GDP: A Measure of Total Production and Income

GDP: A Mea-sure of Total

Productionand Income

Chapter

1CHAPTER OUTLINE

1.Define GDP and explain why the value of production, income, and expenditure are the same for an economy.

A. GDP Defined1. Value Produced2. What Produced3. Where Produced4. When Produced

B. Circular Flows in the U.S. Economy1. Consumption Expenditure2. Investment3. Government Expenditure on Goods and Services4. Net Exports of Goods and Services5. Total Expenditure6. Income

C. Expenditure Equals Income

2.Describe how economic statisticians measure GDP and distinguish between nominal GDP and real GDP.

A. The Expenditure Approach1. Expenditures Not in GDP

B. The Income Approach1. Wage Income2. Interest, Rent, and Profit Income3. Net Domestic Product at Factor Cost4. From Factor Cost to Market Price5. From Net Product to Gross Product6. Statistical Discrepancy

C. GDP and Related Measures of Production and Income1. Gross National Product2. Disposable Personal Income

D.Real GDP and Nominal GDPE. Calculating Real GDPF. Using the Real GDP Numbers

© 2015 Pearson Education, Inc.

230 Part 4 . MONITORING THE MACROECONOMY

3.Describe the uses of real GDP and explain its limitations as a measure of the standard of living.

A. The Standard of Living Over TimeB. Tracking the Course of the Business CycleC. The Standard of Living Among CountriesD.Goods and Services Omitted from GDP

1. Household Production2. Underground Production3. Leisure Time4. Environment Quality

E. Other Influences on the Standard of Living1. Health and Life Expectancy2. Political Freedom and Social Justice

What’s New in this Edition?The data have been updated throughout Chapter 14 and the Income Approach section has been slightly revised with a new subheading for Net Domestic Product at Factor Cost.

Where We AreIn Chapter 14, we define GDP and explain why for the economy, the value of production equals income, which also equals expenditure. We describe how economic statisticians measure GDP. Next we distin-guish between nominal GDP and real GDP. Lastly, we explain and describe the uses of real GDP and its limitations as a measure of the standard of living.

Where We’ve BeenAfter exploring how microeconomic decisions are made, this chapter is the first chapter that directly explores macroeconomics.

Where We’re GoingIn the next two chapters, we will explore other ma-jor macroeconomic measurements. We will describe the labor market and explore measures and trends for employment, unemployment, and wage rates. We will also examine how the price level is measured and see how price indices are used to measure the cost of living and to calculate the inflation rate.


Chapter 14 . GDP: A Measure of Total Production and Income 231

IN THE CLASSROOM

Class Time Needed

The material in this chapter can be covered in about two class ses-sions.

An estimate of the time per checklist topic is:

14.1 GDP, Income, and Expenditure—20 to 30 minutes

14.2 Measuring U.S. GDP—45 to 60 minutes

14.3 The Uses and Limitations of Real GDP—20 to 30 minutes

Classroom Activity: Suppose the econ-omy is operating at full employment on the production possibilities fron-tier. Assume furthermore that GDP increases along the frontier, as de-picted in the figure by the move-ment from point A to point B. Ask your students if this movement nec-essarily involves an improvement in this country’s standard of living. Granted, output has expanded, but it has come at the expense of a dirt-ier environment. Most students will respond by saying that it is difficult to say because it depends on just how badly the environment has de-teriorated. That is to say, if the in-crease in GDP more than compen-sates for the reduction in the qual-ity of the environment, then per-haps it is a welfare enhancing

move and the standard of living has indeed gone up. Point out that this issue is the crux of the controversy—measuring something as elusive as a clean environ-ment.

You might consider asking students if there is any way out of this dilemma. One possible answer is that the standard of living could actually improve if there were developments that pushed the production possibilities frontier outward. In this case, we would be in the enviable position of being able to enjoy a higher GDP coupled with greater environmental quality.

