merged

5. Leisure. Leisure time is by definition nonproduction time. An increase or a decrease in leisure
time affects the quality of life, but does not directly affect production. No adjustment is made to
GDP for an increase or a decrease in leisure time.
Example 8: In 1900, the average work week in America was about 60 hours. In 2000, the
average work week was about 40 hours. This increase in leisure time improved the quality of life,
but did not directly affect GDP.
6. Economic bads. No adjustment is made to GDP for undesired byproducts of production
(pollution) or for unwanted destruction of property (e.g. by earthquake, hurricane, fire, flood,
terrorist attack, etc.).
Example 9: In 2012, Superstorm Sandy caused damage roughly estimated at $65 billion. This
loss was not deducted from GDP for 2012.
An economic bad could actually increase GDP. The damage done by an oil spill or a hurricane
would not be deducted from GDP, but the market value of the production necessary to repair and
replace damaged property would add to GDP. This does not mean that economic bads are
actually good and add to the standard of living. Flaws in GDP as a measure of standard of living
are discussed in an appendix at the end of the chapter.
Two Measures of Total Output; GDP and National Income
Total output can be measured by adding up the Total Expenditures on final goods and services.
Or total output can be measured by adding up the payments to the resource owners who
provided the resources to produce the final goods and services. The two measures of total output
can be illustrated on a simple circular flow diagram. A simple circular flow diagram is discussed in
an appendix at the end of this chapter.
When total output is measured as the sum of Total Expenditures, the result is gross domestic
product. Total Expenditures consists of four types of spending:
1. Consumption. Household consumption of goods and services is the largest component of
GDP. In 2013, consumption made up about 68% of GDP.
2. Investment. Investment is the acquisition of new physical capital. Investment consists of;
a. new capital goods
b. changes in business inventories
c. new residential housing
Example 10: Investment for GDP purposes has a different meaning than the common use of the
word. A person who purchases common stock, real estate, or a used dump truck would consider
each of these purchases an investment. But none of these purchases would be considered
investment spending for GDP purposes.
3. Government purchases. This includes spending by federal, state, and local governments on
goods and services. This does not include transfer payments, which are transfers of income
from the government to households or businesses, not in exchange for goods, services, or
resources. The market value of government purchases is usually determined by the amount of
the government’s expenditure, since government production is usually not sold in the
marketplace. If the city of York, Nebraska spent $543,761 on its library in 2013, this amount
would be included in GDP.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Example 11: Government purchases would include, for example, federal spending on the military
or the Environmental Protection Agency, state spending on public education or highways, and
local spending on police and fire protection or street maintenance.
5 - 3 Measuring Total Output: GDP