Chapter 8 homework

1. Chapter 8 homework • Numbers 4, 6, 8, 16 and 18

2. Chapter 9 GDP and the Business Cycle

3. Calculating GDP (cont’d) • GDP uses dollars as a common denominator to value the goods and services produced in the economy. • The market value of a good is found by multiplying the quantity of each good produced by its price. • GDP is the sum of the market values of all goods and services produced in the economy.

4. New Goods and Services • To avoid double counting, only newly produced goods and services are counted in GDP. • GDP counts the production of a good or service only once, in the year it was produced. • If you bought a car for $3500 in 1999 and sold it this year for $2000 in what year and how much will be counted towards GDP? • $3500 in 1999 only!!

5. Final Goods and Services • GDP includes only final goods and services. • Final goods are used by the ultimate consumer and are not used in the production of other goods. • Intermediate goods are inputs that are “used” up in the production of a final good. • Inputs used in production • Not included in GDP.

6. Goods and Services Produced in a Given Country • Only goods and services produced within a country’s borders are included in GDP. • For example, a Toyota produced in the U.S. would be counted in U.S. GDP. • A Ford produced in Canada would not be counted in U.S. GDP.

7. Goods and Services Produced in Given Period of Time • Because the production takes time we must specify the period over which GDP is measured. • Usually measured annually. • Smoothes out random fluctuations • Accounts for regular, predictable swings in production • Many governments provide quarterly estimates of expected yearly production.

8. The Expenditure Approach to GDP • The market value of output is determined only when it is purchased. • The dollar value of the quantity supplied by producers = dollar value of the quantity demanded • Demanded by who??? • households, firms, the government, and foreign countries. • GDP = C + I + G + (X-M)

9. Consumption Expenditures by Households • Consumption spending (C) refers to the purchases of goods and services by households for their own use. • Durable Goods • Non-Durable Goods • Services • Rental Expenditures on Housing • Consumption accounts for more than two-thirds of all U.S. expenditures.

10. Investment Expenditures • There are three categories of spending that are included in investment expenditures (I): • Spending on capital goods such as machinery and equipment • Capital goods are man-made inputs used—but not used up—in the production of final goods.

11. Investment Expenditures (cont’d) • All private construction • Includes factories, rental property and new single-family homes • Changes in business inventories • Inventory is the stock of goods that a firm produces but does not sell in the same time period. • Firms add to inventory: • When they produce a good in one year and sell it in another year • When they want to protect themselves from an interruption in production • When they overestimate demand for their good

12. Government Expenditure • Government expenditure (G) refers to spending on goods and services by all three levels of government: federal, state, and local. • Transfer payments—such as Social Security payments and unemployment benefits—are not counted as government expenditure. • They do not involve new production.

13. Net Exports • Some goods are not produced domestically. • Spending on these imports (M) are subtracted from GDP.

14. Net Exports (cont’d) • On the other hand, U.S. firms sell some of what they produce to households, firms and governments in foreign countries. • Because produced domestically, spending on these exports (X) are added to GDP.

15. The Expenditure Approach • Adding together the individual components of GDP gives the total value of all final goods and services produced in the economy:

16. Table 9.1 The Components of the Expenditure and Income Approaches to GDP in 2004

17. Can we do it?? • Number 4 and 11

18. Answers?? • 4. Nabisco’s purchase of flour is seen as an intermediate goods purchase and is not counted in GDP. • My purchase of flour is counted as consumption, as it is a final goods purchase regardless of what I do with the flour, assuming I am not selling the baked goods. • The Pentagon’s purchase of flour is included in government spending, as it is buying it as a final good or service. Since the Pentagon is not in the business of selling flour-based products, flour is not seen as an intermediate good. • If Nabisco buys a new oven, it should be part of real investment = I. • Counted but Depends…were the hazelnuts actually produced in Hungary? If so…import so subtracted. If not then consumption and added to GDP

19. Answers?? • 11. GDP = C+I+G+(X-M) • = 5000+1000+500+(3000-4500) • = 5000