To wrap up the discussion you might want to make a connection with this lecture and the material covered in Chapter 4 on Demand and Supply. First, ask stu-dents what kind of a good they think the environment is. That is, ask them if it is a normal good or an inferior good. They might balk at first at the idea by ques-tioning whether it is a good in the first place. Don’t let this problem derail you from your task. Explain that there are many things that we enjoy that are not



necessarily bought and sold in markets that qualify as goods. A clean environ-ment is something that is in just as much demand as national defense, fire pro-tection, or a safe workplace. With this discussion, someone is bound to say that the environment is a normal good. Refresh their memory by restating what it takes for a good to be a normal good. Now you can point out that we have an an-swer for our dilemma in the production possibilities frontier. That is, as a nation expands its national output there is, for a time, damage done to the environment. However, as a nation prospers it has a greater demand and preference for a cleaner environment. And, you can point out that this outcome is exactly what happened in Europe. When the richer West Germany reunited with the poorer East Germany in the late 1980s, observers were stunned by how environmentally dirty East Germany was, especially compared to West Germany!



CHAPTER LECTURE

14.1 GDP, Income, and Expenditure

GDP Defined GDP or gross domestic product is the market value of all the final goods

and services produced within a country in a given time period Value produced: The items in GDP are valued at their market values, that

is, at their prices. If 1,000,000 slices of pizza are sold for $4 each, slices of pizza contribute $4,000,000 to GDP.

What produced: To avoid double counting, GDP includes only final goods and services. A final good or service is a good or service that is pro-duced for its final user and not used as a component of another good or service. It contrasts with an intermediate good or service, which is a good or service that is used as a component of a final good or service.

Where produced: Only the goods and services produced within a country are counted. So a Toyota Tundra produced in Texas is counted in U.S. GDP and a Chevy Silverado produced in Silao, Mexico is not counted in U.S. GDP.

When produced: GDP measures production during a given period of time, typically a year.

Lecture Launcher: Try this exercise to get your students to focus on the elegance of the definition of GDP. From the text, GDP is defined as the market value of all the final goods and services produced within a country in a given time period. Reproduce the definition of GDP by writing it on the board. Ask your students to go through the definition and pull out the essential parts. You will get this list: market value, final goods and services, produced, within a country, and time pe-riod. Underline or draw a box around each key word. Explain that the words cho-sen in this definition were selected carefully. First, if the phrase “market value” had been left out, there would be room for lots of problems. Notice that when the government reports this figure, it doesn’t announce how many trains, planes, and automobiles the country has produced but rather it announces a monetary value. Using monetary values affords us the opportunity to be able to get around the problem of aggregation when the items in question are markedly different. We solve it by allowing the marketplace to determine the weights – and how markets determine value is what students learned back in Chapter 4. The second item on the list is “final goods and services.” The explanation here is straightfor-ward: We are distinguishing between final products and intermediate products. Intermediate goods are goods that are bought by one firm to be used in the pro-duction of another good that will be ultimately consumed. If we include these in-termediate goods, then we would double count the nation’s output. Now we come to the word “produced.” This word is to make clear that sales are not im-portant. If we only counted sales, then the GDP figures would understate produc-tion because not all output is sold. Some of it became inventory. In addition, not all output that is sold is produced in that year. Testimony of this is the sale of an automobile that was actually produced in a previous year. Next is the phrase “within a country.” This phrase is to make clear that we don’t count output that wasn’t produced on a nation’s soil regardless of who was responsible for produc-



ing it. Lastly, is the phrase “time period.” Here we want to make unambiguously clear that we are only talking about production that occurred in a certain period. This phrase leaves no doubt that production of a good or service produced in a previous time period (even if perhaps sold in the present time period) does not count in this period’s GDP.

Circular Flows in the U.S. Economy In the goods market, households, firms, governments, and foreigners buy

goods and services. Consumption expenditure, C, is the expenditure by households on con-

sumption goods and services. This includes both durable goods (meant to last 3 or more years) and nondurable goods.

Investment, I, is the purchases of new capital goods (tools, instruments, machines, buildings, and other durable items), purchases of new homes by households, and additions to inventories. Investment does not include purchases of stocks and bonds, as these are not produced goods or ser-vices.

