Exports (X) but later (NX) Subtract imports at the end because accidentally added in when counting other things.

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1 Measuring GDP 1. Expenditure Approach Sector Household Businesses Government Foreign Expenditure Consumption (C) Investment (I) Government Purchases (G) Exports (X) but later (NX) Subtract imports at the end because accidentally added in when counting other things. Consumption: Everything that households buy Except new homes.. which is counted as investment spending. Farmers who eat their own food, government counts it as consumption.. Same thing with people who own homes.. on going services every year home exists. What home owners would pay to rent homes on market. Imputed rent. Investment Spending 1. Business purchases of plant (factory, retail outlets), equipment (computers) & software (final goods) 2. New Home Construction.. 1. Counted as investment the year it was produced and counted as service every year after 3. Change in Business Inventories 1. Unsold goods even if automobile producer and you have left over parts. 2. Measure production.. Any production that businesses do that is not sold to user, we treat as if business buys its own, that they are the final user... If inventory grow positive, it shrinks negative. Government Purchases Salaries of legislators, president Obama's salary government purchases. Govt is final user. When salary goes up, GDP goes up.. Exclude govt transfer payments. Payment govt makes to individual to help care for them, address issues of inequality.. paying them just to pay them. Social security, unemployment, welfare. Transferring money but nothing is being produced, except services of govt workers that are doing paperwork.. but money itself is not part of GDP.. it's just money changing hands, does not represent actual production. Exports & Imports Exports: sell to foreigners, imports: buy from foreigners. Includes ALL goods & services (including components) Count everything, even intermediate goods.. If Ford builds car in US 30,000.. but 10,000 rep Japan parts = Japan production not US production.. Sell car consumption goes up 30,000 but subtract 10,000 because if not we would be over estimating what's produced in US. Suppose Jap stays in US hotel... It's an export. We always think about goods.. when we export a good it

2 goes somewhere else, BUT can also work if foreigner comes here.. Produced in US but purchased by foreigner.. everything they buy is considered an export. What about is american stays in Japan.. Add it to consumption but subtract is from imports in the end. Foreign students tuition is considered an export.. If something is sold to a foreign resident, it is an export to the US economy. Students as long as in US, everything you buy is considered an export.. even if it takes you 12 years.. An american good produced in a different country, let's say Ford (american company) produces cars and sells them overseas won't affect any components of GDP, because it wasn't produced here it won't be considered as GDP. Toyota in US.. Toyota managed in Japan, management services not part of GDP.. when it sells, deduct out imported components and also any management that was Japan's contribution.. do this by looking at salaries. Only count American contribution. I buy expresso maker = consumption. I'm the final user. Starbucks buys expresso maker = investment. I buy coffee beans = consumption. Starbucks buys coffee beans = intermediate good.. because it's value will be embodied in coffee. What if buy more coffee beans than coffee produced = change in inventory. American company produces something outside US but wants to sell it to an American.. Ford makes Ford Fiesta in Mexico.. not counted as US production, but counts as consumption and as import. Factor Payment Approach Instead of looking at production as who purchases it, look at it as resources.. Labor wages, salary Land rent Capital interest Entrepreneurship Profit These 4 called factor payments (Resources sometimes called factors of production) Production of a diamond ring. Firm Product Sales Revenue Cost of Intermediate Good Diamond Mine Raw Diamond $1, $0.00 (pretending that there are no intermediate goods) Factor Payments If you add together wages, rent, interest and profit (factor payments) you get $1000 Diamond Cutter Cut Diamond $2, $1, $1000 went to pay diamond mine.. $1,500 went into factor payments. Jewelery Maker Ring (ignore $4, $2, $2,000.00

3 band... band is made out of diamonds.. Paris Hilton prolly has one lolololol) Store Available Ring $5, (This would be counted as GDP in the first method) $4, $ Total: $5,000 Total value of Factor payments = value of Final product Factor Payment Approach GDP = Sum of all wages & salaries, rent, interest, and profit earned by households during the year. If you add up wages & salaries, rent, interest & profit you get TOTAL INCOME. GDP = Total Income Two different ways of slicing it up. Every time we increase production, we increase income. The other way of looking at the first $1000 in factor payments of diamond mine = Value added by Diamond Mine.. It took resources and created a $1000 worth of value where no value existed before. $1500 was value added by diamond cutter.. added 1,500 in value to $1,000 product. Value Added Approach GDP = Sum of all value added by all firms in the economy Europe has value added tax.. collects tax each time a firm adds value. Value added approach and Factors added approach are they the same? Nope.. we're not adding the same numbers.. When looking at value we're going from firm to firm (how much value did you add, how much value did you add?) When looking at Factor Payments, we're going household through household Associated Measures 1. Real GDP Nominal Variable Real Variable If tracking GDP over time, Nominal GDP will rise if prices rise even if producing same. Real GDP is measured in Inflation adjusted dollars. (Eg: 2005 dollars)

4 Valuing each good and service as 2005 dollars.. Nominal GDP will make rise. Buy Coffee maker $50 contribute 50 to Nominal GDP but contribute what it cost in 2005 to Real GDP. Problem arises when you have products that weren't created in 2005! 2. Net Domestic Product (NDP) = GDP - Depreciation Production Using Up (Destruction) Goods and services Natural disaster considered depreciation.. In Haiti even though GDP is positive, NDP is negative 3. Real GDP per Capita = Real GDP divided by Population (Living Standard) Measure used to see how well off people are. Used loosely as a measure of living standard When comparing countries.. have to figure out a way to translate currencies.. can't use exchange rate because it fluctuates. Problems 1. Arbitrary Definitions 1. Software used to be considered as arbitrary good till Value of software embodied in final product just like flour in bread.. but in 1999 they decided software lasts a long time and it was added to Investment. When the Bureau changes their mind, they can go back and readjust GDP according to what it would be.. They have the freedom to do this because very little govt intervention.. 2. About to do this again with R&D (count as investment) which will cause 3% spike, but they'll readjust 3. Other countries following US lead with Software and R&D 2. Excluded Production 1. Excluding Non-Market Production 1. Old days most people used to cook at home.. but now order in/eat out pay more because you're paying for the service.. not counted when you cook yourself. In Old days you used to talk about problem with friend, now hire shrink goes to GDP. In Old days you sort out problems with neighbor by working it out, now you have lawyer GDP. 2. Illegal Goods (Value of Marijuana good other than medical does not enter GDP) 3. Excludes other aspects of Economic well-being 1. Could just make people work 80 hours a week and raise GDP.. 2. GDP per capita in US is 20% higher than in France. But wouldn't say standard of living is higher.. French go to work for 4 hours, take 4 hour lunch break lots of wine, and then go back to work and don't do much.. Plus get 4-6 weeks off. Don't go to Paris in August only people there are the ones that didn't get to go on vacation and are pissed :P 3. Economic Bads 1. Inequality, Pollution, Congestion 4. Quality Changes 1. Measuring coffee maker as per 2005 standards, but what if coffee maker has additional feature? Like automatic shut off.. getting 2 things when you buy that coffee maker.. What

5 contribution to GDP? Using 2005 you say it's just like 2005 coffee maker.. Don't want to count it as 50 bucks because some of it is inflation, but also don't want to count as 40 because it's a better product. 2. Housing and Computers they figure out the improvements and raise the price accordingly. But don't do it for other things.. If goods & services getting better over time, Real GDP is underestimating.