What you need to know:
- Define GDP.
- Why is GDP a "monetary measure"?
- What are "double counting", "intermediate goods", and "final goods"?
- What is included in GDP and what is excluded?
- How to calculate GDP using the expenditures approach.
GDP = C + Ig + G + Xn - How to calculate net exports (Xn)
- What is included in Gross Private Domestic Investment (Ig)
- Define and calculate Net Private Domestic Investment (In)
In = Ig - depreciation - What it means when Net Private Domestic Investment is positive, zero, and negative.
- How to calculate National Income
NI = Wages + Rents + Interest + Corp. Profits + Prop. Income - Define and calculate Net Domestic Product (NDP)
NDP = GDP - depreciation NDP - C + In + G + Xn
- Define National Income (NI)
- Define Personal Income (PI)
- Define Disposable Income ((DI)
- Define nominal GDP
- Define and calculate real GDP
real GDP = nominal GDP / (GDP Price Index/100) - Know the problems (shortcomings) of using GDP as a measure of social welfare (how well the economy is doing) and whether, because of them, GDP tends to OVERstate or UNDERstate social welfare
Introduction
We've been using the AS - AD model to understand the macroeconomy. The vertical axis measures the PRICE LEVEL which is the average level of prices in an economy. The horizontal axis measures REAL DOMESTIC OUTPUT which is all the goods and services produced in an economy.
But WHAT NUMBERS do we put on the axes? How do we measure the price level and real domestic output?
We measure real domestic output with REAL GDP and we measure the price level with a PRICE INDEX.
In this lesson we'll learn how to calculate real GDP and a price index.
Measuring Real Domestic Output: real GDP
We will use "real GDP" to measure real domestic output - the total amount of output produced in an economy . The table below lists the GDP for a few countries.
NOTE: 2007 dataPopulations:
- US: 303 million
- Japan: 128 million
- Germany: 82 million
- China: 1,324 million
- UK: 60 million
- France: 61 million
- Italy: 59 million
- Canada: 32 million
- Brazil: 192 million
- India: 1,158 million
- S. Korea: 48 million
- Mexico: 112 million
- Australia: 20 million
Note, that if you wish to COMPARE countries you should use GDP PER CAPITA which is GDP divided by the country's population (GDP per person). Even though the United States has the world's largest GDP, it is not the highest GDP per capita. For a table of GDP per capita see: http://www.nationmaster.com/graph/eco_gdp_percap-economy-gdp-per-capita
Definition: GDP
Gross Domestic Product is the total market value of all final goods and services that are produced in the economy in one year.This is one definition that should be memorized. As you can see it has three components.
(1) "total market value"How can we add the number of buildings produced to the number of candy bars produced to the number of cars produced, etc.? To do this we need a common unit of measure. The unit of measure for real domestic output or real GDP is the market value or moneyTo get the "total" market value then one would think that you would add up the price times the quantity of everything produced:
GDP = SUM P x QGDP =
P this year x Q this year
GDP equals the sum of the prices times quantities of everything produced in a year
This, then, would give you the total market value of everything produced.
(2) "final goods and services"
Only final goods and services are included to avoid double countingFinal goods are bought and used by the final consumer. When you buy a hamburger from McDonald's the value of the hamburger should be included in GDP because it is a final good.Intermediate goods are bought so that they can be resold or further processed. When McDonald's buys buns, ground beef, and ketchup, the value of these purchases of intermediate goods are NOT added to GDP since they will be added when a consumer buys the hamburger (a final good).
If we included the price of the hamburger AND the value of the bun, ground beef, and ketchup then these would be counted twice.
Another way to avoid double counting is to use the value-added method and only add what McDonald's spends on buns, ground beef, and ketchup, but then NOT include what consumers spend on the hamburger.
The point is we want to get a measure of the market value of the final goods that an economy produces.
(3) "produced in one year"
GDP is a measure of what is produced or made in one year, therefore:a. secondhand sales are not included because nothing new is produced, and
b. financial transactions not included because nothing is producedA car produced in 1999 is included in 1999's GDP. Therefore, if a used 1999 vehicle is sold in the year 2001 we would NOT again include its price in the GDP for 2001 since it was not produced then. We WOULD include the profits earned by the used car salesperson in 2001 since he or she did clean, advertise, and sell the used car in that year, but we would not include the value of the 1999 car itself.
Also, a lot of the "business news" that you hear concerning the billions of dollars spent on stocks and bonds each day does not affect the GDP directly.