Government expenditures on goods and services, G, is the expendi-tures by all levels of the government on goods and services.

Net exports of goods and services, NX, is the value of exports of goods and services minus the value of imports of goods and services. Ex-ports of goods and services are the items that firms in the United States produce and sell to the rest of the world. Imports of goods and services are the items that households, firms, and governments in the United States buy from the rest of the world.

Government transfer payments, such as Social Security payments, are not part of government expenditures on goods and services because these expenditures include only funds used by the government to buy goods and services. Transfer payments are not buying a good or service for the government and so are not included in gov-ernment expenditures on goods and services.

Total Expenditure Total expenditure equals C + I + G + NX. Households receive wages, capital, interest, rent, and profit as income. Some

part of total income is not paid out to households by firms, but from an eco-nomic standpoint, this undistributed profit is income paid to households and then loaned back to firms.

Expenditure Equals Income Because firms pay out as income everything they receive as revenue from

selling goods and services, total income, Y, equals total expenditure. So:Y = C + I + G + NX.

For a firm, the value of its production is the cost of the production, which equals the income generated by the production. So the value of production equals income equals expenditure, or

GDP = Y = C + I + G +NX. Households use their income on consumption expenditure, saving, and pay-

ing net taxes. Therefore it is the case that Y = C + S + NT



Land Mine: At an intuitive level, the equality between income and expenditure is not a difficult concept to get across. It makes sense to students that whatever someone spends must ultimately end up as income to someone else. The problem comes when we put this into practice. The reason has to do with the fact that there are two non-income charges against GDP (depreciation and indirect taxes less subsidies). If they are ignored, then when us-ing the income approach the figure obtained will be less than the figure obtained using the expenditure approach. As always we are faced with a tradeoff. You can proceed immediately to intro-duce depreciation and indirect taxes less subsidies and do a com-prehensive job. It will be accurate, but your simple and powerful point that income equals expenditure will be lost. The second al-ternative is to wait and let the intuitive equality sink in. This pro-cedure has the benefit of preserving the expenditure/income equality without prematurely exhausting your students. The downside is that you delay the inevitable. You will eventually have to explain the discrepancy sometime.

14.2 Measuring U.S. GDP

The Expenditure Approach The expenditure approach measures GDP as the sum of consumption expen-

diture, C, investment, I, government expenditures on goods and services, G, and net exports of goods and services, ( X M ). So GDP = C + I + G + ( X M ) or, in the second quarter of 2013, annualized, and rounded to the nearest hundred billionth of dollars, $11.4 trillion + $2.6 trillion + $3.1 trillion + $0.5 trillion = $16.7 trillion.

Expenditures not in GDP include: Used goods: Expenditures on used goods are not part of current GDP be-

cause these goods were part of GDP during the period in which they were produced.

Financial assets: The purchase of financial assets, such as stocks, is not part of GDP because these are not expenditures on goods and services.

The Income Approach The income approach measures GDP using several steps:

The income approach starts with the sum of wage income plus interest, rent, and profit income. This sum equals net domestic product at fac-tor cost.

To change the measure from factor cost to market price, indirect taxes less subsidies are added because these are government taxes and trans-fers that affect market prices.

The next step adds depreciation, the decrease in the value of capital that results from its use and obsolescence.

If everything is measured correctly, adding depreciation would yield GDP. But there often is a statistical discrepancy, the difference between the expenditure approach and the income approach. The difference is mea-



sured as the expenditure approach minus the income approach, so any statistical discrepancy is added to the sum to yield the income approach GDP.

GDP and Related Measures of Production and Income Gross national product, (GNP) is the market value of all final goods and

services produced anywhere in the world in a given time period by the fac-tors of production supplied by the residents of the country. So pharmaceuti-cal drugs produced in Ireland by a U.S. drug company is part of U.S. GNP but not part of U.S. GDP. U.S. GNP equals U.S. GDP plus net factor income from abroad.

Disposable personal income is the income received by households minus personal income taxes paid. It equals GNP minus depreciation minus any sta-tistical discrepancy minus retained profits by businesses plus transfer pay-ments minus personal income taxes.

