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Lecture 3

ECON 20B Lecture 3: Econ20B-Lecture3

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Econ 20B - Lecture 3- Nominal GDP, Real GDP,and GDP Deflator Expenditure Approach (Con’t) ● 2. Investment, I ○ Private spending on tools, plant and equipment used to produce future output ■ Residential Investment: purchase of a new house ■ Nonresidential Investment: spending by firms on new factories, office building, machinery etc. used to produce other goods ○ Changed in business inventories- goods produced by not yet sold ■ Ex: GM has $100 million worth of unsold car at the beginning of the year, and $260 million worth of unsold cars at the end of the year ● Change in the car inventory= Final value - initial value = $260 - $100 = $160 million [inventory investment] ■ Ex: GM buys $200 million worth of new factories or machinery ● Non-residential Investment ■ Ex: GM has $100 million of unsold car at the beginning of the year, and $0 million worth of unsold cars at the end ● Inventory investment = final value - initial value = 0-100 = -$100 million ● Key: not this year’s production, this increases consumption; decreases investment; overall doesn’t affect GDP ● Key: An intermediate foos added to the inventory is a part of GDP (i.e taken as final). Later when it is added, reduction in the inventory investment subtract from the GDP ○ This is an exception to the final rule ● 3. Government Purchase, G ○ Spending by government- fed, state and local on goods and services ■ Ex: teacher’s salaries, highways, etc. ○ Rule: transfer payments ( social security benefit, unemployment insurance payments) ■ Transfer payment is not in exchange for any goods and services ■ Transfer payments are not included in the GDP ● 4. Net Exports, NX ○ Exports (X) - import (M) ■ Exports: goods and services produced domestically, and sold to foreigners ■ Imports: goods and services produced in foreign country b
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