When people buy stocks and bonds from whom do they buy them? If I buy $100 of stock in IBM, from whom do I buy it? I may buy it through a stock broker, but whose stock do I buy? I probably didn't buy it from IBM (unless it was an IPO - Initial Public Offering), but rather I bought it from somebody who had bought it earlier. In other words, I bought "used" stock. But the main point is, when I buy $100 on IBM stock, nothing is being produced so the $100 is not added to GDP.
REVIEW: (Textbook Question 7-13)
Which of the following are actually included in this year’s GDP? Explain your answer in each case.
a. Interest on an AT&T corporate bond.b. Social security payments received by a retired factory worker.
c. The unpaid services of a family member in painting the family home.
d. The income of a dentist.
e. The money received by Smith when she sells her economics textbook back to the bookstore.
f. The monthly allowance a college student receives from home.
g. Rent received on a two-bedroom apartment.
h. The money received by Josh when he resells his current-year-model Honda automobile to Kim.
i. The publication of a college textbook.
j. A 2-hour decrease in the length of the workweek.
k. The purchase of an AT&T corporate bond.
l. A $2 billion increase in business inventories.
m. The purchase of 100 shares of GM common stock.
n. The purchase of an insurance policy.
ANSWERS are at the bottom of this webpage.
Circular Flow Model
The circular flow model can help us to understand the two approaches used to measure GDP.
1. expenditures approach
2. income approach
Arrow # 3 is real GDP (goods and services produced). This is output produced by business and sold in the product markets to consumers (households). This is what we want to measure. This is real domestic output. This is GDP.
To measure this level of produced output we can measure arrow #4 which are the expenditures spent on this output. This is the EXPENDITURES APPROACH. If something is produced and sold the amount sold should equal the amount produced. The only problem with this is what happens if something is produced one year but not sold in the next year? If we just added up the market values of goods and services that were sold these items would be included in the wrong year. To handle this problem we include items produced one year and sold the next as changes in business inventories which ARE included the year that they are produced.
We can also measure arrow #1 which is the income earned by households when they sell their resources (arrow #2) to businesses. The value of output produced (GDP) is equal to the value of ALL the income earned by everyone who had anything to do with producing the output. If a $20,000 car is sold, then $20,000 was earned by everyone who was involved in producing and selling the car. So to measure GDP ( the value of the products produced) we can sum up all the income earned in producing that level of GDP. This is the INCOME APPROACH to calculating GDP.
Expenditures Approach
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GDP = C + Ig + G + Xn
1. personal consumption expenditures (C) includes durable goods (lasting 3 years or more), nondurable goods and services.2. gross private domestic investment (Ig)
Remember that we defined investment as the "accumulation of capital" and we defined capital as "manufactured resources" so investment occurs when businesses buy capital. If a carpenter buys a hammer it is an investment. (Note: if an economist buys 100 shares of stock in Microsoft, it is NOT an economic investment.)
[Noninvestment transactions - despite how the term "investment" is used by the general public, investment does not include transfers of ownership of paper assets (stocks and bonds) or real assets (houses, jewelry, art). Only newly created capital is counted as investment.]
Economic Investment includes:
1) all final purchases of machinery, equipment, and tools by businesses
2) all construction (including homes)
3) changes in inventories (To include items produced one year but sold the next. If businesses are able to sell more than they currently produce, this entry will be a negative number. )gross vs. net domestic investment (In)
Gross investment is ALL NEW INVESTMENT and includes the three items listed above.Net investment includes only the CHANGES to the nation's capital stock
Each year as new goods and services are being produced, some of the existing capital equipment is wearing out and buildings are deteriorating. This is called "depreciation" or "consumption of fixed capital". Whereas gross investment adds to a country's stock of capital, depreciation reduces a country's stock of capital.
Net investment = Gross Investment - depreciation
In = Ig - depreciationNet investment is related to economic growth.
If net investment is positive then the country ends up with more capital at the end of the year than it stated with. Since we know that economic growth is caused by getting "more resources", if net investment is positive then the economy is growing, ("expanding economy").
What type of economic growth is this (1) increasing our potential from the 5Es or, (2) achieving our potential (or achieving full employment)?It would be "increasing our potential" which is caused by getting more resources, better resources, and better technology.
If net investment is negative this means that depreciation is greater than gross investment, or more capital wears out than is produced so we would have a "declining economy".
