FUNDAMENTALS OF BUSINESS ECONOMICS

B. Measuring National Output

1  Gross Domestic Product (GDP)

• Market value of final goods and services currently produced for the market within a nation during a period of time

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a.  Characteristics of GDP

• Market value 

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• Final goods and services

- Sold to end users

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• Currently produced

- Used products not counted

- Products product but not sold counted

- Financial securities transactions not counted

- Transfer payments not counted

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• For the market

- Nonmarket transactions not counted - legal (e.g., housework) and illegal (e.g., drug trafficking)

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• Within a nation

- Measures production within a country's borders, regardless of who produces the products

- Gross National Product (GNP) - market value of final goods and services produced by a nation's resources, regardless of location

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• During a period of time

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b.  Shortcomings of GDP

(1) Nonmarket transactions excluded

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(2)  Black market and underground transactions excluded

• Illegal activities, cash economy

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(3)  Quality improvements improperly accounted for

• Price increases may not capture complete quality improvement

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(4)  Leisure and quality of life not considered

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(5)  Harmful and dangerous output counted the same as useful output

• Natural disasters, wars, environmental disasters counted as increasing GDP

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c.  Imputed value of some nonmarket transactions included

Ex.- Owner-occupied housing

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2.  Circular flow diagram

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3.  Macroeconomic expenditures

• Calculated by the Bureau of Economic Analysis

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a.  Personal consumption expenditures (C)

• Durable goods - last more than three years

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• Nondurable goods - last less than three years

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• Services - noncommodity items

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b.  Gross private domestic investment spending (I)

• Business fixed investment

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• Residential fixed investment

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• Changes in business inventory

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c.  Government consumption expenditures and gross investment (G)

• Federal

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• State and local

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d.  Net exports (NE)

• Exports (EX)

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• Imports (IM)

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• Represents the demand for goods and services

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4.  Equilibrium

a.  Desired demand = desired supply

• Desired demand > desired supply => business inventories fall => hiring, increased production, higher prices

• Desired demand < desired supply => business inventories rise => layoffs, decreased production, lower prices

b.  Desired leakages = desired injections

(1)  Leakages

• Saving (S)

• Taxes (T)

• Imports (IM)

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(2)  Injections

• Investment (I)

• Government spending (G)

• Exports (EX)

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c.  Circular flow model and recessions

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