and new single-

family homes

Changes in business inventories

• Inventory is the stock of goods that a firm produces but does not sell in the same time period.

• Firms add to inventory: When they produce a good in one year and sell it in

another year When they want to protect themselves from an interruption

in production When they overestimate demand for their good

Government Expenditure

• Government expenditure (G) refers to spending on goods and services by all three levels of government: federal, state, and local. Transfer payments—such as Social

Security payments and unemployment benefits—are not counted as government expenditure.

• They do not involve new production.

Net Exports

• Some goods are not produced domestically. Spending on these imports (M) are

subtracted from GDP.

Net Exports (cont’d)

• On the other hand, U.S. firms sell some of what they produce to households, firms and governments in foreign countries. Because produced domestically, spending

on these exports (X) are added to GDP.

•

Net ExportsX M

GDP C I G (X M )

The Expenditure Approach

• Adding together the individual components of GDP gives the total value of all final goods and services produced in the economy:

Table 9.1 The Components of the Expenditure and Income Approaches to GDP in 2004

Can we do it??

• Number 4 and 11

Answers??

4. Nabisco’s purchase of flour is seen as an intermediate goods purchase and is not counted in GDP.

My purchase of flour is counted as consumption, as it is a final goods purchase regardless of what I do with the flour, assuming I am not selling the baked goods.

The Pentagon’s purchase of flour is included in government spending, as it is buying it as a final good or service. Since the Pentagon is not in the business of selling flour-based products, flour is not seen as an intermediate good.

If Nabisco buys a new oven, it should be part of real investment = I.

Counted but Depends…were the hazelnuts actually produced in Hungary? If so…import so subtracted. If not then consumption and added to GDP

Answers??

• 11. GDP = C+I+G+(X-M) = 5000+1000+500+(3000-4500) = 5000