# Eco 6351 Economics for Managers Chapter 10d (addendum). GDP Prof. Vera Adamchik.

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Eco 6351 Economics for Managers Chapter 10d (addendum). GDP Prof. Vera Adamchik

Gross Domestic Product is the total value of all final goods and services produced for the marketplace during a given time period (usually a year) within the nations borders

Why is domestic product gross? Gross means before deducting the depreciation of capital. Depreciation is the decrease in the value of the firms capital that results from wear and tear and obsolescence. GDP includes gross investment (see Gross Private Domestic Investment below). So total product is a gross measure.

Final vs. Intermediate Intermediate goods and services are the goods and services that firms buy from each other and use as INPUTS in the production of goods and services that they eventually sell to final users. A good can sometimes be an intermediate good and sometimes a final good. Whether a good is intermediate or final depends on what it is used for, not on what it is.

Measuring GDP Because value of production = income = expenditure, statisticians can measure GDP in three ways: –expenditure approach –income approach –value-added approach

Measuring GDP: Expenditure approach GDP = C + I + G + NX Spendings not included in GDP: –on intermediate goods and services –on used goods –on financial securities (firms often sell financial assets to finance purchases of new capital goods. GDP includes the amount spent on new capital, not the amount spent on pieces of paper.)

GDP = C + I + G + NX Personal Consumption Expenditures (C) are the expenditures by households on goods and services produced in the U.S. and the rest of the world. They do not include the purchase of new homes, which is counted as part of investment.

GDP = C + I + G + NX Gross Private Domestic Investment (I) is (1) expenditure by firms on buildings and capital equipment produced in the U.S. and the rest of the world PLUS (2) expenditure on new homes by households (i.e., residential construction). (3) It also includes the change in business inventories.

Gross means the total amount spent on purchases of new capital and on replacing depreciated capital. Private indicates that government investment is considered part of G. Domestic means that machinery sold by American forms to foreign companies is included in eXports rather than in I. Please note that only three things – newly produced capital goods (factory, machinery), residential construction, and inventory investment – are Investment in national income accounting terminology. It does not include exchanges of existing assets (for example, purchases of financial securities).

The treatment of investment goods runs slightly counter to the rule that GDP includes only final goods. In a broad sense, factories, equipment, machines, and the like might be considered to be intermediate goods. After all, their owners want them only for use in producing other goods, not for any innate value that they possess. But this classification would present a real problem. Because factories and machines normally are never sold to consumers, when would we count

them in GDP? National income statisticians avoid this problem by defining investment goods as final products demanded by the firms that buy them.

GDP = C + I + G + NX Government purchases of goods and services (G) are the purchases of goods and services (produced in the U.S. and the rest of the world) by all levels of government. But it does not include transfer payments. These payments, such as medical aid and social security benefits, are not purchases of goods and services. They are transfers of funds from government to households.

GDP = C + I + G + NX Net Exports (NX) are the value of exports (X) minus the value of imports (M).

Measuring GDP: Income Approach GDP sums incomes paid by firms to households for the resources they hire: –compensation of employees (wages for labor); –net interest (interest for capital); –rental income (rent for land); –corporate profits (profits for entrepreneurship); –proprietors income (is a mixture of the previous four items).

Measuring GDP: Value added approach Value added = value of firms output - value of intermediate goods bought from other firms