If gross investment (all new capital that is produced) EQUALS depreciation (capital that wears out) then net investment will equal zero. there will be no changes to amount of capital that a country has, and there will be a "static economy".
3. government purchases (G)
This includes purchases by all levels of government (federal, state and local). Whenever the government buys something or pays somebody it is included in government purchases.Government purchases does NOT include transfer payments. Transfer payments, by definition, are payments for which nothing is expected in return. Government transfer payments include welfare and social security payments, transfers from the federal government to state government and from state to local governments. These are not included in GDP as government purchases because when the government transfers money, NOTHING IS PRODUCED and GDP only includes production. Of course, when people on welfare spend their government check on food and rent then this does enter GDP as consumption (C).
4. net exports (Xn)
Net exports (Xn) included the value of all exports from a country minus the value of all imports.Xn = X - MIf a country has a trade deficit then the value of imports is greater than the value of a country's exports and net exports (Xn) is negative.
It should be obvious why exports is included in GDP and it should be obvious why imports should NOT be added to GDP. But why do we have to SUBTRACT imports from GDP. Subtracting is a lot different than not adding.
Imports are subtracted from GDP because they were incorrectly included in consumption expenditures (C). Since imports are produced in another country they should not be added to our GDP, but they are added as art of of consumption so therefore they have to be removed.
Practice Problem
Given the data below, use the EXPENDITURES APPROACH to calculate GDP.
Use the data below to calculate the GDP of this economy using the expenditures approach. All figures are in billions.
Personal consumption expenditures
$400
Government purchases
128
Gross private domestic investment
88
Net exports
7
Net foreign factor income earned in the U.S.
0
Consumption of fixed capital
43
Indirect business taxes
50
Compensation of employees
369
Rents
12
Interest
15
Proprietors' income
52
Corporate income taxes
36
Dividends
24
Undistributed corporate profits
22
ANSWER: Before scrolling down, pick up some paper and a pencil and actually calculate GDP. DOING it yourself is better than reading it.
.
.
.
GDP = C + I + G + Xn .
.
From the table we get:
GDP = C + I + G
+
Xn
GDP = 400 + 128 + 88 + 7 GDP = C + I + G + Xn = 400 + 128 + 88 + 7 = $ 623
The Real World - the 2007 United States GDP:
Income Approach --calculating national income (NI)
A second way to calculate GDP is by adding up all INCOME - flow #1 in the circular flow diagram below is the income received when resources are sold to businesses.
There are four types of resources (four factors of production):
- labor
- land
- capital
- entrepreneurial ability
Each of these resource types receives what economist call INCOME when they are sold:
- labor receives wages
- land receives rent
- capital receives interest
- entrepreneurial ability receives profits
So if we add up:
wages + rent + interest + profitswe should get GDP -- well almost. Actually we get something called National Income (NI), or the income EARNED by the resources. the textbook goes through the calculation on how to get from NI to GDP - but we won't have to do that in this course. What we will do is divide the profits earned by entrepreneurs into two types: proprietor's income and corporate profits. So:
NI = Wages + Rents + Interest + Corp. Profits + Prop. Income [The new edition of our textbook now also adds Taxes on production and imports including general sales taxes, excise taxes, business property taxes, license fees, and customs duties to the above to get NI -- we will not do this either.]Definitions:
national income: all income earned by American supplied resources, whether here or abroad, plus taxes on production and imports.Compensation of employees includes wages, salaries, fringe benefits, salary and supplements, and payments made on behalf of workers like social security and other health and pension plans.
Rents: payments for supplying property resources (adjusted for depreciation it is net rent).
Interest: payments from private business to suppliers of money capital.
Proprietors' income: income of incorporated businesses, sole proprietorships, partnerships, and cooperatives.
Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the shareholders, and the remainder is left as undistributed corporate profits (also referred to as retained earnings).
Practice Problem
Given the data below, use the INCOME APPROACH to calculate National Income (NI).
Use the data below to calculate the GDP of this economy using the income approach. All figures are in billions.
Personal consumption expenditures
$400
Government purchases
128
Gross private domestic investment
88
Net exports
7
Net foreign factor income earned in the U.S.
0
Consumption of fixed capital
43
Indirect business taxes
50
Compensation of employees
369
Rents
12
Interest
15
Proprietors' income
52
Corporate income taxes
36
Dividends
24
Undistributed corporate profits
22
ANSWER: Before scrolling down, pick up some paper and a pencil and actually calculate GDP. DOING it yourself is better than reading it.
