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CHAPTER 5: GDP: A Measure of Total Production & Income

by: Tykiera Manning

CHAPTER 5: GDP: A Measure of Total Production & Income ECON 222 003

Marketplace > University of South Carolina > Macro Economics > ECON 222 003 > CHAPTER 5 GDP A Measure of Total Production Income
Tykiera Manning
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About this Document

These notes over Gross Domestic Product and its entirety.
Principles of Macroeconomics
Dr. Shimpalee
Class Notes
Macroeconomics, Economics




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This 5 page Class Notes was uploaded by Tykiera Manning on Saturday August 27, 2016. The Class Notes belongs to ECON 222 003 at University of South Carolina taught by Dr. Shimpalee in Fall 2016. Since its upload, it has received 48 views. For similar materials see Principles of Macroeconomics in Macro Economics at University of South Carolina.

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Date Created: 08/27/16
Chapter5 –GDP:A Measure of TotalProductionandIncome GDP,Income and Expenditure  GrossDomesticProduct(GDP) isthe total market value of all final goods & services producedwithina countryin a givenperiodof time.  Afinalgoodandservice is something that isproducedfor itsfinal user andnot asa component of anothergoodorservice.  Anintermediategoodorservice isused as a component of a final good orservice. For example, a truck isthe final good, but the tire for the truck is the intermediate good.  Nationalincomeandproductaccounts ornational accountsprovide a set of numbers that indicate the country’sstate of economicperformance  SimonKuznets (1901-1985) andRichard Stone (1913-1991) developed comprehensive systemsformeasuring a nation’s output of goodsandservices Circular Flows in the U.S. Economy Fourgroups buythe final goodsandservicesproduced:households, firms, governments, andthe restof the world. Fourtypesof expenditure agree to these groups:  Consumption expenditure  Investment  Government expenditure ongoodsandservices  Net exportsof goodsandservices Consumption Expenditure (C)  It isthe expenditure byhouseholdson consumptiongoodsandservices. Also includes house andapartment rents,including the rental value of owner-occupiedhousing.  Goodsinclude householdspending on durable goods (ex. Televisions andDVD players) andnon-durable goods(ex. Orange juice and pizza)  Services include such intangible items, such as haircuts androck concerts. Investment (I)  Investment isthe purchase of new capitalgoods(tools, instruments, machines, buildings,andother constructions)and additionsto inventories. Capitalgoods are durable goodsproduced byone firmandbought byanother. includesspending on: Physical capital(e.g., machines,tools) Constructionof structure (factories,office buildings) Changesto inventories (inventoriesare stocks of goodsandraw materialsheldto facilitate businessoperations) *Investmentdoesnotmeanthe purchase offinancial assetslikestocks and bonds* Chapter5 –GDP:A Measure of TotalProductionandIncome Government Expenditure (G)  It isall spendingonthe goods& services purchasedby government at the federal, state, andlocal levels  Government Expenditure excludestransferpayments,suchas Social Securityor unemployment insurance benefits Net Exportsof GoodsandServices  Isthe value of exportsof goodsandservicesminusthe value of importsof goodsand services Net exports= Exports –Imports= Trade balance Exports(X) = the goodsandservicesthat are made inone countryand transmittedto foreigners Imports(IM) = the goodsandservicesthat are bought byresidents,governmentsor businessesof a country, but made outside of the country X >IM=TradesurplX<IM =Trade deficit Total Expenditure Expenditure approach: GDP= C+ I + G+ NX *measurestotal expenditure onoutput ofgoods & services* GDP= C+ I + G+ X - IM C = Consumerexpenditure I = Investment G = Government expenditure NX = Net exports orX - IM Income  Net taxesequal taxespaid minus cash benefits received  Saving isthe amount of income that isnot paid in net taxesorspent onconsumption goodsandservices. TotalIncome (Y) = Consumptionexpenditure (C)+ Savings (S) + Net taxes(NT) Income approach: GDP= Wages + (Rent + Interest+ Profit) + Indirect taxeslesssubsidies+ Depreciation *measurestotal incomeof everyonein the economy* Chapter5 –GDP:A Measure of TotalProductionandIncome Circular-Flow Diagram Illustrates theflow offunds throughthe foursectionsof theeconomy -household, firms,government and foreign sectorvia three typesof markets: factormarkets,marketsforgoods andservices, andfinancial markets.  Financialmarkets –isa market that allowspeople to buyandsell stocks, bonds, or financial assets  Factormarkers – isa market that allowspeopleto buyandsell inputs use inthe productionprocess (Ex. Land)  Productmarkets–isa market that allowspeople to buyandsell products Government Budget Balance GBB = Government revenue –Government spending GBB = Taxes –(Government expenditure + Transferpayment) GBB = T –(G+ Tr) *T>(G + Tr) budgetsurplus* *T<(G + Tr) budget deficit* Disposable Personal Income (DPI)  The total amount of money available for an individual or population to spend or save aftertaxeshave beenpaid. DPI = (Wage + Profit + Interest+ Rent) +Tr –T Chapter5 –GDP:A Measure of TotalProductionandIncome GrossDomesticProduct Analyzed GDPisthe total market value ofall final goods & services produced withina country ina given periodof time  MarketValue –current market price (Price perunit x quantity)  All –GDP includesall itemsproduced inthe economyandsold legallyin markets  Finalgoods –intendedforthe enduser. Intermediate goods: used as components oringredientsinthe productionof othergoods. GDPonlyincludesfinal goods: they alreadyembodythe value of the intermediate goods used intheirproduction  GoodsandServices –GoodsandTangible goods andintangible services(cell phone, concerts, drycleaning)  Produced – GDP includes currently produced goods, not goods produced in the past  WithinaCountry –GDP measuresthe value of productionthat occurswithina country’s borders, whetherdone by its owncitizensorbyforeignerslocatedthere  GivenPeriodofTime – usuallya year ora quarter(3 months) GrossNational Product (GNP)  GNP isaneconomic measurement of the total value of all final goodsand servicesthat a nationproduces ina year andthe income earnedbyits citizens(excluding income generatedbyforeigners inthe nation’s economy)  GNP isthe market value of allthe final goodsandservicesproducedanywhere inthe worldina giventime periodbythe factorsof productionsuppliedbyresidentsof the country  GNP isequal to GDPplus income earnedbyresidentsfromoverseas investmentsminus income generated byforeigners inthe nation’s economy GNP= GDP+ (Net factor income fromabroad) GNP= GDP+ ((Income earnedabroad byU.S. citizensandfirms) –(Income earnedinthe US by foreignfirmsorresidents)) Questions WhichofthefollowingwillbeincludedinGDPfortheUnitedStates?(What’sinandWhat’s out?) 1. Hamburger buns bought by McDonald’s corporation for making Big Macs (NO) 2. Aused macroeconomictextbooks (NO) 3. Anew FordFocus2016 (YES) 4. Anew Ferrari2016 (NO) Chapter5 –GDP:A Measure of TotalProductionandIncome WhichofthefollowingtransactionswillbeincludedinGDPfortheUnitedStates?(What’s inandWhat’sout?) 5. A20-year-oldhouse issold to a young familyfor$200,000. The familypays the real estate agent a 6 percent commission, or $12,000 (YES/NO) 6. iPhone (NO, BUT IS PART OFTHEU.S. GNP)


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