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Chapter 8 homework
• Numbers 4, 6, 8, 16 and 18
Chapter 9
GDP and the
Business Cycle
Calculating GDP (cont’d)
• GDP uses dollars as a common
denominator to value the goods and
services produced in the economy.

The market value of a good is found by
multiplying the quantity of each good
produced by its price.

GDP is the sum of the market values
of all goods and services produced in
the economy.
New Goods and Services
• To avoid double counting, only newly
produced goods and services are
counted in GDP.

GDP counts the production of a good
or service only once, in the year it
was produced.

If you bought a car for $3500 in 1999 and
sold it this year for $2000 in what year and
how much will be counted towards GDP?
• $3500 in 1999 only!!
Final Goods and Services
• GDP includes only final goods
and services.

Final goods are used by the ultimate
consumer and are not used in the
production of other goods.

Intermediate goods are inputs that are
“used” up in the production of a final good.
• Inputs used in production
• Not included in GDP.
Goods and Services
Produced in a Given Country
• Only goods and services produced within a
country’s borders are included in GDP.

For example, a Toyota produced in the U.S. would
be counted in U.S. GDP.

A Ford produced in Canada would not be counted
in U.S. GDP.
Goods and Services
Produced in Given Period of Time
• Because the production takes time we
must specify the period over which GDP
is measured.

Usually measured annually.
• Smoothes out random fluctuations
• Accounts for regular, predictable swings in
production
• Many governments provide quarterly
estimates of expected yearly production.
The Expenditure Approach to GDP
• The market value of output is
determined only when it is purchased.

The dollar value of the quantity supplied by
producers = dollar value of the quantity
demanded

Demanded by who???
• households, firms, the government, and foreign
countries.

GDP = C + I + G + (X-M)
Consumption Expenditures
by Households
• Consumption spending (C) refers to the
purchases of goods and services by
households for their own use.

Durable Goods

Non-Durable Goods

Services

Rental Expenditures on Housing
• Consumption accounts for more than twothirds of all U.S. expenditures.
Investment Expenditures
• There are three categories of spending
that are included in investment
expenditures (I):

Spending on capital goods such as
machinery and equipment
• Capital goods are man-made inputs used—but
not used up—in the production of final goods.
Investment Expenditures (cont’d)

All private construction
• Includes factories, rental property and new singlefamily homes

Changes in business inventories
• Inventory is the stock of goods that a firm produces but
does not sell in the same time period.
• Firms add to inventory:

When they produce a good in one year and sell it in
another year

When they want to protect themselves from an interruption
in production

When they overestimate demand for their good
Government Expenditure
• Government expenditure (G) refers to
spending on goods and services by all
three levels of government: federal,
state, and local.

Transfer payments—such as Social
Security payments and unemployment
benefits—are not counted as government
expenditure.
• They do not involve new production.
Net Exports
• Some goods are not produced
domestically.

Spending on these imports (M) are
subtracted from GDP.
Net Exports (cont’d)
• On the other hand, U.S. firms sell
some of what they produce to
households, firms and governments
in foreign countries.

Because produced domestically, spending
on these exports (X) are added to GDP.
•
Net Exports  X  M
The Expenditure Approach
• Adding together the individual
components of GDP gives the total
value of all final goods and services
produced in the economy:
GDP  C  I  G  (X  M )
Table 9.1 The Components of the Expenditure
and Income Approaches to GDP in 2004
Can we do it??
• Number 4 and 11
Answers??



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
4. Nabisco’s purchase of flour is seen as an intermediate
goods purchase and is not counted in GDP.
My purchase of flour is counted as consumption, as it is a
final goods purchase regardless of what I do with the flour,
assuming I am not selling the baked goods.
The Pentagon’s purchase of flour is included in government
spending, as it is buying it as a final good or service. Since
the Pentagon is not in the business of selling flour-based
products, flour is not seen as an intermediate good.
If Nabisco buys a new oven, it should be part of real
investment = I.
Counted but Depends…were the hazelnuts actually
produced in Hungary? If so…import so subtracted. If not
then consumption and added to GDP
Answers??
•
11. GDP = C+I+G+(X-M)

= 5000+1000+500+(3000-4500)

= 5000