Background Material


Basic Concepts

1. What is GDP?

 

 GDP is the current output of final goods and services produced by domestically located factors of production, valued at market prices.  Nominal (or current dollar) GDP is calculated using current market prices.  Real (or constant dollar) GDP is calculated using the market prices of a given base period.

 
2. What are the major expenditure components of GDP?

 

 Consumption, Investment, Government Purchases, and Net Exports
3. What are stylized facts?

 

 Stylized facts are empirical regularities that describe the behavior of economic indicators.
4. List some stylized facts about GDP.

 
  • Real GDP grows at about 3% per year.
  • Consumption is about 2/3 of GDP.
  • Consumption is less variable than GDP over the business cycle.
  • Investment is more variable than GDP over the business cycle.
  • etc.

 
5. If  X  denotes an economic indicator, what is the interpretation of  DlnX?

 

 DlnX  is the continuously compounded growth rate of  X.
6. What explains GDP?

 

 Factors of production (capital, labor) and technology.

 
7. What determines how total output gets divided?

 

 Factors of production get paid their marginal products.

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National Income Accounting

1. Indicate whether each of the following transactions is included in GDP, and explain why. Your answer will depend heavily on your explanation.

 

 GDP measures the value of currently produced final goods and services, valued at market prices. After a few adjustments (such as deducting depreciation and indirect business taxes), this also equals the value of total compensation of factors of production, known as national income. These definitions imply:

 
a. welfare payments No. Transfer payments are not payments for productive services, nor are the part of government purchases of goods and services.

 
b. a used office building purchased by a high-tech firm

 

 No. The building is not newly produced.
c. semiconductors produced by a U.S. firm but sold to a firm in Hong Kong Yes. The semiconductors are new output produced by domestically located factors of production. They are part of net exports.

 
d. a report written by a sociology professor for the Department of Health and Human Services Yes. Assuming the professor is compensated for writing the report, the compensation is included in government purchases of goods and services.

 
e. a new General Motors car purchased by Avis Yes. This is part of gross private domestic investment.

 
f. the transportation services this car provides to Avis customers Yes. This is part of consumption expenditures on services.

 
g. the transportation services of an identical car owned and used by Mr. Smith No. There is no market transaction. The transportation services are part of what some economists call "household production." The only imputation of household production in GDP is for owner-occupied housing.

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