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Chapter 7-8

ECO 2013 Chapter Notes - Chapter 7-8: Gross Domestic Product, List Of Countries By Real Gdp Growth Rate, Gdp Deflator

Course Code
ECO 2013
Nora Underwood- Caputo

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Part 3: The Data of Macroeconomics
Chapter 7: Measuring the Wealth of Nations
Activities that go in to making and buying a product (such as just a mere jar of peanut butter)
adds value to the economy
How do we measure how much?
At each stage the product is sold as an output of one firm and purchased as an input by
another firm
How to add up all econ activity w/o double-counting items resold more than once before
they reach the consumer?
National income accounting- system created to calculate the value of a nat’l economy
Valuing an Economy
Macroeconomics- the study of the economy on a broad scale, focusing on issues such as
economic growth, inflation, and unemployment
consumption, production, prices in the aggregate (on the national lvl.)
steady economic growth, stable prices, and low unemployment = key
*Gross Domestic Product (GDP)- most commonly used metric for measuring the value of a nat’l
economy; sum of the market values of all final goods & services produced w/in a country in a
given pd. of time
measures economy’s size & value
when imports inc, GDP decreases
Unpacking the definition of GDP
4 Important pieces of GDP:
1. Market Value
Translate the production of various goods and services into a common unit so we can add
them up
Common unit = Market value in the U.S. (measured in $)
2. Final Goods & Services
To avoid double-counting, ignore the price of intermediate good & services (those used
only to produce something else, like raw materials in the final good)
Count only expenditures on final goods and services!
o Those that get sold to a consumer = purchase contributed to GDP
G&S that are consumed by an end-user are called final goods
3. Produced Within a Country
Location of production matters, not the citizenship of the producer
U.S. company’s factory in China would result in Chinese GDP
Gross National Product (GNP)- sum of the market values of all final goods & services produced
and capital-owned by the permanent residents of a country in a given pd. of time
Produced by all [ex: U.S.] companies regardless of location
Includes worldwide income earned by a country’s enterprises & permanent residents
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Excludes production by foreign nationals working domestically
4. Given Period of Time
Output can theoretically be measured over any time pd.
GDP is usually calculated on a quarterly basis (4x/yr)
o Used to estimate annual GDP
o Adjusted to account for seasonal patterns
Quarterly GDP typically shown as a seasonally adjusted estimate at an annual rate
o Predictable patterns = good guesses at GDP rates
Production = Expenditure = Income*
“Size” of an economy the amount of ‘stuff’ (output/production) ppl. in the economy are
making; includes goods & services
About 3/4ths of U.S. output is services, not goods
Two ways of placing dollar values on goods and services:
Measure total output by measuring total expendituresum of all the money people spend
buying final goods & services
Measure production by adding up everyone’s income
o Expenditures in one party = income for another
When we exclude taxes and the freoign sector, every penny spent on a G&S becomes income for
one of the factors of production
Approaches to Measuring GDP
Idea of ‘production = expenditure = income’ would be true on easy terms if we lived in a
economy, where all goods produced and sold domestically was consumed asap
Economy more complicated; international trades, imports, exports
Ex included in GDP: renting an apartment, paying college tuition, buying a new
computer, a local gov’t installs a new stoplight
The Expenditure Approach
Include the following for expenditures:
Consumption; final goods consumed on purpose
Intermediate goods are included in GDP only in the sense that their value is contained in
the market price of the final good
Investment; Goods bought by firms for investments
Government purchases
Net Exports; exports= goods & services prod. In the US and bought by foreigners
o Don’t count imports
o Net export = amt. of exports amt. of imports; used to calc. expenditures
Consumption- spending on goods & services by private individuals and households
Includes nondurable (food/clothing) goods, durable (computers/cars) goods, and services
(tutoring/plumbing), or paying for rent/education
Has to be new to be counted in GDP; doesn’t count re-sold items (eBay)
o Service and shipping fees however does count as consumption
Investment- spending on productive inputs, such as factories, machinery, & inventories
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Goods bought by people/firms who plan to use those purchases to prod. G&S in the
future, rather than consuming them
Capital goods (machines/tools) and warehouses or factories
An investment on a newly built house vs. paying for rent (service)
Investment goods are counted only if they’re new (incl. present houses/factories)
o Services of realtor selling u the house
o Doesn’t include shares of stock
Inventory- stock of goods that company produces now but doesn’t sell immediately
o Dealing w goods prod. but not sold until later
o Treat it as if producing company has “bought” it to keep in stock for the future
o No net inc. in GDP (WHY?)
Non-residential fixed, residential fixed
Government purchases- spending on goods & services by all lvls. of gov’t
Includes gov’t consumption and investments
Spending that transfers resources to individuals does not count (SSN programs for
private consumption)
When families buy groceries w/ money they’ve received this expenditure is part of
consumption, and thus counts as GDP
If families buy new house w/ they’ve received, it represents investment and as GDP
Net exports (NX)- exports minus imports; value of goods & services prod. domestically and
consumed abroad mins the value of goods & services produced abroad and consumed
Domestic spending o imports should get subtracted from GDP calculations, while int’l
spending on exports should get added
If exports are higher than imports, NX will be (+)
If imports are higher than exports, NX will be (-)
You can tell that residents buy more goods from abroad than they sell to people abroad if
their NX is negative
The Income Approach
Another way to deduct the value of a nat’l economy is to add up the income earned by everyone
in the country; highlights relative importants of the factors of production
Add up wages earned, interested earned on capital investments, rents earned on land &
property, and profits earned by firms
Income = Wages + Interest + Rental income + Profits
Same result as the expenditure method w/o any imports & exports
Transaction b/w foreign producers & buyers don’t involve domestic
production/expenditures and therefore don’t figure into GDP calculations
The Value-Added Approach (IDK THIS)
Looking at all transactions, but counting only the value they add to the economy
Look at the difference b/w the sale value of the product & value of the inputs that went
into it
To see final value added, sum up the value-added at each stage of the process
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