GDP and its GDP and its ComponentsComponents

GDP = C + G + I + XGDP = C + G + I + XNN

GDP: total value of all GDP: total value of all final goods and final goods and services produced services produced during a time period during a time period inside a country inside a country (usually annually) (usually annually)

Easiest for us to Easiest for us to consider in class using consider in class using the expenditure flowthe expenditure flow

Key expenditures:Key expenditures:– Personal Personal

ConsumptionConsumption– Government Government

PurchasesPurchases– Private InvestmentPrivate Investment

(Buying Capital)(Buying Capital)– Net ExportsNet Exports

US Real GDP 1945-2010

Source: Google Public Data

Personal ConsumptionPersonal Consumption

Household Household consumptionconsumption

2/3 of US economy2/3 of US economy Must be purchases Must be purchases

of of newnew items items Examples:Examples:

– SodasSodas– iPodsiPods– CarsCars– Washing machinesWashing machines

(Durable goods)(Durable goods)– Rockies ticketsRockies tickets

Government PurchasesGovernment Purchases Purchases by all Purchases by all

levels of gov’t: levels of gov’t: national, state, national, state, county, city, etc.county, city, etc.

Must be purchases Must be purchases of goods and of goods and services, not all services, not all gov’t spendinggov’t spending

Does not include Does not include “transfer payments:” “transfer payments:” gov’t spending on gov’t spending on welfare, social welfare, social security, etc. (not security, etc. (not buying goods or buying goods or services)services)

Private InvestmentPrivate Investment Goods produced for use in Goods produced for use in

the production of other the production of other goods and services (capital)goods and services (capital)

““Gross Private Investment” Gross Private Investment” includes three categories:includes three categories:

– Firms’ spending on new Firms’ spending on new buildings, plants, tools, buildings, plants, tools, capitalcapital

– Purchases of new Purchases of new residential housingresidential housing

– Additions to firms’ Additions to firms’ inventoriesinventories

Note: spending must be on Note: spending must be on new items only, not items new items only, not items produced in the pastproduced in the past

Investment is choice to Investment is choice to postpone current postpone current consumption in order to consumption in order to produce more in the futureproduce more in the future

Investment is highly volatile Investment is highly volatile component of GDPcomponent of GDP

Net Exports (XNet Exports (XNN))

Net Exports = Net Exports = Exports – ImportsExports – Imports

Negative net exports Negative net exports = “trade deficit”= “trade deficit”

Positive net exports Positive net exports = “trade surplus”= “trade surplus”

Tricky in current Tricky in current economy: products economy: products contain imported contain imported and domestic partsand domestic parts

US has run a trade US has run a trade deficit since 1980s. deficit since 1980s. Good thing? Bad Good thing? Bad thing?thing?

GDP and GNPGDP and GNP ““Domestic” = a land (e.g., Domestic” = a land (e.g.,

inside US borders) inside US borders) Includes a land’s income, Includes a land’s income, regardless of who does the workregardless of who does the work

““National” = a people (e.g., the National” = a people (e.g., the US people)US people)Gross National Product includes Gross National Product includes a people’s income, wherever a people’s income, wherever they live and workthey live and work

Example: Example: Mexican workers’ wages earned in Mexican workers’ wages earned in

the US are included US GDP, the US are included US GDP, because they are created inside the because they are created inside the USUS

US workers’ wages earned abroad US workers’ wages earned abroad excludedexcluded from the US GDP, from the US GDP, because they are earned outside because they are earned outside the USthe US

Per Capita GDPPer Capita GDP Population of Greece Population of Greece

= 11M; Population of = 11M; Population of USA = 300MUSA = 300M

Total GDP ÷ Total GDP ÷ population = Per population = Per Capita GDPCapita GDP

Per Capita figures Per Capita figures help help

– compare wealth of compare wealth of nationsnations

– wealth of a nation wealth of a nation over time (“yes GDP over time (“yes GDP grows, but are people grows, but are people wealthier?”)wealthier?”)

Comparing Real GDP Over YearsComparing Real GDP Over Years

Percentage of GDP ComparisonsPercentage of GDP Comparisons

We can compare We can compare national national expenditures as expenditures as percentages of percentages of GDPGDP

War SpendingWar SpendingDuring Peak During Peak

YearYear% of GDP% of GDP

Iraq Iraq (2008)(2008) 4.4%4.4%

VietnamVietnam 9%9%

Korea Korea 14%14%

WW2WW2 37%37%

Source: The Economist, Feb 10, 2007