1. GDP and its Components

2. GDP = C + G + I + X N  GDP: total value of all final goods and services produced during a time period inside a country (usually annually)  Easiest for us to consider in class using the expenditure flow  Key expenditures: –Personal Consumption –Government Purchases –Private Investment (Buying Capital) –Net Exports

3. US Real GDP 1945-2010 Source: Google Public Data

4. Personal Consumption  Household consumption  2/3 of US economy  Must be purchases of new items  Examples: –Sodas –iPods –Cars –Washing machines (Durable goods) –Rockies tickets

5. Government Purchases  Purchases by all levels of gov’t: national, state, county, city, etc.  Must be purchases of goods and services, not all gov’t spending  Does not include “transfer payments:” gov’t spending on welfare, social security, etc. (not buying goods or services)

6. Private Investment  Goods produced for use in the production of other goods and services (capital)  “Gross Private Investment” includes three categories: –Firms’ spending on new buildings, plants, tools, capital –Purchases of new residential housing –Additions to firms’ inventories  Note: spending must be on new items only, not items produced in the past  Investment is choice to postpone current consumption in order to produce more in the future  Investment is highly volatile component of GDP

7. Net Exports (X N )  Net Exports = Exports – Imports  Negative net exports = “trade deficit”  Positive net exports = “trade surplus”  Tricky in current economy: products contain imported and domestic parts  US has run a trade deficit since 1980s. Good thing? Bad thing?

8. GDP and GNP  “Domestic” = a land (e.g., inside US borders) Includes a land’s income, regardless of who does the work  “National” = a people (e.g., the US people) Gross National Product includes a people’s income, wherever they live and work  Example:  Mexican workers’ wages earned in the US are included US GDP, because they are created inside the US  US workers’ wages earned abroad excluded from the US GDP, because they are earned outside the US

9. Per Capita GDP  Population of Greece = 11M; Population of USA = 300M  Total GDP ÷ population = Per Capita GDP  Per Capita figures help –compare wealth of nations –wealth of a nation over time (“yes GDP grows, but are people wealthier?”)

10. Comparing Real GDP Over Years

11. Percentage of GDP Comparisons  We can compare national expenditures as percentages of GDP War Spending During Peak Year % of GDP Iraq (2008) 4.4% Vietnam9% Korea14% WW237% Source: The Economist, Feb 10, 2007