Macroeconomics: GNP and GDP Concepts

Macroeconomics

• Study of the economy as a whole
• GNP: Income earned by Americans in the US and abroad
• GNP_US = GDP_US = (American Income - Foreign Income)
• If (American Income - Foreign Income) > 0, then GNP > GDP (true for US)
• If (American Income - Foreign Income) < 0, then GNP < GDP
• GDP: Amount of wealth accumulated through the production of goods and services in one fiscal year
• GDP = (P₁ * Q₁) + (P₂ * Q₂) + ... + (P_x * Q_x)
  • P = price; Q = quantity of goods

Gross Domestic Product (GDP)

• Market value of all final goods and services produced within a country in a given period (time frame)
• All goods measured in the same units (e.g., dollars in the US)
• Excludes items without market value (e.g., black market transactions, unpaid work)
• Final goods: intended for the end user
• Intermediate goods: components used in the production of other goods (already accounted for in the final good's value)
• GDP includes tangible and intangible goods
• GDP includes currently produced goods, not those produced in the past
• Often measured annually or quarterly (3 months)

Income Equals Expenditure

• GDP measures total expenditure on goods and services within a country's borders
• Does not always indicate the overall health of a nation
• Does not reflect wealth distribution

Circular-Flow Diagram

• Simple depiction of macroeconomic interactions
• Illustrates GDP as spending, income, revenue, and factor payments
• Shows factors of production (labor, land, capital, natural resources) and their interaction, as well as income generation
• Households own factors of production, sell them to firms, then receive income

Day 2 - Consumption (C), Investment (I)

• Consumption: Spending on goods and services (durable, non-durable goods, services)
• Housing Costs: Renters - rent payment; Homeowners - imputed rental value
• Investment: Spending on goods that will be used in the future to produce more goods (does not include financial assets like stocks, bonds). Includes residential investment (newly built homes)

Day 3 - Government Purchases (G), Net Exports (NX)

• Government Purchases: Spending on goods and services by federal, state, and local governments (excluding transfer payments)
• Net Exports: Exports (spending by foreigners on domestically produced goods and services) − Imports (spending on foreign-produced goods and services). Indicates trade balance (surplus if exports > imports, deficit if imports > exports)

GDP Components

• GDP = C + I + G + NX (Consumption + Investment + Government Purchases + Net Exports)
• Alternative expression: Y = (C_d - C_f) + (I_d + I_f) + (G_d + G_f) + EX - IM

This quiz covers essential concepts in macroeconomics, focusing on Gross National Product (GNP) and Gross Domestic Product (GDP). It explains the differences between GNP and GDP, their calculations, and what they represent in terms of the economy. Test your understanding of these fundamental economic indicators.