Transcript GDP - cloudfront.net

THE BUSINESS CYCLE ILLUSTRATED:
Indicators of the Business Cycle
[“The leading indicators have predicted 11 of the last 15 recessions”]
Coincident Indicators
“Where we are now”
Payroll employment
Personal income
Factory orders
Lagging Indicators
“Where we have been”
Labor cost, unempl. duration
prime interest rates, etc.
Leading Indicators
Ave work week
Unempl claims
New orders
New businesses
Stock prices
New orders
Building permits
Delivery times
Inventories
Materials prices
Money supply
Credit
Had a recession in 2001
• Peak
• temporary maximum in Real GDP. At this point the
unemployment rate (u%) is probably below the natural rate of
unemployment, and the inflation rate (π%) is probably
increasing.
• Recession/Contractionary
• The contractionary phase of the business cycle. A period of
decline in Real GDP accompanied by an increase in u%. To be
classified as a recession, the economic decline must be at least 6
months long.
• Trough
• The bottom of the business cycle. The u% is probably high and
π% is probably low.
• Recovery/Expansionary
• The phase of the business cycle where the economy is returning
to full employment.
FOUR PHASES OF BUSINESS CYCLE
• Productivity refers to the
amount of goods and
services produced from
each unit of labor input.
• A nation’s standard of
living is determined largely
by the productivity of its
workers.
PRODUCTION FUNCTION
• Y = A F(L, K, H, N)
• Y = quantity of output
• A = available production technology
• L = quantity of labor
• K = quantity of physical capital
• H = quantity of human capital
• N = quantity of natural resources
• F( ) is a function that shows how the inputs are combined.
PRODUCTION FUNCTION
• Setting x = 1/L,
• Y/ L = A F(1, K/L, H/L, N/L)
• Where:
• Y/L = output per worker
• K/L = physical capital per worker
• H/L = human capital per worker
• N/L = natural resources per worker
PRODUCTION FUNCTION
• Productivity (Y/L) depends on:
• physical capital per worker (K/L),
• human capital per worker (H/L),
• and natural resources per worker (N/L),
• as well as the state of technology (A).
DIMINISHING RETURNS AND THE
CATCH-UP EFFECT
• As the stock of capital rises, the extra output produced from
an additional unit of capital falls; this property is called
diminishing returns.
• Because of diminishing returns, an increase in the saving rate
leads to higher growth only for a while.
• In the long run, the higher saving rate leads to a higher level
of productivity and income, but not to higher growth in these
areas.
SECTORS:
B. Business Firms
D. Consumer Households
C. Where goods and
services are
supplied and
demanded (bought
and sold)
A. Where factors of
production (LLCE) are
supplied and
demanded (bought
and sold).
• Payments for goods and services
(expenditures)
• Payments for factors of production
(income)
• Goods and services
• Factors of Production
LEAKAGES AND INJECTIONS FROM
INCOME/EXPENDITURE FLOWS:
• Government
• Leakage – Taxes (T)
• Injection – Government Expenditures (G)
• Financial Institutions
• Leakage – Saving (S) (income not spent)
• Injection – Business Investment (I)
• Foreign Sector
• Leakage – Expenditures for Imports (M)
• Injection– Expenditures for Exports (X)
Aggregate (total) Expenditures = C + I + G + X-M
(AE) = GDP = AD
THE MEASUREMENT OF GDP
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• GDP is the total market value of all final goods
and services produced within a country in a
given period of time.
THE MEASUREMENT OF GDP
• “GDP is the Market Value . . .”
• Output is valued at market prices.
• “. . . Of All. . .”
• Includes all items produced in the economy and legally
sold in markets
• “. . . Final . . .”
• It records only the value of final goods, not intermediate
goods (the value is counted only once).
• “. . . Goods and Services . . .”
• It includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor
visits).
THE MEASUREMENT OF GDP
• “. . . Produced . . .”
• It includes goods and services currently produced, not
transactions involving goods produced in the past.
• “ . . . Within a Country . . .”
• It measures the value of production within the
geographic confines of a country.
• “. . . In a Given Period of Time.”
• It measures the value of production that takes place
within a specific interval of time, usually a year or a
quarter (three months).
THE COMPONENTS OF GDP
GDP (Y) is the sum of the following:
 Consumption (C)
 Investment (I)
 Government Purchases (G)
 Net Exports (NX)
Y = C + I + G + NX
CONSUMER HOUSEHOLDS
• Symbol
• Name
• Significance
C
Consumption
• Other Data
Durable goods
Nondurable goods
Services
Largest sector/
Significant impact
BUSINESS FIRMS
• Symbol
• Name
• Significance
Very important.