..
.
NI = Wages + Rents + Interest + Corp. Profits + Prop. Income .
.
From the table we get:
NI = Wages + Rents + Interest + Corp. Profits + Proprietor's Income NI = 369 + 12 + 15 + 82 + 52 NI = Wages + Rents + Interest + Corp. Profits + Prop. IncomeCorporate profits are used for three different purposes:
- Corporate income taxes = 36
- Dividends = 24
- Undistributed corporate profits = 22
Corporate profits then equal 36 + 24 + 22 = 82 . On the exams I will give you "corporate profits".
NI = 369 + 12 + 15 + 82 + 52 = $ 530
GDP = C + I + G + Xn = 400 + 128 + 88 + 7 = $ 623
As you can see, National income does not equal GDP. There are some expenditures (that are included in the expenditures approach) that are not income (therefore not included in the income approach). They are indirect business taxes ( 50), depreciation (43), and net foreign income factor ( 0 ), But, again, you won't have to do this in this course.
Other Social Accounts
Net Domestic Product (NDP)
GDP - Depreciation = NDP National Income (NI)
NI is income EARNED by the factors of production (resources).
NI = Wages + Rents + Interest + Corporate Profits + Proprietor's Income Personal Income (PI)
PI is the income RECEIVED by the factors of production (resources). To calculate, take NI minus payroll taxes (social security contributions), minus corporate profits taxes, minus undistributed corporate profits, and add transfer payments.Disposable Income (DI) is your SPENDABLE income. DI is personal income minus personal taxes.
The Real World - the 2007 United States GDP:
REVIEW:
7-8 (Key Question) Below is a list of domestic output and national income figures for a given year. All figures are in billions. The ensuing questions ask you to determine the major national income measures by both the expenditure and income methods. Answers derived by each approach should be the same.
a. Using the above data, determine GDP and NDP by the expenditure method.b. Calculate National Income (NI) by the income method.
Personal consumption expenditures..............
Net foreign factor income earned
Transfer payments...........................
Rents
Consumption of fixed capital (depreciation).......
Social security contributions
Interest.......
Proprietors’ income
Net exports..........................................
Dividends (part of corporate profits)
Compensation of employees.............
Indirect business taxes
Undistributed corporate profits (part of profits)....
Personal taxes
Corporate income taxes (part of corporate profits)....
Corporate profits
Government purchases........
Net private domestic investment
Personal saving...........$245
4
....12
14
....27
20
....13
33
.....11
16
....223
18
....21
26
....19
56
......72
33
.......20ANSWERS:
a. Using the above data, determine GDP and NDP by the expenditure method.
GDP = $388
GDP = C + Igross + G + Xn
Igross = Inet + depreciation = 33 + 27 = 60
GDP = 245 + 60 + 72 + 11 = 388NDP = $361
NDP + C + Inet + G + Xn
NDP = 245 + 33 + 72 + 11 = 361or
NDP = GDP - depreciation
NDP = 388 - 27 = 361b. Calculate National Income (NI) by the income method.
NI = $339
NI = wages + rents + interest + profits
profits = corporate profits + proprietor's income
profits = 56 + 33 = 89
NI = 223 + 14 + 13 + 89 = 339
GDP and Economic Well-Being
GDP per capita is often used to measure a country's well being or standard of living. The higher the GDP per capita for a country the better off the country is. But there are some problems with using GDP per capita to measure a country's standard of living.
Problems with using GDP to Measure the Standard of Living:
1. non-market transactions are not included in GDP
2. leisure increases the standard of living but it isn't counted
3. improved product quality often isn't accounted for in GDP
4. GDP does not account for the composition output
5. GDP does not account for the distribution of output
6. increases in GDP may harm the environment and decrease the standard of living
7. the underground economy produces goods and services but they are not included in GDP
