Chapter 23 group b discussion question

1. Write out the GDP equation and give it's purpose(s). Give a brief (1 to 2 sentence) explanation of each of the four components and give one specific example of each.

Gross Domestic Product (Y) is the sum of spending in consumption (C), investment (I), government purchases (G), and net exports (NX), as expressed in the equation Y=C+I+G+NX. This equation helps explain how the economy is using its scarce resources among various types of spending. Consumption is the amount households spend on goods and services, such as the amount a household spends on food. Investment is the amount spent on goods to be used to produce more goods and services. This includes capital equipment, inventories, and structures. The purchase of a new house is an example of an investment spending on structures because the household will use this purchase for future goods and services. Government purchases are categorized as local, state, and federal spending on goods and services. An example is the amount spent on salaries of government workers. Net exports equal the amount spent on domestically produced goods by foreigners, which are exports, minus the amount spent on foreign goods by domestic residents, which are imports. For example, if a household purchases a foreign-produced car, net exports are reduced by the amount this car was purchased for because the car is an import.

2. What is the difference between nominal GDP and real GDP? Answer question 4a fromProblems and Applications in your book.

Nominal GDP is the production of goods and services valued at current prices, while real GDP is the production of goods and services valued at constant prices. Real GDP is not affected by changes in prices. In question 4a from the Problems and Applications section in the book, for the year 2005, nominal GDP is calculated as $200, real GDP is calculate as $200, and the GDP deflator is 100. In year 2006, nominal GDP is $400, real GDP is $400, and the GDP deflator is 100. For year 2007, nominal GDP is $800, real GDP is $400, and the GDP deflator is 200.\

3. Each month, the US Bureau of Economic Analysis publishes revised GDP data for the nation. Go to http://www.bea.gov and find the following information.
Has GDP increased or decreased over the past 6 months?
What is the biggest component of GDP?
What is the smallest component?
What component of GDP has increased the most from last quarter?
What component has increased the least or decreased the most?

GDP has increased over the past 6 months. The largest component of GDP is personal consumption expenditures. The smallest component of GDP is net exports of goods and services. Personal consumption expenditures have increased the most from last quarter. Net exports of goods and services have decreased the most.

4. Indicate which components of GDP, if any, each of the following transactions would affect? Explain.

A family buys a new refrigerator.
This would affect consumption because a household is spending on good and services.

Aunt Jane buys a new house.
This would affect investment because it is spending on structures that will be used in the future for more goods and services.

Ford sells a Mustang from its inventory.
Who purchases the Mustang will affect which component of GDP will be affected. Since Ford is a domestic company, if the car was purchased by a foreigner, then this transaction will count as a net export.
 
You buy a pizza.

This would affect consumption because a household is spending on the nondurable good of food.

California repaves Highway 101.
This would affect government purchases because the state government is spending money on goods and services to repave the highway.

Your parents buy a bottle of French wine.
This would affect net exports because domestic residents are spending on foreign goods.

Honda expands its factory in Marysville, OH.
This would affect investment because it is spending on capital equipment, inventories, and structures for future use to produce more goods and services.