• Other Data
Total
Ig
Gross Private
Domestic Investment
Affects productive
potential of economy
Capital goods
All construction (houses, etc.)
Changes in inventory
HOW DOES BUSINESS INVESTMENT AFFECT THE
PRODUCTIVE CAPACITY OF THE ECONOMY?
• IG = Depreciation + Net Investment
replacement
capital
additions to the
stock (amount) of capital
in the economy
Machines worn out / used up while producing the
nation’s output.
Consumption of fixed capital
Depreciation is also called:
Capital consumption allowance (CCA)
GOVERNMENT (PUBLIC) SECTOR
• Symbol
• Name
• Significance
G
Government
Expenditures
Significantly large
Includes
gov.
purchases
• Other Data
of goods and services
TRANSFER PAYMENT:
• Money that is transferred from one person to another (or
group or business). Usually government is doing the
redistribution.
• Key characteristic --- no good or service or factor of
production is exchanged in return (purely financial
transaction)
• Examples of transfer payments:
• Private: Aunt Suzie gives you a check for your birthday.
• Public: subsidies to businesses, social security payments,
veteran’s benefits, welfare payments, unemployment
compensation.
• Note: work may have been done in the past for which the
recipient is receiving the payment (social security,
unemployment compensation, veteran’s benefits); however,
no CURRENT PRODUCTION is taking place for receipt of the
money NOW.
FINANCIAL MARKETS
The Bond Market
• A bond is a certificate of indebtedness that
specifies obligations of the borrower to the
holder of the bond.
• Characteristics of a Bond
• Term: The length of time until the bond matures.
• Credit Risk: The probability that the borrower will fail
to pay some of the interest or principal.
• Tax Treatment: The way in which the tax laws treat
the interest on the bond.
• Municipal bonds are federal tax exempt.
• Bond Prices react to interest rates.
• If a bond is paying 10% and interest
rates go to 5% is the bonds price
going to go up or down?
• What if interest rates go to 15% what
is that bond going to be worth?
• So if interest rates go up bond prices
go down and vice versa.
FINANCIAL MARKETS
• The Stock Market
• Stock represents a claim to partial ownership in a
firm and is therefore, a claim to the profits that
the firm makes.
• The sale of stock to raise money is called equity
financing.
• Compared to bonds, stocks offer both higher risk and
potentially higher returns.
• The most important stock exchanges in the
United States are the New York Stock Exchange,
the American Stock Exchange, and NASDAQ.
THE IMPORTANCE OF SAVING AND
INVESTMENT
•
•
As the stock of capital rises, the extra
output produced from an additional unit
of capital falls; this property is called
diminishing returns.
Because of diminishing returns, an
increase in the saving rate leads to higher
growth only for a while.
GDP AND ECONOMIC WELL-BEING
• Some things that contribute to well-being are
not included in GDP.
• The value of leisure.
• The value of a clean environment.
• The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value
of volunteer work.
1. Second Hand Sales[no production]
2. Public/Private Transfer Payments
3. Purely Financial Transactions
4. Intermediate Goods
5. U.S. Corporations producing overseas
6. Non-market transactions
[household or volunteer work]
Underground Economy
7. Illegal business activity
8. Unreported legal business activity
HOUSING
WEIRDservices is somewhat
The
value of IS
housing
difficult to measure.
a. If housing is rented, the value of the rent
is used to measure the value of the housing
services.
b. For housing that is owned (or
mortgaged), the government estimates the
rental value and uses this figure to value the
housing services.
C ___
Y 1. You buy a purple “Tinky Winky” from Wal-Mart.
___
___
6 ___
N 2. You and your family paint your house. [labor involved]
N 3. You marry your housemaid. [“working-for-love”] [her services]
___
6 ___
3 ___
N 4. You buy 100 shares of Microsoft Corporation.
___
N 5. You volunteer to babysit your little sister to help your parents while
6 ___
___
they work.
1 ___
N 6. Bob buys a 1965 ford Mustang convertible, in 2010, which is in mint
___
condition.
C ___
Y 7. The salesman gets a commission [pay] for selling that 1965 Ford
___
Mustang in 2010.
N 8. You and your friend volunteer to cook at the senior class picnic.
___
6 ___
___
8 ___
N 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it.
Does the $500 the dentist keeps and doesn’t report count?
7 ___
___
N 10. You are given s suitcase full of $100 bills from the sale of smuggled
drugs.
