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Unformatted text preview: MACROECONOMICS Gross domestic product (GDP) can be defined mainly in three ways, the widely known one is the aggregate expenditure approach, the definition with which we are going to start with. Aggregate expenditure definition : Gross Domestic Product (GDP) is the current market value of all new commercial final goods and services (sold or unsold does not matter), plus the raw material produced by busi- nesses and sold to the others and yet awaiting to be assembled into final products, and plus the value of households labor bought by the government sector (the only non-commercial product that goes in to GDP). All prod- ucts should be currently produced say within a quarter or year, within the geographical border of the country. Also not that the productive resources can be both domestic as well as foreign. In other words, your GDP has border limitation but no resource limitation. Since this GDP is measured in current periods dollar value, it is also known a nominal GDP or current dollar GDP. Why governments purchases of labor but not buy Coke-Cola goes in GDP? When Coke-Cola hires you to produce coke, it recoups your salary by selling coke to us. Government produces services and do not sell for money direct, therefore, government expenditures on labor services goes to GDP. When government hires one more labor, GDP goes up. When Government pays a family food-stamps, family income goes up, but in the process of transaction nothing new is created, therefore, government AID does not show up in GDP, although it is government expenditures. Points to remember: Some activity costs some party and generates income for someone else but produce nothing new, will not show up in GDP. For example if you pay me $100 to find out your lost wedding ring that was produced years back, will not show up in GDP. Although, you may issue me a W2, this income is taxable and will show up in personal income (will be discussed later on). The huge interest payment that government pays to service its debt does not produce anything new, will not show up in GDP. Where it will show up? The answer again in personal income. 1 The amount unsold goes into inventory investment and inventory in- vestment is positive, the amount oversold comes from our existing in- ventory and inventory investment is negative (please note that inven- tory investmentIMPORTAANT, we shall discuss it again) What you produce for yourself is not included in GDP. However, what you buy from business people to produce something for yourself is included in GDP, only your labor and some home-grown input that you may use are not included in GDP. Any second hand transaction is not included in GDP. You sell your car, house, the proceeds will not be include in GDP. However, if the transaction of old goods creates new services or profit, they will be included in GDP. Selling your home through an agent creates income for the agent, involves closing cost, and many other fees will be included in GDP....
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- Fall '10