Gross private Domestic Investment, or “Investment o Investment- spending by firms on new factories, office building, machinery, and additions to inventories, and spending by households on new houses Government Consumption and Gross Investment, or “Government Purchases” o Government Purchases- spending by federal, state, and local governments on goods and services. Net Exports of Goods and Services, or “ Net Exports” o –exports minus imports 12
° ° An Equation for GDP and some actual values Consumer spending on services is greater than the sum of spending on durable and non durable goods Business fixed investment is the largest component of investment Purchases made by state and local governments are greater than purchases made by the federal government Imports are greater than exports, so net exports are negative ° Does GDP Measure What We Want it to Measure? ° Shortcomings in GDP as a measure of total production Household production o Household production refers to goods and services people produce for themselves (cutting someone’s grass) The underground economy o Underground Economy- buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal (unreported income, black market) ° Shortcomings of GDP as a measure of Well-Being The value of leisure is not included in GDP GDP is not adjusted for pollution or other negative effects of production GDP is not adjusted for changes in crime and other social problems GDP measures the size of the pie but not how the pie is divided up ° Real World- US GDP during WWII Before WWII, the US experienced sever economic turmoil. The great depression began in 1929, and is commonly associated with following the stock market crash in oct 1929 The economy suffered continued contraction during the first half of the decade and low growth during the latter half the events associated with WWII created an intense demand for goods and services never before seen 13
° Real GDP versus Nominal GDP Overtime, price levels for goods and services may rise (for reasons we will discuss in greater depth later) Inflation - is the term for rising price levels for the same (or very similar) goods and services (Hershey’s bar) Inflation rate - the % increase in the price level from one year to the next ° Calculating real GDP Real GDP : the value of final goods and services in a given year at a designated base-year price level o P_base year x Q_current year Nominal GDP : the value of final goods and services (P x Q) of a given year using same year prices o P_current year x Q_current year ° Why does this matter?