___
N 11. Your mother is teaching you to read
6 ___
1. 2nd Hd sales
2. Transfers
___
N 12. Your dad bakes you a home-baked loaf of bread.
6 ___
3.
4.
5.
6.
7.
8.
Financial
Intermediate
Overseas
Non-market
Illegal
Unreported
___
C ___
Y 13. You buy a loaf of bread from Kroger’s Grocery Store.
G ___
Y 14. The U.S. government purchases 5 B-2 Bombers for $2 B each.
___
4 ___
N 15. Ford buys a ton of sheet metal used in making car doors.
___
___
Y 16. You buy a new “iPad” from the Apple store.
C ___
C ___
Y 17. You send in a $90 check to your dentist for cleaning your teeth.
___
Ig ___
Y 18. Your family buys a new house next to the mansion of Bill Gates.
___
___
G ___
Y 19. 100 additional teachers are hired by the Frisco ISD.
Ig ___
Y 20. GM invest in $500 million worth of robots to assemble their cars.
___
6 ___
N 21. You volunteer 10 hours a week of your time to work for senior
___
citizens.
Ig ___
___
Y 22. Ford produces 25,000 F150s in Denver which are not sold by the
end of the year.
___
X ___
Y 23. Russia buys 3,000 Dell computers, produced in NY, as they
become Rusky Dell Dudes.
6 ___
N 24. A man’s wife does all his cooking and sewing, working for him 16
___
hours per day.
1. 2nd Hd sales
5 ___
N 25. Nike produces $10 million worth of Nike’s in Vietnam.
___
2. Transfers
3.
4.
5.
6.
7.
8.
Financial
Intermediate
Overseas
Non-market
Illegal
Unreported
Lets’ take a look at
some “Is It
Included In GDP”
questions on the
2007 FRQ.
3. [8 pts] Indicate whether each of the following is counted in
the U.S. GDP for the year 2006. Explain each of your answers.
(a) The value of used textbook sold through online auction in 2006.
Answer: No, it was counted the year it was produced. Because it was
not produced again, it would not be counted. That would be double counting.
[2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]
b. Rent paid in 2006 by residents in an apartment building built in 2000
Answer: Yes, rents consist of the income received by the households and
businesses that supply property resources. The properties have to be maintained
or “serviced” each year. It is included in the income approach to GDP.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
c. Commissions earned in 2006 by a stockbroker
Answer: Yes, payment is being made for productive services of the
broker. So the purchase of stocks would not count but his work would.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
d. The value of autos produced in 2006 entirely in South Korea by a
firm fully owned by U.S. citizens
Answer: No, GDP measures production inside the U.S. regardless of
ownership. These autos were produced in South Korea.
[2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]
REAL VERSUS NOMINAL GDP
• Nominal GDP values the production
of goods and services at current
prices.
• Real GDP values the production of
goods and services at constant prices.
NOMINAL
[MONEY]
GDP V. REAL GDP
An increase in prices and/or output will increase
nominal GDP.
Only an increase in output will increase real GDP.
Nominal GDP could increase even if output falls.
Real GDP = Nominal Y/GDP deflator x 100
So, nominal GDP measures output & prices.
Real measures only output [actual production]
Constant (real) GDP v. current (money) GDP
GROSS DOMESTIC PRODUCT – MARKET VALUE OF ALL
FINAL LEGAL OUTPUT PRODUCED IN A COUNTRY IN ONE
YEAR.
Nominal (money) GDP
=$6.00
Year one
$2.00
$2.00
$2.00
The base year is the benchmark year
to which other years are compared.
Nominal GDP measures
“current” output valued
at current prices.
Nominal (money) GDP
=$6.10
Year Two
[Recession - decrease in real output]
$3.05
$3.05
Real GDP – measures only output.
[measures current output at base-year
prices ($4), not current prices ($6.10)].
[“Real” or “constant-dollar” GDP]
GDP DEFLATOR – MORE BROAD
GDP Deflator includes prices
for all goods that we produce:
1.What householders are buying
2.What businesses are buying
3.What the government is buying
4.What foreigners are buying
[does not include imports because
we don’t produce imports]
GDP DEFLATOR
The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
THE “GDP” BALLOON
$6,736.9/126.1 x 100 = $5,342.5
takes
Nominal – measured in terms of money.
Real – measured in terms of goods/services.
