The Components of GDP

GDP can be expressed as: GDP = C + I + G + NX where:

· C is private consumption (or Consumer expenditures) in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on.

· I is defined as business investments in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. 'Investment' in GDP is meant very specifically as non-financial product purchases. Buying financial products is classed as saving in macroeconomics, as opposed to investment (which, in the GDP formula is a form of spending). The distinction is (in theory) clear: if money is converted into goods or services, without a repayment liability it is investment. For example, if you buy a bond or a share, the ownership of the money has only nominally changed hands, and this transfer payment is excluded from the GDP sum. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of the real economy or the GDP formula.

· G is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. The relative size of government expenditure compared to GDP as a whole is critical in the theory of crowding out, and the Keynesian cross.

· NX are "net exports" in the economy (accounts for gross exports – gross imports; also (X – M)). GDP captures the amount a country produces, including goods and services produced for overseas consumption, therefore exports are added. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Ex. 11. a) Read the text and answer the following questions:

· What purpose are price indexes used for?

· What is the most widely used index? Why?

· How is CPI calculated?

b) Translate the text into Russian.

The Consumer Price Index (CPI). Anyone who is going to compare "levels of economic activity" from one year to another needs to know something about price indexes. The best known and most widely used index is — the consumer price index, also called the "cost of living index." What it does is make up a list of all the things that the "average consumer" would buy and in what quantities in the average year. This list will include postal services, medical services, tires and gasoline, meat and potatoes, clothing and everything else bought by "the average family."

It isn't always easy to decide exactly how much of which things to put into this list. But the government statisticians make the best estimates they can and go ahead. Then they add up all the costs of all the things. This gives them the "cost of living" of the "average family" in the base year. That's the first step.

The next step is to take the same list of things and assign the present cost of each item on the list, then add up the total. This shows the "cost of living" of an "average family" at the present time (present month, or week). Then the base year cost is divided into the present cost to get the consumer price (cost of living) index.

Ex. 12. Translate into Russian:

The argument in favour of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it. If GDP isn't a mea­sure of welfare, then what is it? What's it good for? Just this: GDP is a measure of the speed at which the economy is running. That's all. It isn't a precisely accurate measure but it's pretty good. It's good enough to tell us when the economy is clicking along well and when it's slowing down and by about how much. That isn't everything. But it's a lot.

Ex. 13. Translate into Russian:

GDP is one way of measuring the total output of an economy. GNP is another method. GDP is the sum value of all goods and services produced within a country. GNP narrows this definition a bit: it is the sum value of all goods and services produced by permanent residents of a country regardless of their location. The important distinction between GDP and GNP rests on differences in counting production by foreigners in a country and by nationals outside of a country. For the GDP of a particular country, production by foreigners within that country is counted and production by nationals outside of that country is not counted. For GNP, production by foreigners within a particular country is not counted and production by nationals outside of that country is counted. Thus, while GDP is the value of goods and services produced within a country, GNP is the value of goods and services produced by citizens of a country.

Ex. 14*. DISCUSSION QUESTIONS

1. Prove the importance of using the GNP/GDP concept as a measure of economic performance.
2. In Belarus the economists refer to GDP when measuring the nation’s economic performance. Why? Give your suggestions.
3. Does a Japanese-owned automobile factory in the US count in US GDP or in Japanese GNP?

4. In one of the reports to the US Congress in 1934 there was mentioned some information about the limits of GDP: “...the welfare of a nation can scarcely be inferred from a measure of national income. If the GDP is up, why is America down? Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.” Discuss this opinion with your group-mates.

Ex. 15. Speak about measuring economic performance.

Date: 2014-12-21; view: 1029