5 Consumption - C Durable goods: goods that last a relatively long time Nondurable goods: goods which are perishableServices: goods which do not involve the production of physical things
6 Investment - INonresidential: expenditures by firms on machines, factories, tools, etc.Residential: expenditures by households on new houses and apartment buildingsBusiness inventories: goods that firms produce now with the intent to sell later
7 Government Purchases - G Expenditures by federal, state and local governments on final goodsDoes not include transfer payments (social security, unemployment benefits, etc.)
8 Net Exports - (EX-IM)Exports: sales to foreigners of U.S. produced goodsImports: purchases by U.S. citizens of foreign produced goodsNet Exports = Exports - Imports
9 Income ApproachA method of computing GDP that measures the incomes - wages, rents, interest, and profits - received by all factors of production in producing final goods.
10 National IncomeCompensation of employees: wages, salaries, etc., paid to householdsProprietors’ income: income of unincorporated businessesCorporate profits: income of corporationsNet interest: interest paid by businessesRental income: income received by property owners
11 DepreciationDepreciation is the decline in value of capital assets as they wear out or become obsolete.
12 Indirect Taxes and Subsidies Indirect Taxes: sales taxes, custom duties, license fees, etc.Subsidies: payments made by the government for which it receives goods or services
13 Net Factor Payments to Rest of World Payments of factor income to the rest of the world minus the receipt of factor income from the rest of the world
14 Gross National Product Add to GDP any income earned abroad by US firms or residentsSubtract any income earned in the US by foreign firms or residents.
15 Net National Product - NNP NNP = GDP - depreciation
16 National Income - NINI = NNP - indirect taxes + subsidies
17 Personal Income - PIPI = NI - (corporate profits - dividends) - social insurance payments
18 Disposable Personal Income - DPI DPI = PI - personal income taxes
19 Nominal GDP Nominal GDP is GDP measured in current dollars Current dollars: the current prices that one pays for goods and services
20 Real GDP Real GDP is measured in constant year prices Real GDP is adjusted for inflationConstant year: an arbitrary base year from which prices are derived
21 GDP adjusted for inflation. Base year will be year 1. Real GDPGDP adjusted for inflation.Base year will be year 1.
22 GDP DeflatorA measure of the prices of all goods and services produced= (Nominal GDP/Real GDP) * 100
23 Rate of change in price level Rate of InflationRate of change in price levelGDP deflator (year 2) - GDP deflator (year 1)Inflation (year 2) =GDP deflator (year 1)
24 Limitations of the GDP Concept Social WelfareUnderground EconomyPer Capita GDP
25 Review Terms & Concepts Base yearBusiness inventoriesCompensation of employeesCorporate profitsCurrent dollarsDepreciationDisposable personal incomeDurable goodsExpenditure approachFinal goods & servicesFixed-weight procedureGovernment consumption & investmentGross Domestic Product (GDP)Gross investment