Real GDP and Nominal GDPThe market value of production and hence GDP can increase either because the pro-duction of goods and services are higher or because the prices of goods and services are higher.

Calculating Real GDP Real GDP allows the quantities of production to be compared across time.

Real GDP is the value of final goods and services produced in a given year expressed in terms of the prices in a base year.

Nominal GDP is the value of the final goods and services produced in a given year expressed in terms of the prices in that same year.



Traditionally, real GDP is calculated using prices of the base year (the year in which real GDP equals nominal GDP).

The top table to the right has data for 2012 for an economy that produces only books and coffee. In 2012, nominal GDP is $3,000. The second table to the right has data for 2013. In 2013, nominal GDP is $6,000.

Nominal GDP has doubled

but what is real GDP between these years?

To determine how real GDP changes, sup-pose that 2012 is the base year. Then real GDP equals nominal GDP in 2012. Now we need to determine real GDP in 2013.

Real GDP in 2013 is calculated using the 2013 quantities and the 2012—the base year—prices. The table to the right shows these calculations.

APPENDIX

The chained-dollar method for calculating real GDP is presented in the appendix. See the notes for the appendix for details.


GDP Data for 2012

Item Quan-tity

Price

Market Value

Books 40 $25 $1,000

Coffee 1,000 $2 $2,000

Nominal GDP

$3,000GDP Data for 2013

Item Quan-tity

Price

Market Value

Books 50 $30 $1,500

Coffee 1,500 $3 $4,500

Nominal GDP

$6,0002013 Quantities and 2012 Prices

Item2013

Quanti-ties

2012Price

sMarket Value

Books 50 $25 $1,250

Coffee 1500 $2 $3,000

Real GDP (2012 dol-lars)

$4,250


14.3 The Uses and Limitations of Real GDPReal GDP can be used to compare the standard of living over time, to track the course of the business cycle, and to compare the standard of living among countries.

The Standard of Living Over Time Standard of living is measured by the value of goods and services that peo-

ple enjoy, on average. Real GDP per person can be used to measure and com-pare the standard of living. Real GDP per person is real GDP divided by the population. In the United States in 2013, real GDP per person is 2.9 times larger than

it was in 1960. Real GDP per person has doubled about every 30 years for the past 100 years, though its growth rate experiences short run fluctua-tions.

Potential GDP is the value of real GDP when all of the economy’s factors of production – labor, capital, land, and entrepreneurship – are fully employed. When some factors are unemployed, real GDP is below potential GDP. When some factors are over-employed, real GDP exceeds potential GDP. Potential GDP grows over time, though not at a constant rate.

Tracking the Course of the Business Cycle Fluctuations in the growth of real GDP reflect business cycles. A business

cycle is the periodic but irregular up-and-down movement of total production and other measures of economic activity. Business cycles have two phases and two turning points: Expansion: The expansion phase is the period during which real GDP is

increasing. Recession: The recession phase is commonly defined as a period during

which real GDP decreases for at least six months, though the NBER has a broader definition.

Peak: A peak is the highest level of real GDP yet attained. A peak is a turning point between an expansion and a recession.

Trough: A trough is the temporary low-point in real GDP. A trough is a turning point between a recession and an expansion.

Lecture Launcher: I find it useful to use a marathon metaphor to help students vi-sualize the business cycle. I tell them to think of the U.S. economy as running in a marathon – always trying to move forward at a sustainable pace in a seemingly never-ending journey. Obviously, going backwards in a marathon is undesirable as we are moving farther away from where we are trying to get to – moving forward is the desired direction. But it’s not just about moving forward – we want to move for-ward at a relatively swift pace, not just walk (we’re better than that!). However, a marathon needs to be run at a sustainable pace. Trying to sprint a marathon is un-sustainable and will lead to over-exhaustion and ultimately slow us down in the long run. A recession is going backwards in the marathon (with a negative real GDP growth rate), while an expansion is moving forward in the marathon (with a positive real GDP growth rate). A peak is when we stop moving forward and start to go back-wards (turning point between positive and negative), while a trough is when we stop going backwards and start moving forward again (turning point between negative and positive).



