CHAPTER 12

The Bureau of Economic Analysis​ (BEA) divides its statistics on Gross Domestic Product​ (GDP) into four major categories of​ expenditures:

1. Personal​ Consumption: Spending by households on goods and services​ (not including new​ houses). 2. Gross Private Domestic​ Investment: Spending by firms on new​ factories, machinery, and additions to​ inventory; spending by households on new houses. 3. Government​ Purchases: Spending by​ federal, state, and local governments on goods and services. 4. Net​ Exports: Exports minus Imports.

GDP is not a perfect measure of a​ country's well-being for the following​ reasons:

1. The value of leisure is not included in GDP. When a person​ retires, GDP falls even though that​ person's well-being may have increased. 2. GDP is not adjusted for pollution or other negative effects of production. For​ example, the value of cigarettes is included in​ GDP, with no adjustment made for the costs of the health effects many smokers develop. 3. GDP is not adjusted for crime or other social problems. An increase in crime might lower​ well-being but can increase GDP if it leads to increased spending on public safety. 4. GDP does not account for income distribution. That​ is, GDP measures the size of the​ pie, not how the pie is divided up.

Why is GDP an imperfect measurement of total production in the economy?

A GDP Does not include household production or production from the underground economy

National income is

GDP minus depreciation.

Personal income

Income received by households. This is equal to national income minus corporate earnings plus government transfer payments and interest on government bonds.

Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to present, what would be true about the relationship of nominal GDP and real GDP?

RGDP<NGDP because prices are rising

Household​ production:

Refers to goods and services that people produce for themselves. The most important type of household production is the services a homemaker provides to the​ homemaker's family. Examples include cleaning​ house, preparing​ meals, and caring for children. The value of these services is not included in GDP.

Underground​ economy:

Refers to the buying and selling of goods and services that is concealed from government to avoid taxes or regulations or because the goods and services are illegal. Examples include drugs and prostitution. According to some​ estimates, the U.S. underground economy may be as much as​ 10% of measured GDP.

Real GDP​ (RGDP)

The value of final goods and services evaluated at​ base-year prices.

Nominal GDP​ (NGDP)

The value of final goods and services evaluated at​ current-year prices.

Which of the following equations sums up the components of gross domestic product?

Y= C+I+G+NX

Disposable personal

is equal to personal income minus personal tax payments such as federal income tax.

We divide income into four​ categories:

wages,​ interest, rent, and profit.