GDP Part I

Measuring Growth Economists analyze the economy using statistical measures that track the income, spending, and output of a nation. GDP is the most important GDP is the market value of all final goods and services produced within a nation in a given period of time.

Components of GDP To be included in GDP, a good or service needs to fulfill 3 requirements Must be a final good, not an intermediate good: Fabric used to make a shirt=intermediate good The shirt=final good. Must be produced during the time period, regardless of when it is sold. Cars made this year, but that are sold next year would be counted in this year’s GDP. Must be produced within the nation’s borders. Products made in foreign countries by US companies are not included in USA GDP.

Calculating GDP National spending on final goods/services according to 4 sectors of the economy: Consumption C: all the spending by households on durable and non durable goods/services. Durable goods: an item that does not wear out quickly. Ex: you drive to the movies. Nondurable goods: an item that is used up fairly quickly after purchase. Ex: popcorn at the movies.  Investment I: measures what businesses spend. Fixed investment: new construction and purchases of equipment, machinery, tools. Inventory investment: made up of unsold goods that businesses keep on hand.

Government Spending G: all spending of federal, state, and local governments on goods and services. Ex: spending in defense, highways, public education… Gov’t spending on transfer payments like social security and unemployment benefits are not included. These payments allow ppl to buy goods/services so they are counted as consumption. Net Exports X: Exports. Goods/services that are made in the US but sold in foreign countries. US consumers also buy, or import goods made in other countries: cars, car parts, and crude oil are the largest imports. The GDP only counts net exports—the value of US exports minus the value of US imports. f. To calculate GDP, you add up all the expenditures from all sectors:

Economists use GDP to tell how well a country’s economy is doing. Two Types of GDP Economists use GDP to tell how well a country’s economy is doing. Increasing GDP means that the economy is creating more jobs and more business opportunities. Nominal GDP: stated in the price levels for the year which the GDP was measured. Most basic form. Because prices tend to increase, nominal GDP is not accurate. Real GDP: states GDP corrected for changes in prices from year to year. It is an estimate of the GDP if prices were to remain constant.