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Exploration 11 Gross Domestic Product [National Income Accounting] Thread This is the final economic measurement of the state of the economy. Don’t forget that, besides these three, measurements of inequality are also important. You should be able to: Define GDP and explain its limits List and explain the four components of GDP Explain why GDP [expenditures] = output = income Verbal questions – final good? Mayonnaise Purchased by me Purchased by State Line diner Computer System Purchased by me Purchased by Verizon Categories of Final Goods: Expenditures Approach GDP = Consumption [C] + Investment [I] + Government purchases [G] + Net exports [X – M] GDP = C + I + G + [X – M] What is GDP today? Bureau of Economic Analysis Team exercise – Try your skill at counting GDP [EL p70/71] “Clickers” A = government B = business investment C = consumer spending D = net exports E = excluded Equality of output, income and expenditure We’ve discussed expenditures But how much income will there be in an economy? The Pie Principle The size of the pie we eat is equal to the size of the pie we bake $10B in production (output) = $10B goods and services to use Income is just a name for the right to use goods and services Equality of Income and Expenditure Circular flow, Fig 7-1, p 167: HH selling labor services/buying goods BF buying labor services/selling goods GDP [Expenditures] = Output = National Income Key idea: whatever is produced is paid for Wages + rents + interest + profits Add: depreciation, indirect business taxes and net foreign factor income. [Fig 7-2, p 171] What’s are some limits to GDP? [Link] Treats “goods” and “bads” the same Treats crime, divorce and natural disasters as economic gain. Environmental spills and cleanups count Ignores non-market activity Depletion of natural capital as income Takes no account of income distribution Ed Diener, Martin E. P. Seligman, “Beyond Money: Towards an Economy of Well-Being” http://www.brookings.edu/dybdocroot/comm/events/20040603b.pdf Counting Expenditures & Income: The Pie Principle Team Exercises [EL p72] Expenditures* Income* C 5660 w 4920 I 1330 prop income 560 G 1470 corp profits 820 X 960 rents 140 -M -1080 interest 450 8340 sales taxes 560 deprec 890 8340 *$ billions Next time: What is most popular movie of the week? What is the most popular movie of all time? As measured by box-office receipts. Wrap up: What did you learn? What is GDP? What are intermediate goods? What are the components of GDP: Expenditures approach? Income approach?
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