GDP

Name: _______________________________________ Period: ______ Date: __________

Explanations of GDP and its Components

It is common to see the following equation in economics textbooks:

GDP = C + I + G + NX

Consumption spending (C) consists of consumer spending on goods and services. It is often divided into spending on durable goods, non-durable goods, and services. These purchases accounted for 70 percent of GDP in the first quarter.

• Durable goods are items such as cars, furniture, and appliances, which are used for several years (9%).
• Non-durable goods are items such as food, clothing, and disposable products, which are used for only a short time period (21%).
• Services include rent paid on apartments (or estimated values for owner-occupied housing), airplane tickets, legal and medical advice or treatment, electricity and other utilities. Services are the fastest growing part of consumption spending (41%).

Investment spending (I) consists of non-residential fixed investment, residential investment, and inventory changes. Investment spending accounts for 15 percent of GDP, but varies significantly from year to year.

• Non-residential fixed investment is the creation of tools and equipment to use in the production of other goods and services. Examples are the building of factories, the production of new machines, and the manufacturing of computers for business use (10%).
• Residential investment is the building of a new homes or apartments (5%).
• Inventory changes consist of changes in the level of stocks of goods necessary for production and finished goods ready to be sold (0%).

Government spending (G) consists of federal, state, and local government spending on goods and services such as research, roads, defense, schools, and police and fire departments. This spending (19%) does not include transfer payments such as Social Security, unemployment compensation, and welfare payments, which do not represent production of goods and services. Federal defense spending now accounts for approximately 5 percent of GDP. State and local spending on goods and services accounts for 12 percent of GDP.

Net Exports (NX) is equal to exports minus imports. Exports are items produced in the U.S. and purchased by foreigners (10%). Imports are items produced by foreigners and purchased by U.S. consumers (14%). Thus, net exports (exports minus imports) are negative, about - 4% of the GDP.

Questions

1. What happens to real GDP as consumption spending increases?
2. What happens to consumption spending as real GDP increases?

3.      How should government spending on new roads and school buildings be treated? As consumption or investment? Some other way?

4.      How should individual spending on college tuition be treated? As consumption or investment? Some other way?

Components of GDP

Determine if each of the items listed below should be included in GDP and under which component or components: Consumption, Investment, Government, Exports or Imports.

1. A sound system produced and sold in the U.S. by a Chinese company
2. College tuition
3. Social Security payments
4. Microsoft stock purchased from Microsoft
5. A space shuttle launch
6. The purchase of a plane ticket to London on British Airways
7. The purchase of a U.S. Treasury Bond by an individual
8. A new factory
9. The sale of a previously occupied house
10. A jacket made in Mexico and sold in the U.S.
11. A television produced, but not sold.
12. A home cooked meal
13. A dinner at a restaurant
14. A computer produced in the U.S. and sold in Canada
15. A new interstate highway

Short Answer Essay Questions

1. If gross domestic product increases by three percent over a year, are we better off? Why or why not?
2. If consumers begin to purchase more automobiles manufactured in the U.S. instead of those manufactured abroad, what will happen to real GDP?
3. Why is income not included in gross domestic product?