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Lecture 21

ECON 2400 Lecture 21: Lesson 21

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ECON 2400
prof Antone

Lesson 21 Net Exports As exports were less than imports in 2011, the United States ran a trade deficit in goods and services with the rest of the worldthat is, net exports were negative. Exports were 13.8 of GDP in 2011 while imports were 17.7 of GDP. Trade with the rest of the world in goods and services, therefore, is quite important to the U.S. economy. Government Expenditures An important point is that the government spending included in the NIPA is only the expenditures on final goods and services. Government expenditures, which consist of expenditures by federal, state, and local governments on final goods and services, were 20.1 of GDP in 2011. The main components of government expenditures are federal defense spending (5.5 of GDP in 2011), federal nondefense spending (2.7 of GDP in 2011), and state and local spending (11.9 of GDP in 2011). The NIPA also make the important distinction between government consumption and government gross investment, just as we distinguish between private consumption and private investment. An important point is that the government spending included in the NIPA is only the expenditures on final goods and services. This does not include transfers, which are very important in the government budget. These outlays essentially transfer purchasing power from one group of economic agents to another, and they include such items as Social Security payments and unemployment insurance payments. Transfers are not included in GDP, as they are simply money transfers from one group of people to another, or income redistribution rather than income creation. Nominal and Real GDP and Price Indices While the components of GDP for any specific time period give us the total dollar value of goods and services produced in the economy during that period, for many purposes we would like to make comparisons between GDP data in different time periods. This might tell us something about growth in the productive capacity of the economy over time and about growth in our standard of living. A problem, however, is that the average level of prices changes over time, so that generally part of the increase in GDP that we observe is the result of inflation. We show how to adjust for this effect of inflation on the growth in GDP and, in so doing, arrive at a measure of the price level and the inflation rate.
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