Our goal is for a sustainable pace for expansion, which is typically thought of as a real GDP growth rate of approximately 3 percent - that is the jogging pace that the U.S. economy has demonstrated it is capable of sustainably expanding at. Expand-ing more rapidly than that can only be done temporarily and trying to expand be-yond that pace for an extended period will lead to “overheating” in the economy (ul-timately revealed to be inflationary pressure) and an eventual backlash - a reces-sion. Expanding less than that level is not living up to our potential. This is also an opportunity to introduce the non-technical term of “growth recession” – when the economy is growing (so it can’t technically be in recession), though growing so slowly there will still be some recession-like characteristics (such as rising or high unemployment). A growth recession is like walking in the marathon. While growth recession is not defined by the NBER or introduced in this textbook, it has grown in popularity in the media as it sometimes serves as a useful description of the seem-ingly “gray” area of the business cycle that is not a recession, but not a healthy ex-pansion either. Growth recession sometimes precedes actual recession (a slowdown before GDP growth ultimately turns negative – such as the tail end of the expansions before the early 80s double-dip recession and the 2001 recession), follows a reces-sion (GDP growth turns positive but is still lower than a healthy rate – such as the recoveries following the 1990-1991, 2001, and 2007-2009 recessions), or in the mid-dle of an expansion (a slowdown that almost takes the place of an actual recession – such as the soft patch in the mid-90s).

I find that the marathon metaphor helps students visualize the business cycle, what our goals are, and the purpose of fiscal and monetary policies (in order to either slow down or speed up our jogging pace).

The Standard of Living Among CountriesTo compare real GDP per person among countries, the real GDPs should be calcu-lated using a common set of prices, called purchasing power parity prices. When this conversion is done (as the data in Chapter 2 show) U.S. real GDP per person is higher than in other advanced economies.

Goods and Services Omitted From GDPGDP measures the value of goods and services that are bought in markets, so it ex-cludes:

Household Production: Household production is productive activities at the home that do not involve market transactions. As more services, such as childcare, meals and laundry are provided in the marketplace, the measured growth rate overstates development of all economic activity.

Underground Production: Underground production is the part of the econ-omy that is hidden from the view of the government either because people want to avoid taxes and regulations or because the goods and services being produced are illegal. If the underground economy is a reasonably stable pro-portion of all economic activity, the growth rate will be accurate.

Leisure Time: Leisure time is an economic good that does not get measured in the official GDP figures. Increases in leisure time lower the economic growth rate, but we value our leisure time and we are better off with it. In-creased output is not worth very much if we have little or no time to enjoy it.



Environmental Quality: Pollution does not directly lower the economic growth rate. If our standard of living is adversely affected by pollution, our GDP measure does not show this fact. The reason is that the devices that we produce to mitigate pollution count as part of GDP but the pollution itself is not subtracted.

Lecture Launcher: A discussion of omissions from GDP can arouse students’ inter-est. For example, you might point out that if one of your students mows her/his own lawn, the value of the student’s production doesn’t show up in GDP. But if you hire the student to mow your lawn (and if your student reports the income earned correctly to the IRS), the value of the student’s production does show up in GDP. Why don’t we measure all lawn mowing as part of GDP? Some reasons are cost of collecting data and the degree of intrusiveness we’d be willing to tol-erate. But note how little we spend on collecting the GDP data and how rela-tively inexpensive it would be to add some questions about domestic production to either the Labor Force Survey or the Family Expenditure Survey.

Lecture Launcher: You might like to explain how the omission of illegal goods and services also leads to some misleading comparisons. For instance, the day before prohibition ended, the production of illegal beer was not counted as part of GDP. But the day after prohibition ended, the production of now legal beer counted. Ask your students to suggest two good reasons why illegal goods and services are omitted. First, the data are hard but not impossible to obtain. Second, there may be the moral position that illegal activities should not be included in GDP. This latter observation can lead to an interesting discussion. Ask the students if they think that the production of, say, marijuana should be included in GDP. Some, maybe even many, of them will see no problem with this. Then ask about the production of murder-for-hire. The response, we hope, will be significantly different. Does such a “good” have any value?