8. GDP does not account for a possible future decline in output due to resource depletion.
9. Noneconomic Sources of Well-Being like courtesy, crime reduction, etc., are not covered in GDP.
10. We must use per capita GDP to compare the living standards of different countries.
1. non-market transactions are not included in GDP
GDP doesn’t measure some very useful output because it is unpaid (homemakers’ services, parental child care, volunteer efforts, home improvement projects). Called non-market transactions2. leisure increases the standard of living but it isn't counted
GDP doesn’t measure improved living conditions as a result of more leisure.3. improved product quality often isn't accounted for in GDP
GDP doesn’t measure improvements in product quality unless they are included in the price4. GDP does not account for the composition of output
GDP makes no value adjustments for changes in the composition of output. Nominal GDP simply adds the dollar value of what is produced; it makes no difference if the product is a semiautomatic rifle or a jar of baby food.5. GDP does not account for the distribution of output
GDP makes no value adjustments for changes in the distribution of income. Per capita GDP may give some hint as to the relative standard of living in the economy; but GDP figures do not provide information about how the income is distributed.6. increases in GDP may harm the environment and decrease the standard of living
- The harmful effects of pollution are not deducted from GDP (oil spills, increased incidence of cancer, destruction of habitat for wildlife, the loss of a clear unobstructed view).
- GDP does include payments made for cleaning up oil spills and the cost of health care for cancer victims.
7. the underground economy produces goods and services but they are not included in GDP
GDP does not include output from the Underground Economy. Illegal activities are not counted in GDP (estimated to be around 8% of U.S. GDP). Legal economic activity may also be part of the “underground,” usually in an effort to avoid taxation.
Illegal activities are not counted in GDP (estimated to be around 8% of U.S. GDP).
Legal economic activity may also be part of the "underground," usually in an effort to avoid taxation.
8. GDP does not account for a possible future decline in output due to resource depletion.
9. Noneconomic Sources of Well-Being like courtesy, crime reduction, etc., are not covered in GDP.
10. We must use per capita GDP to compare the living standards of different countries.
Which country has a higher GDP, Switzerland or India? Which has a higher level of economic well-being:
- Switzerland:
- GDP: $239.3 billion (2003 est.)
- Population: 7,450,867 (July 2004 est.)
- GDP per capita: $32,700 (2003 est.)
- India:
- GDP: $3.033 trillion (2003 est.)
- Population: 1,065,070,607 (July 2004 est.)
- GDP per capita: $2,900 (2003 est.)
GDP per capita = GDP / population
REVIEW:
Do each of the following cause GDP to OVERSTATE the economic well-being of a country or UNDERSTATE it?
1. non-market transactions (Does GDP OVERstate or UNDERstate economic well-being?)not included so, GDP UNDERstates well-being.
2. improved product quality (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being.
3. more leisure (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being.
4. the composition of output (Does GDP OVERstate or UNDERstate economic well-being?)
if "bad" things are being produced, then GDP OVERstates well-being.
5. the distribution of income (Does GDP OVERstate or UNDERstate economic well-being?)
an unequal distribution of income would result in GDP OVERstating the well-being of most of a country's population6. the underground economy (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being
7. GDP and the environment (Does GDP OVERstate or UNDERstate economic well-being?)
harmful effects of pollution and costs of pollution reduction are not deducted from GDP, so GDP OVERstates well-being.
8. Non-economic sources of well-being (Does GDP OVERstate or UNDERstate economic well-being?)
not accounted for, so GDP UNDERstates well-being
9. Resource depletion (Does GDP OVERstate or UNDERstate economic well-being?)
GDP overstates well-being since when we are depleting the resources our GP is high, but in a future with fewer resources GDP will be lower
10. per-capita income (Does GDP OVERstate or UNDERstate economic well-being?)
GDP OVERstates well-being in countries with large populations and UNDERstates well-being in countries with small populations
Measuring the Price Level and real GDP
Introduction
We've been using the AS - AD model to understand the macroeconomy. The vertical axis measures the PRICE LEVEL which is the average level of prices in an economy. The horizontal axis measures REAL DOMESTIC OUTPUT which is all the goods and services produced in an economy.
But WHAT NUMBERS do we put on the axes? How do we measure the price level and real domestic output?
We have seen that we measure real domestic output with REAL GDP and we have learned how to calculate GDP. In the lecture on unemployment and inflation we learned how a PRICE INDEX is used to measure the price level. Now we will learn how to use a price index to calculate REAL GDP.
Nominal GDP and real GDP
Nominal GDP is the market value of all final goods and services produced in a year. Nominal GDP is a (P x Q) figure including the quantity of every item produced in the economy in one year times its price THAT year.Nominal GDP is calculated using the current prices prevailing when the output was produced but real GDP is a figure that has been adjusted for price level changes.
Nominal GDP = SUM (this year's prices x this year's quantities) =
Therefore, if nominal GDP increases is it because we are producing more (
Q this year ) or is it because the Price Level increased (
In fact it is possible for nominal GDP to increase even though the quantity produced has DECREASED. How?