$4,839
$3,492
$4,848
THE INCOME APPROACH
W+I+R+P
• W=COMPENSATION OF EMPLOYEES
• I=NET INTEREST=INTEREST YOU RECEIVE FROM
INVESTMENTS(CDS, AND STOCKS)
• R= RENTAL INCOME-RENTING OF HOUSES, etc
• P=PROFITS-PROFITS EARNED BY BUSINESSES
• SA= STATISTICAL ADJUSTMENTS (Corporate Income
Taxes, Dividends, Undistributed Corporate Profits)
Expenditure Approach
Gross Domestic Production
Income Approach
Gross Domestic Sales
Consumption by
Households
Rents
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
+
+
+
Interest
G
= D=
P
Profits
Statistical Adjustments
[corporate income taxes,
Dividends, undistributed
Corporate profits]
+
Wages
OTHER MEASURES OF INCOME
•
•
•
•
•
Gross National Product (GNP)
Net National Product (NNP)
National Income
Personal Income
Disposable Personal Income
•
•
GROSS NATIONAL PRODUCT
Gross national product (GNP) is the total
income earned by a nation’s permanent
residents (called nationals).
It differs from GDP by including income that
our citizens earn abroad and excluding income
that foreigners earn here.
NET NATIONAL PRODUCT (NNP)
•
Net National Product (NNP) is the total income of
the nation’s residents (GNP) minus losses from
depreciation.
NATIONAL INCOME
•
National Income is the total income earned by a
nation’s residents in the production of goods and
services.
•
It differs from NNP by excluding indirect business
taxes (such as sales taxes) and including business
subsidies.
PERSONAL INCOME
•
Personal income is the income that households and
noncorporate businesses receive.
•
Unlike national income, it excludes retained earnings, which
is income that corporations have earned but have not paid
out to their owners.
•
In addition, it includes household’s interest income and
government transfers.
DISPOSABLE PERSONAL INCOME
•
Disposable personal income is the income that household
and noncorporate businesses have left after satisfying all
their obligations to the government.
•
It equals personal income minus personal taxes and certain
nontax payments.
BREAKING DOWN NATIONAL SAVINGS
NS=(Y-T-C)
+
•Private Savings-is the
amount of income that
households have left after
paying their taxes and
paying for their consumption
(TR-G)
Public Savings-is the
amount of tax revenue that
the government has left
after paying for it spending
COMPOUNDING AND THE
RULE OF 70
ACCORDING TO THE RULE OF 70, IF SOME
VARIABLE GROWS AT A RATE OF X PERCENT
PER YEAR, THEN THAT VARIABLE DOUBLES IN
APPROXIMATELY 70/X =YEARS.
AN EXAMPLE OF THE RULE OF 70
•
$5,000 invested at 7 percent interest per
year, will double in size in 10 years
70/ 7 = 10
THE IMPORTANCE OF SAVING AND
INVESTMENT
THE CATCH-UP EFFECT REFERS TO THE
CONDITION THAT, OTHER THINGS BEING
EQUAL, IT IS EASIER FOR A COUNTRY TO
GROW FAST IF IT STARTS OUT RELATIVELY
POOR.
 Poor countries devote more resources to consumer
production than rich countries do.
 As more resources flow into capital production, the rate of
economic growth in rich countries increases, and so does
the gap between rich and poor countries.
Rich Countries Favor
Future Goods
Poor Countries Favor Present Goods
2009 2019
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
Goods for the Future
Goods for the Future
2019
CONSUMPTION
2009
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
Yes, if there is Full Employment.
The speed limit for GDP growth is 4%.
But, if the economy is in recession,
There is no speed limit for GDP growth.
increased
Expanding Productive Capacity
No change
Maintaining
our production
possibilities
Static Productive Capacity
decreased
Declining Productive Capacity
CHECK FOR UNDERSTANDING
WHAT’S INCLUDED / EXCLUDED IN GDP AND HOW IS IT
CLASSIFIED?
Year
Price of
Hot dogs
Quantity of
Hot dogs
Price of
Hamburgers
Quantity of
Hamburgers
2001
$1
100
$2
50
2002
$2
150
$3
100
2003
$3
200
$4
150
Calculating Nominal GDP:
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $600
2003
($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) = $1200
Calculating Real GDP (base year 2001):
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $350
2003
($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $500
REAL AND NOMINAL GDP
Year
Price of
Hot dogs
Quantity of
Hot dogs
Price of
Hamburgers
Quantity of
Hamburgers
2001
$1
100
$2
50
2002
$2
150
$3
100
2003
$3
200
$4
150
Calculating the GDP Deflator:
2001
($200/$200) x 100 = 100
2002
($600/$350) x 100 = 171
2003
($1200/$500) x 100 = 240
Year
PL Footballs
Year 1
Year 2
Year 3
$10
12
14
Q Footballs
120
200
180
PL Basketballs
$12
15
18
Q Basketballs
200
300
275
Nominal GDP year 1?