Other Influences on the Standard of LivingOmitted from GDP but important for the standard of living is:

Health and Life Expectancy: While obviously important factors determining the standard of people’s living, they are omitted from real GDP. Health and life expectancy have improved as infant deaths and death in childbirth have almost been eliminated. Life expectancy has increased from 70 years at the end of WWII to nearly 80 years today. These gains have been checked some-what by AIDS and drug abuse, which take away from our standard of living.

Political Freedom and Social Justice: Political freedom and social justice are not measured by real GDP. A country might enjoy a very large GDP but have limited political freedom and social justice and hence have a lower standard of living.



USING EYE ON THE U.S. ECONOMY

Is a Computer Program an Intermediate Good or a Final Good?

This Eye presents a perfect opportunity to demonstrate to students that economic statistics are not perfect. After reading it, they might get the impression that economists are being arbitrary about the clas-sification of software in the national income accounts. Remind them that the reason for the reclassification of software from an intermedi-ate good to investment reflects the fact that software has many of the same characteristics as other types of investment. For instance, it has a life span just like capital and it helps improve productivity. In addi-tion, it also depreciates just like capital. Students won’t need too much convincing for them to agree. But just in case, it wouldn’t hurt to mention that software eventually becomes obsolete as new soft-ware is developed to meet the changing needs of industry. Point out that the meaning of depreciation here comes with a bit of a twist be-cause the software doesn’t actually get used up the way physical ma-chinery tools or factories would but instead gets “used up” as it becomes obsolete. However, you can explain that this treatment of depreciation is not that much different than how physical capital equipment is treated in the sense that it too with the passage of time becomes obsolete as newer and more productive tools and equipment are introduced.

USING EYE ON THE BOOMS AND BUSTS

How Do We Track the Booms and Busts of our Economy?

This Eye serves as an excellent way to introduce data lags in macro-economics, to point out the usefulness of tracking a variety of macroe-conomic measurements, and to reinforce the need to constantly try to improve upon our measurements. Our most recent recession was not formally identified until nearly a year after it had begun (and the 2001 recession wasn’t formally defined until it had actually ended – though the end wasn’t formally declared for almost another 2 years!). Ask stu-dents why it took so long? What are the repercussions of this lag be-tween the actual beginning of a recession and the declaration of a re-cession? In addition, neither the 2001 recession nor the first few quar-ters of the recession that began in 2007 would have been defined as a recession if we strictly used real GDP growth as a guide. Why might focusing just on one measurement be too limiting? Ask you students what other measurements should be included in the determination of short run economic success and failure? You can use this discussion to serve as a preview of the importance to macroeconomic policy of be-ing able to accurately and promptly measure a variety of economic in-dicators.



USING EYE ON YOUR LIFE

Making GDP Personal

It’s useful here to focus on how a statistic like GDP can either under-state or overstate are level of economic well-being. One exercise that can help students focus on this issue is by asking them what sorts of products or services do we consume more of today that were actually produced in greater volumes by the household in 1970. If your stu-dents have trouble making a list you could give them a jumpstart with the following list: childcare services, housecleaning services, fast-food restaurant meals and dry cleaning. Explain that part of the reason for the surge in production of these goods is simply explainable by the economic growth that the country has enjoyed. However, another sig-nificant explanatory variable is the change in the demographics of the labor force. In particular more women started to enter the workforce. As they did the demand for these types of services and goods in the marketplace intensified as women discovered that they needed a place to keep their children while they worked, have their house clean because they weren’t there to do it themselves and so on.

USING EYE ON THE GLOBAL ECONOMY

Which Country Has the Highest Standard of Living?

