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Economics 12 Ch. 9

Economics 12 Ch. 9. Ms. Park. Next Presenters. Quasim & George. Review. What are three types of method for calculating GDP?. Expenditure method. GDP is a measure of the quantity of goods and services PRODUCED by an economy. Production Method

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Economics 12 Ch. 9

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  1. Economics 12Ch. 9 Ms. Park

  2. Next Presenters • Quasim& George

  3. Review • What are three types of method for calculating GDP?

  4. Expenditure method • GDP is a measure of the quantity of goods and services PRODUCED by an economy. • Production Method • Any good or service that is produced will also be PURCHASED and used by someone. • Production Method = Expenditure Method

  5. Expenditure Method Cont. • Users of the final goods and services that make up the GDP are divided into four categories: households, firms, governments, and the foreign sector (foreign purchasers of domestic product)

  6. Four components of expenditure • There are four components of expenditure: 1) Consumption, 2) Private-sector investment, 3) Government purchases, and 4) Net exports.

  7. 1. Consumption • Consumption: also called personal expenditure, is spending by households on goods and services • Durable goods: long-lived goods purchased for household use (Ex. car, furniture) Important: new houses are not treated as consumer durables but as part of private-sector investment. • Semi-durable goods: consumer goods that would be expected to last for a year or more (Ex. clothing) • Non-durable goods: consumer goods that would typically be used only once. (Ex. food, gasoline) • Services: everything from haircuts and taxi rides to legal and financial services.

  8. 2. Private-sector investment • Private-sector investment: also called business investment or investment, is spending by firms on final goods and services, primarily capital goods and housing • Investment in non-residential structures and equipment: purchase by firms of new capital goods such as machinery, factories, office building, shopping malls, and transportation equipment. • Investment in residential structures: purchases of new dwellings • Investment in inventories: refers to change in company inventories. Important: for accounting purposes, the goods a firm produces but does not sell during the current period are treated as if the firm had bought those goods from itself.

  9. Q&A • Purchases of new dwellings, regardless of whether the dwelling is a new house purchased by a family for personal use or a new apartment building purchased by a landlord to earn rental income, falls under private-sector investment. Why do you think so?

  10. 3. Government Purchases • Government Purchases: purchases by federal, provincial, and municipal governments of final goods (such as computer) and services (such as teaching in public schools)

  11. 4. Net Exports • Net exports= Exports – imports • Exports: domestically produced final goods and services sold abroad • Imports: purchases by domestic buyers of goods and services that were produced abroad

  12. Calculating GDP: Expenditure Method • Y = C + I + G + NX • Y = GDP, or output • C = Consumer expenditure • I = Private-sector investment • G= Government purchases • NX = Net exports

  13. Example • Suppose that an economy produces 1 million automobiles valued at $15,000. Of these, 700,000 are sold to consumers, 200,000 are sold to businesses, 50,000 are sold to the government, and 25,000 are sold abroad. No automobiles are imported. The automobiles left unsold at the end of the year are held in inventory by auto producers. Find C, I, G, NX, and GDP.

  14. Homework • Textbook Questions: #5 • Handout Problems: #3&4 • Review Questions: #2

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