The Expenditures Approach (LM 6 Part 1)

Inventory Investment

Changes in inventories from one year to the next. Inventory investment is positive if firms produce more than they sell; it is negative if they sell more than they produce. When a boat is produced this year but not sold until next summer, it is included in inventory investment in the year in which it is manufactured. When the boat is sold (next summer), that boat will be subtracted from inventory investment.

Personal Consumption (3 types)

Consumer durables Consumer nondurables Services

Two largest expenditures

Consumption (C) and government Purchases (G)

Consumption (C) Formula

Consumption= Nondurable goods + Durable goods + Services

Since 1955, all government purchases have ------ as a percent of nom GDP

Fallen

Nominal GDP Calculation

GDP= C+I+G+NX

Final Goods and Services

Goods and services that are sold to the end user and are not used to produce another product for subsequent sale.

Intermediate Goods

Goods that are used to build or make another product that is subsequently sold -Not part of Nominal GDP -Reallocation of resources are intermediate as well

Consumer Durables

Goods that have an average life of three years or more Appliances, cars, and furniture

Consumer non-durables

Goods that have an average useful life of less than three years food and clothing

Exports (X)

Goods, services, or resources that are made domestically but sold internationally

Imports (M)

Goods, services, or resources that are made internationally but purchased domestically

Second largest expenditure

Government purchases (G)

The value of corporate stocks and bonds traded in a given year is

excluded from the calculation of GDP because it is not a component of gross investment.

Expenditure Approach

focuses on categorizing output by who purchased it.

GDP tends to overstate economic well-being because it takes into account

total spending to deal with the adverse health effects of some products.

Bartering is part of the..

underground economy

Gross Investment when calculating nom GDP

Investment + amount depreciation

Business Fixed Investment

Purchases by firms that of new capital goods offices, factories, tools, machines

Time period of GDP calculations

1 year

Investment Spending portion of Nominal GDP

1/6 or 16.6% gross investment as a percentage of nominal GDP is only about one-fourth as large as consumption

In accounting, as opposed to economics, depreciation refers to

A process that spreads the cost of an asset over a number of years

Between the years 1997 and 2009 minimum wage rose by almost

41%, whereas prices in the economy increased by 28%

Nominal Gross Domestic Product (GDP)

A measure of GDP in which the quantities produced are valued at current-year prices. Nominal GDP measures the current dollar value of production of all FINAL goods and services that are produced during a fixed period.

Transfer payments

A payment made by the government that does not require an exchange of economic activity in return. Transfer payments often take the form of payments to households. Examples: Social Security,

What type of consumption is a movie ticket?

A service because it is representative of enterntainment

What type of consumption is buying a steak AT A RESTAURANT

A service because of the restaurant environment (as opposed to buying a state at a grocery store

Government Purchases (G)

All final goods purchased by federal, state, and local governments—such as tanks, police cars, fire engines, and office supplies—during a given time period, as well as all final services purchased from labor resources—such as airport security personnel, police officers, and teachers. *State and local government purchases are now more than federal

Tax Revenues

Are not counted in nominal GDP

The more ----- that is available it its workers, the more productive a nation will be

CAPITAL

The consumption of fixed capital in each year's production is called

Depreciation

Summary of Personal Consumption and Government Purchases

Gross domestic product, GDP, equals the sum of consumption, gross investment, government purchases, and net exports. Consumption (C) is the largest component of GDP. It is made up of consumer durable goods, consumer nondurable goods, and services. The next-largest component, government purchases (G), includes all final goods and services purchased by federal, state, and local governments. Government purchases do not include transfer payments, which are payments from the government for which no good or service is actually received in exchange. Over time, both components—consumption and government purchases—have seen significant changes in their composition. Households now spend more on services than they do on durable and nondurable goods. Also, state and local government purchases are now greater than federal government purchases.

Summary of Gross Investment (I)

Gross investment contains three components: business fixed investment, residential investment, and inventory investment: Remember to add in depreciation Business fixed investment consists of purchases by firms of new capital goods. Residential investment is the construction of new homes. Inventory investment is the result of changes in inventories from one year to the next. Although investment spending is a much smaller share of nominal GDP than is consumption, investment is much more volatile. Changes in investment spending may play an important role in determining the strength and weakness of the economy.

Gross Investment tells...

How much capital is being created

Net Investment (Inet)

Measure of how fast the capital stock of a country is increasing (the difference between gross investment and the amount of capital that has been taken out of service) -represents the net change in the capital stock during a year.

