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Chapter 2

ECON202 Chapter Notes - Chapter 2: Gdp Deflator

Course Code
Maryann Vaughan

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The Science of Macroeconomics
Gross Domestic Product: Expenditure and Income
Two Definitions:
Total expenditure on domestically-produced final goods and services
Total income earned by domestically-located factors of production.
Expenditure equals income because every dollar spent by a buyer becomes income to the seller
Final Goods, Value Added and GDP
The value of the final goods already includes the value of the intermediate goods, so
including intermediate and final goods in GDP would be double-counting.
Some rules for calculating GDP
1. The importance of inventories. Since we want to measure production in a given year, we
add the value of unsold goods to inventories and include this value in the GDP
2. We add-up the many and varied goods and services by multiplying the quantity by the
market price
a. Requires common unit of market price
3. Exclude intermediate goods. Count the value of final goods and services only in the GDP
calculation. Otherwise, double-counting will occur. Final good includes the value of the
component parts
4. If goods or services do not have a price, use an imputed value

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a. Imputed rent on owner-occupied housing-“roof over the head” example
b. Government serves are valued at cost
5. Excluded:
a. used goods
b. Home production
c. Underground economy
d. Services of durable goods
The Expenditure Components of GDP
consumption, C
investment, I
government spending, G
net exports, NX
Consumption (C)
The value of all goods and services bought by households.
durable goods - last a long time
e.g., cars, home appliances
nondurable goods - last a short time
e.g., food, clothing
services - work done for consumers
e.g., dry cleaning, air travel

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Investment (I)
Spending on goods bought for future use (i.e., capital goods)
The purchase of newly produced goods/services to add to the capital stock
Business fixed investment: Spending on plant and equipment
Residential fixed investment: Spending by consumers and landlords on housing units
Inventory investment: The change in the value of all firms’ inventories
Housing: Structure is imputed once as investment and ever year on afterwards, it is imputed as
calculated “rent” for the service
Investment vs. Capital
Note: Investment is spending on new capital.
Example (assumes no depreciation):
1/1/2009: economy has $500b worth of capital
during 2009:investment = $60b
1/1/2010: economy will have $560b worth of capital
Government Spending (G)
G includes all government spending on goods and services in all levels of government.
G excludes transfer payments (e.g., unemployment insurance payments), because they
do not represent spending on goods and services.
Transfer payments: Direct transfers of money from government to individuals
Transfer payments are included in “government outlays,” but not in government spending.
People who receive transfer payments use these funds to pay for their consumption, no
production involved. Thus, we avoid double-counting by excluding transfer payments from
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