Nom. GDP =
IF prices increased a lot, nominal GDP would increase even if the quantity produced went down.
x Q this year
) =
So if we know that nominal GDP has increased, we still do not know if we are producing more (and reducing scarcity) or if the price level has just increased.
Real GDP is a measure of how much was actually produced. That is why it is used on the AS/AD graph as a measure of real domestic output (RDO). We measure RDO with real GDP, not nominal GDP.
We calculate real GDP by summing the quantity produced of everything in an economy times ITS PRICE IN A BASE YEAR. Since we always use the same base year prices if the quantity produced increases it will increase real GDP.
Real GDP = SUM (base year's prices x this year's quantities) =By using the same price level (base year prices) we remove the effects of a higher price level (inflation) and if REAL GDP increases we know that the economy is producing more and scarcity is being reduced.
real GDP
- real GDP = SUM P base year x Q specific year
- specific year's quantities x base years prices
Real GDP = SUM (base year's prices x this year's quantities) =
By using the same price level (base year prices) we remove the effects of a higher price level (inflation) and if REAL GDP increases we know that the economy is producing more and scarcity is being reduced.
Calculating a price index
To measure the price level we use a price index. A price index is a measure of the price level as a percent of the price level in a BASE year. This is different from inflation which is the rate of increase in the price level from the PREVIOUS year.
As you have read, to calculate a price index a year is selected as a base year. The average level of prices for that year is assigned a value of 100. Then the price levels for all other years are calculated as a percent of the base year.
GDP Price Indexdefinitiona price index is a measure of the price of a specified collection of goods and services, called a "market basket", in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year (called the "base year")calculating a GDP price index
price index in a given year = (price of market basket in a specific year / price of same market basket in base year) x 100calculating real GDP
real GDP = Nominal GDP / Price IndexActually, you then need to multiply it by 100.
real GDP = (Nominal GDP / Price Index) x 100
The following data show nominal GDP and the appropriate price index for several years.
Compute real GDP for each year. In which year(s) was there a recession (decline in real GDP)?. All GDP are in billions.
Nominal Price level
Year GDP index Real GDP
1 $117 120 ___
2 124 104 ___
3 143 85 ___
4 149 96 ___
5 178 112 ___
6 220 143 ___
The answers are below:
ANSWERS:
Nominal Price level
Year GDP index Real GDP
1 $117 120 $ 98
2 124 104 119
3 143 85 168
4 149 96 155
5 178 112 159
6 220 143 154
Textbook, questions 7-13 ANSWERS
(a) Interest on an AT&T bond. Included. - Income received by the bondholder for the services derived by the corporation for the loan of money.
(b) Social security payments received by a retired factory worker. Excluded. - A transfer payment from taxpayers for which no service is rendered (in this year).
(c) The services of a family member in painting the family home. Excluded. - Not a market transaction. If any payment is made, it will be within the family.
(d) The income of a dentist. Included. - Payment for a final service. You cannot pass on a tooth extraction!
(e) The money received by Smith when she sells her economics textbook to a book buyer. Excluded. - Secondhand sales are not counted; the textbook is counted only when sold for the first time.
(f) The monthly allowance a college student receives from home. Excluded. - A private transfer payment; simply a transfer of income from one private individual to another for which no transaction in the market occurs.
(g) Rent received on a two-bedroom apartment. Included. - Payment for the final service of housing.
(h) The money received by Josh when he resells his current-year-model Honda automobile to Kim. Excluded. - The production of the car had already been counted at the time of the initial sale.
(i) The publication of a college textbook. Included. - It is a new good produced for final consumption.
(j) A 2-hour decrease in the length of the workweek. Excluded. - The effect of the decline will be counted, but the change in the workweek itself is not the production of a final good or service or a payment for work done.
(k) The purchase of an AT&T corporate bond. Excluded. - A noninvestment transaction; it is merely the transfer of ownership of financial assets. (If AT&T uses the money from the sale of a new bond to carry out an investment in real physical assets that will be counted.)
(l) A $2 billion increase in business inventories. Included. - The increase in inventories could only occur as a result of increased production.
(m) The purchase of 100 shares of GM common stock. Excluded. - Merely the transfer of ownership of existing financial assets.
(n) The purchase of an insurance policy. Included. - Insurance is a final service. If bought by a household, it will be shown as consumption; if bought by a business, as investment—as a cost added to its real investment in physical capital.
