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Economics - GDP, Inflation, and Unemployment

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Study GuideEconomics–GDP, Inflation, and Unemployment1. GDP1.1What is GDP?Gross Domestic Product (GDP)is themarket value of all final goods and services producedwithin a country in one year.It is themost important measure of a country’s economic performancebecause it tells us howmuch an economy produces.A closely related concept isGross National Product (GNP).GNP measures themarket value of all final goods and services produced by a nation’s citizensand firms in one year, no matter where the production happens.1.2GDP vs GNP: What’s the Difference?The difference between GDP and GNP is mainly aboutwhere production takes placeandwhoproduces it.•GDP includes:oGoods and services producedinside a country, even if they are made byforeignfirms or workers.•GNP includes:oGoods and services produced by a country’sown citizens and firms, even ifproduction happensoutside the country.In practice,GDP and GNP values are usually very close, so economists often useGDPto studyoverall economic activity.For this reason, the rest of this chapter focuses onGDP.

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Study Guide1.3Measuring GDPThere aretwo main waysto measure GDP:1.The Expenditure Approach2.The Income ApproachBoth methods give thesame final value of GDP.1.4The Expenditure ApproachTheexpenditure approachadds upall spending on final goods and services produceddomestically in one year.What are Final Goods?•Final goods and servicesare bought forfinal use.•They arenot resoldor used to make other goods in the same year.Intermediate goods(goods used to produce other goods) arenot includedto avoiddoublecounting.Their value is already included in the price of final goods.1.5The Four Components of GDP (Expenditure Approach)GDP is thesum of four major types of spending:1.5.1. Consumption (C)This is thelargest part of GDP.It includes:•Nondurable goods: food, clothing•Durable goods: cars, refrigerators, appliances•Services: doctors, barbers, lawyers, mechanics, teachers

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Study Guide1.5.2. Investment (I)Investment means spending on goods that helpproduce more goods in the future.There are two types:a) Fixed InvestmentIncludes:•New machinery and equipment•Factories and offices•Residential housing•Replacement of old or worn-out equipmentThe value of goods that must be replaced each year is calleddepreciation.b) Inventory Investment•Goods that firms produce buthave not yet sold•Thechange in inventory valuefrom one year to the next is counted as investment1.5.3. Government Expenditure (G)Includes government spending on:•Salaries of government employees•Construction of roads, bridges, and public buildings•Military and public servicesTransfer payments(like pensions, welfare, or social security) arenot included, because:•No new goods or services are produced in return1.5.4. Net Exports (X − M)•Exports (X): domestically produced goods sold abroad →added•Imports (M): foreign goods bought domestically →subtractedNet exports = Exports − Imports

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Study Guide1.6The Income ApproachTheincome approachmeasures GDP byadding all incomes earned in production during theyear.These incomes include:•Wages•Profits•Rent•InterestThe idea is simple:Money spent on goods and services eventually becomes income for households and firms.1.7Why Do We Adjust Income?Two items are included in spending butdo not directly become income:1.DepreciationoReplacing worn-out equipmentoIncreases income for sellers but reduces profits for buyersoTotal income stays unchanged2.Indirect Business TaxesoSales tax, excise taxoCollected by firms but paid to the governmentoNot counted as firm incomeSo, to move fromGDP to National Income, we subtract:•Depreciation•Indirect business taxes
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Document Details

University
Texas A&M University
Course
Economics
Subject
Economics

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