Holt 7525-9 S15_IT

4. Net Exports. An export is a good produced domestically and sold to someone in a foreign
country. An import is a good produced in a foreign country and purchased domestically. Net
exports equals exports minus imports.
Exports – total foreign purchases of domestic goods.
Imports – total domestic purchases of foreign goods.
Exports need to be added to GDP since they will not be included as part of domestic
consumption, investment, or government purchases.
Example 12: A Ford F-150 manufactured in Michigan and purchased by a consumer in Canada
will not be included in U.S. consumption (since it was not purchased by a consumer in the U.S.)
But the value of the F-150 needs to be included in U.S. GDP, since it was produced in the U.S.
Imports need to be subtracted from GDP since they will be included as part of domestic
consumption, investment, or government purchases.
Example 13: A Volvo manufactured in Sweden and purchased by a consumer in Waco, Texas
will be included in U.S. consumption (since it was purchased by a consumer in the U.S.). But the
value of the Volvo needs to be excluded from U.S. GDP, since it was not produced in the U.S.
Below is a summary of gross domestic product and Total Expenditures for 2013:
Total Expenditures:
Consumption
Investment
Government Purchases
Net Exports
Gross Domestic Product
$11,484 billion
2,648 billion
3,144 billion
-508 billion
$16,768 billion
When total output is measured as the sum of all payments to resource owners, the result is
national income. National income consists of five types of payments;
1. Employee compensation
2. Proprietors’ income
3. Corporate profits
4. Rental income
5. Net interest income
Typically employee compensation makes up about 60% of national income.
Per Capita Output
When comparing different economies, per capita output numbers may be more informative than
total output numbers. (Per capita means “per person”.) Per capita GDP comparisons for selected
countries are included in Chapter 15.
Example 14: India has a much larger economy than Switzerland. In 2013, India’s GDP was
$4,990 billion, while Switzerland’s GDP was only $371 billion. But Switzerland had a much higher
per capita GDP, $54,800 versus $4,000.
As mentioned earlier in this chapter, there are flaws in GDP as a measure of standard of living.
Thus, there are flaws in per capita GDP as a measure of standard of living. When comparing
different economies in terms of standard of living, these flaws must be kept in mind. Flaws in
GDP as a measure of standard of living are discussed in an appendix at the end of the chapter.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Measuring Total Output: GDP 5 - 4