Explain to students that economists have long wrestled with the inad-equacies of using GDP to measure the standard of living. In fact, econ-omists have never thought of it as a singular measure of social welfare for the reasons that are mentioned at the end of the chapter. The ef-forts by environmental economists and by the United Nations are steps in the direction to ameliorate some of these shortcomings. How-ever, the trouble with the HDI is that it combines variables that are difficult to aggregate because they are measured in markedly differ-ent units. For instance, there is no obvious way to combine real GDP per person with life expectancy or literacy rates. Put your students into groups and have them develop their own standard of living mea-surement system. Ask them to brainstorm a list of what they believe are the factors that most influence standard of living. Then ask them to devise a way to measure each of those factors and assign weights to each factor that reflect their relative importance. In addition to the standard of living debate, this exercise can also segue into discussing the philosophy of measuring the value of human life and the value that people place on additional possible years of longevity. In lawsuits in-volving wrongful death, courts are often put in the position of valuing the years “taken” from a victim in terms of dollars in order to compen-sate widows and orphans. It’s a controversial area but it can prove a very interesting discussion for those who dare charter these waters.



ADDITIONAL EXERCISES FOR ASSIGNMENT

Questions Checkpoint 14.1: GDP, Income, and Expenditure1. Identify each of the following as either included or not included

in GDP. Make sure to give an explanation for those that you judge as not included. In addition, state whether each included item is consumption, investment, government expenditure, or net ex-ports.

1a. The purchase of copy paper by Intel, which is used by the com-pany staff.

1b. The purchase of an electronic handheld organizer by a sales man-ager to keep track of clients.

1c. The purchase of a new aircraft carrier by the Navy.1d. An increase in Dell’s inventory of unsold personal computers.1e. A family eating dinner at Taco Bell.1f. The salary of the President of the United States.1g. A Mom baking a birthday cake for her 8 year-old daughter.1h. The sale of a used computer.1i. Your donation of a used computer to a local elementary school.1j. The purchase by a German resident in Germany of an American-

made ceiling fan produced in the United States.

Checkpoint 14.2: Measuring U.S. GDP

Item DollarsConsumption expenditure 800Investment 400Government expenditure 200Exports 50Imports 75Depreciation 100

2. Using the information in the table above, calculate GDP.

ItemAmount

(trillions of dol-lars)

Consumption expenditure 4.97Investment 1.14Government expenditure 1.37Net exports 0.08Wages 4.20Interest, rent, and profit 1.68Depreciation 0.89

3. The table above gives some of the items in the U.S. National In-come and Product Accounts in 1995. Suppose the statistical dis-crepancy equals $0.



3a. Use the expenditure approach to calculate U.S. GDP in 1995.3b. Use the income approach to calculate U.S. net domestic product

at factor cost in 1995.3c. Calculate GDP minus net domestic product at factor cost in 1995.3d. Calculate indirect taxes less subsidies in 1995.

Answers Checkpoint 14.1: GDP, Income, and Expenditure1a. Not included because it is an intermediate good.1b. Included as part of investment.1c. Included as part of government expenditures.1d. Included as part of investment.1e. Included as part of consumption expenditure.1f. Included as part of government purchases.1g. Not included because it is household production.1h. Not included because it was included in GDP in the year it was

produced.1i. Not included because it was included in GDP in the year it was

produced.1j. Included as part of net exports.

Checkpoint 14.2: Measuring U.S. GDP2. GDP equals the sum of consumption expenditure, investment,

government expenditure on goods and services, and net exports. So GDP = $800 + $400 + $200 + ($50 $75), which is $1,375. The amount of depreciation is not used.

3a. Using the expenditure approach, GDP = C + I + G + NX = $4.97 trillion + $1.14 trillion + $1.37 trillion $0.08 trillion = $7.40 tril-lion.

3b. Using the income approach, net domestic product at factor cost = Wages + Interest, rent, and profit = $4.20 trillion + $1.68 tril-lion = $5.88 trillion.

3c. GDP minus net domestic product at factor cost = $7.40 trillion $5.88 trillion = $1.52 trillion.

3d. The difference between GDP and net domestic product at factor cost, $1.52 trillion, is equal to depreciation plus (indirect taxes minus subsidies). From the table, depreciation, $0.89 trillion. So indirect taxes minus subsidies = $1.52 trillion $0.89 trillion = $0.63 trillion.
