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GDP and its Components

GDP and its Components. GDP = C + G + I + X N. GDP: total value of all final goods and services produced during a time period inside a country (usually annually) Easiest for us to consider in class using the expenditure flow Key expenditures: Personal Consumption Government Purchases

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GDP and its Components

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  1. GDP and its Components

  2. GDP = C + G + I + XN • GDP: total value of all final goods and services produced during a time period inside a country (usually annually) • Easiest for us to consider in class using the expenditure flow • Key expenditures: • Personal Consumption • Government Purchases • Private Investment(Buying Capital) • Net Exports

  3. US Real GDP 1945-2010 Source: Google Public Data

  4. Personal Consumption • Household consumption • 2/3 of US economy • Must be purchases of new items • Examples: • Sodas • iPods • Cars • Washing machines(Durable goods) • Rockies tickets

  5. Government Purchases • Purchases by all levels of gov’t: national, state, county, city, etc. • Must be purchases of goods and services, not all gov’t spending • Does not include “transfer payments:” gov’t spending on welfare, social security, etc. (not buying goods or services)

  6. Private Investment • Goods produced for use in the production of other goods and services (capital) • “Gross Private Investment” includes three categories: • Firms’ spending on new buildings, plants, tools, capital • Purchases of new residential housing • Additions to firms’ inventories • Note: spending must be on new items only, not items produced in the past • Investment is choice to postpone current consumption in order to produce more in the future • Investment is highly volatile component of GDP

  7. Net Exports (XN) • Net Exports = Exports – Imports • Negative net exports = “trade deficit” • Positive net exports = “trade surplus” • Tricky in current economy: products contain imported and domestic parts • US has run a trade deficit since 1980s. Good thing? Bad thing?

  8. GDP and GNP • “Domestic” = a land (e.g., inside US borders) Includes a land’s income, regardless of who does the work • “National” = a people (e.g., the US people)Gross National Product includes a people’s income, wherever they live and work • Example: • Mexican workers’ wages earned in the US are included US GDP, because they are created inside the US • US workers’ wages earned abroad excluded from the US GDP, because they are earned outside the US

  9. Per Capita GDP • Population of Greece = 11M; Population of USA = 300M • Total GDP ÷ population = Per Capita GDP • Per Capita figures help • compare wealth of nations • wealth of a nation over time (“yes GDP grows, but are people wealthier?”)

  10. Comparing Real GDP Over Years

  11. Percentage of GDP Comparisons • We can compare national expenditures as percentages of GDP Source: The Economist, Feb 10, 2007

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