Summary of net Exports

Net exports is one of the four components of nominal GDP and is calculated by finding the difference between exports and imports. The reason net exports is included in nominal GDP is that some expenditures on U.S. products come from other countries. Those expenditures are not included in consumption, gross investment, or government purchases, so we need to include them as exports. Similarly, some of the expenditures made by domestic households, businesses, and governments are for products not produced domestically, so we need to exclude them from nominal GDP, which we do by subtracting imports. Both exports and imports have been increasing over time for most countries as international travel and communication have become less expensive.

Next Years Beginning Capital

Net investment + the beginning capital of this/the previous year

Summary of Nominal GDP

Nominal GDP is the total value of all final goods and services produced in an economy during a given period of time, usually 1 year. When calculating nominal GDP, we use current prices and current output. To avoid double-counting, we include only final goods and services in the GDP calculation. We exclude intermediate goods (those goods that firms buy and then include in the products they sell), since their value is included in the final price to consumers. We also exclude used goods; their value was already accounted for in the year they were produced. There are several ways of calculating nominal GDP. One way, the expenditures approach, focuses on categorizing output by who purchased it. The four main categories of expenditure are consumption (C), gross investment (I), government purchases (G), and net exports (NX). Nominal GDP is represented mathematically as GDP = C + I + G + NX.

Services

Outputs of the direct activities of another person often intangible-haircuts, medical exams, entertainment *Today, services constitute two-thirds of what households buy. Why? As incomes have increased over time, people are more willing to pay others to do things for them

Government Purchases (G)

Purchases made by local, state, and federal governments All final goods purchased by federal, state, and local governments—such as tanks, police cars, fire engines, and office supplies—during a given time period, as well as all final services purchased from labor resources—such as airport security personnel, police officers, and teachers.

Gross Investment (I)

Purchases of capital goods made by FIRMS: The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business (nonresidential_ fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment. DON'T INCLUDE DEPRECIATION IN THIS

Consumption (C)

Purchases that are made by households: All expenditures made by households on goods and services, like clothing, food, electronics, and recreation, during a given time period. -C makes up the largest percentage of Nominal GDP

The three types of gross investment

Residential fixed Investment Inventory Investment Non residential Fixed Investment

Summary of net versus gross investment

The capital stock of a country depends on gross investment, but gross investment by itself does not tell us how fast the capital stock is increasing. Instead, one needs to know net investment: gross investment minus depreciation. Depreciation is the amount of capital that is no longer in operation due to wearing out, being used up, or becoming obsolete. The capital stock increases only if net investment is positive. If firms are investing but capital is wearing out faster than it's being replaced, net investment is negative and the capital stock in the economy will actually decrease.

Depreciation

The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year. equals the depreciation rate times the amount of capital

Net Exports (NX)

The difference between exports and imports NX= X-M

Net Exports relationship with M and X

The figure also shows that exports generally exceeded imports before 1975. Since 1975, however, imports have always exceeded exports. One can also see net exports from the figure. Net exports is just the vertical distance between the two. Net exports is positive when exports exceed imports but negative when the reverse is true

Investment

The formation of new productive capital or the expansion of inventories within an economy. Investment occurs either when firms buy goods and services that will enhance productivity and increase output or when they INCREASE their inventories of the goods they sell.

Which of the following is not a component of gross investment?

The purchase of a new drill press by the Ajax Manufacturing Company. **The purchase of 100 shares of AT&T by a retired business executive. Construction of a suburban housing project. The piling up of inventories on a grocer's shelf.

Gross Investment (I)

This is the most fluid (AND VOLITILE!) aspect See other definition because I am too lazy to write it out again The decline in gross investment spending preceded the overall decline of the economy. This is not unusual, as gross investment is considered by many economists to be a "leading indicator"—an indicator that helps show the direction the overall economy is heading. Low or negative investment growth could be a sign that the economy is headed toward a recession in the near future

The Expenditures Approach Summary

We can measure the output of an economy, or its nominal GDP, by adding up the expenditures of each of the economy's four sectors: consumption, gross investment, government purchases, and net exports. This method is called the expenditures approach.

Residential Fixed Income

When firms build houses and sell them to consumers

The GDP PRICE INDEX measures the ------ possible range of prices in an economy

broadest

In the expenditures approach of national income accounting, C, I, and G include expenditures for

domestically-produced, as well as imported, goods and services. -This is why imports are later subtracted from NX!

The U.S. produces and sells millions of different products. To aggregate them together into a single measure of domestic output, the quantity of each good produced is weighted by its cost of production.

market price

When gross investment is positive, net investment

may be either positive or negative.

Net Investment Formula

net Investment = I (Gross Investment)-Depreciation

If an economy produces 100 pencils and 100 pens, and pencils sell for twice as much as pens,

pencils are weighted as twice as important in the economy compared to pens