Nominal GDP Year 2?
Nominal GDP year 3?
nGDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600
nGDP in Year 2 = ($12 × 200) + ($15 × 300) = $6,900
nGDP in Year 3 = ($14 × 180) + ($18 × 275) = $7,470
Year
PL Footballs
Year 1
Year 2
Year 3
$10
12
14
Q Footballs
120
200
180
PL Basketballs
$12
15
18
Q Basketballs
200
300
275
• Using Year
1 asGDP
the Base
Real
yearYear:
1?
• Real GDP in Year 1 = ($10 × 120) + ($12 × 200) =
$3,600 Real GDP Year 2?
• Real GDP in Year 2 = ($10 × 200) + ($12 × 300) =
$5,600 Real GDP year 3?
• Real GDP in Year 3 = ($10 × 180) + ($12 × 275) =
$5,100
• (Note that nominal GDP rises from Year 2 to Year 3,
but real GDP falls.)
1. YOU SPEND $5 TO ATTEND A MOVIE.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
2. YOU PAY A CONTRACTOR $100,000 FOR A NEW
HOUSE.
I
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
3. YOU PAY $60,000 TO THE OWNER TO PURCHASE A
TEN YEAR OLD HOME.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
4. THE GOVERNMENT INCREASES ITS MILITARY
EXPENDITURES BY $1 BILLION.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
5. THE GOVERNMENT SENDS A $600 SOCIAL
SECURITY CHECK TO A RETIRED PERSON.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
6. YOU PURCHASE $2000 OF MICROSOFT STOCK ON
THE STOCK MARKET.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Security (stock) transaction / nonproduction or
purely financial transaction
7. AT THE END OF THE YEAR, A CAR DEALER FINDS
THAT ITS INVENTORIES OF CARS ARE $300,000 HIGHER
THAN THE BEGINNING OF THE YEAR.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Additions to inventories are unsold output. They are counted
as Ig. Even though they are not sold, they must be counted because they were produced.
8.
A HOUSEWIFE DOES A LOT OF WORK
CARING FOR HER HUSBAND AND KIDS.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Nonmarket Transaction (underground economy)
9.
GENERAL MOTORS BUYS NEW ROBOTS FOR
ITS ASSEMBLY-LINE.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Robots are new capital goods.
10. APPLE BUILDS A NEW IPOD FACTORY.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
All new construction is counted as business investment. Building
a factory is also adding to the economy’s capital stock.
11. R.J. REYNOLDS COMPANY BUYS CONTROL
OF NABISCO.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Security (stock) transaction / nonproduction or
purely financial transaction
12. YOU BUY A NEW TOYOTA MADE IN JAPAN.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Imports must be subtracted because the expenditure by Americans
is for a car produced in another country (Japan).
13. YOU PAY TUITION TO ATTEND AN
ECONOMICS COURSE AT THE LOCAL
COLLEGE.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
14. IBM PAYS YOU THE INTEREST ON YOUR IBM
BOND.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Tricky question: Although stock and bond sales ARE NOT counted, dividends from stock and
interest from corporate (but not government) bonds are counted because they represent income
currently earned from the production of the current year’s output. This is tricky because no
answer is correct. Interest payments would be part of the income approach – not the
expenditures approach to GDP calculation.
15. A NEW TRUCK IS PRODUCED BUT NOT SOLD
IN 2005. IN 2006, THE TRUCK IS SOLD.
. truck is counted as negative change in inventory in
A. The
2005 and a positive change in inventory in 2006.
B. The truck is counted as a positive change in inventory
in 2005 and as consumption and a negative change in
inventory in 2006.
C. The truck is counted as consumption in 2005.
D. Because it was not sold in the year it was produced,
the truck is not counted in the GDP of either year.
The truck, although unsold in 2005, must be counted in 2005 because that was the year it was
produced; therefore, in 2005 it is counted as part of Ig. In 2006 it was purchased (increase in C) but
also the purchase reduced Ig by the same amount the C increased; therefore, the net effect for 2006 is
zero.
16. A PAINTER PAINTS HIS OWN HOME.
• C counted as consumption
• Ig
counted as business investment
• G counted as government expenditures
• Xn added or subtracted in the foreign sector
•N
NOT COUNTED (WHY?)
Nonmarket Transaction – underground economy.