Chapter 11: Spending, Income, and. . Explain how economist define and measure an. economys . Apply the expenditure method for measuring. GDP to analyze economic . Define and compute nominal GDP and real. . Discuss the relationships between GDP and. economic well-beingMcGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights Value.• Aggregate measure of quantities produced.• More expensive items receive a higher weighting. – Willingness to pay is an indication of benefit received from. the goodSome Non-Market Goods Included.• Government goods and services are not sold in the. market. – These goods have value. – Increase overall output. – Quantities are known. – Prices cannot be established.• Government production is valued at cost. – Overstates GDP if there is waste and inefficiency. 112 Final Goods and Services.• Final goods and services are consumed by the. ultimate user. – End products of production. – Included in GDP.• Intermediate goods and services are used up in. the production of final goods. – Not included in GDP to avoid double counting.• A barbers assistant earns $2 per haircut for. providing services such as shampooing and. sweeping up. – Barber charges $10 per haircut. – Haircuts contribution to GDP is $10. 113 Goods Can Be Final and. Intermediate.• Milk can be sold as a final product or used as an. intermediate good. – Gallons of milk in the store. – Gallons of milk sold to restaurants. – Count only the final goods.• A capital good is a long-lived good used in the. production of other goods and services. – Houses, apartments, and motels. – Stoves in restaurants, cooking schools. – Delivery vehicles and taxis.• Money is not a capital good. 114 Produced in a Country in a. Period of Time.• "Domestic" in GDP means the activity is. measured within a countrys borders. – Nationality of owners or company is not relevant.• Value must be produced in the year considered. – Sell a 20-year old house for $200,000. • Pay $12,000 commission. • Value added is $12,000. • House was not produced in the period of time. studied. • Count income generated from the sale of used goods 115 Expenditure Method for. Measuring GDP.• Four users of final goods. Households ■ Firms. Government ■ Foreigners.• All goods produced are purchased by one of. these groups in a given year.• Amount spent = market value.• GDP can be measured two ways. – Market value. – Total spending for final goods less value of imports 116 Consumption Expenditure.• Consumption expenditure is spending by. households for goods and services. – Consumer durables are long-lived consumer goods. • Cars • Furniture • Appliances. – Consumer non-durable goods are shorter-lived. goods. • Clothing • Food • Bedding. – Services are the largest component of consumer. spending. • Education • Taxi rides • Haircuts 117 Investment.• Investment is spending by firms on final goods. and services.• Business fixed investment is purchases of new. capital goods. • Plant • Property • Equipment.• Residential investment is construction of new. homes and apartment buildings.• Inventory investment is the change in unsold. goods to the companys inventory. – These goods are produced but not yet sold. – This entry can be positive or negative. 118 Economic
