[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

produced). Some are government purchases. And some of the goods, called exports, go
to other countries. If we did not import any goods (that is, buy goods produced in
other countries), then GDP would simply consist of goods that went for private consumption,
private investment, government purchases, or exports. But not all such
goods are produced in this country. For instance, many consumer electronics and automobiles
that individuals purchase are produced in other countries. To calculate
GDP using the final goods approach, we therefore need a final step of subtracting the
amount imported. Thus,
GDP = C + I + G + X − M,
where C is consumption, I is investment, G is government purchases, X is exports,
and M is imports. The difference between exports and imports is referred to as net
exports. This equation is an identity; that is, it is always true (by definition) that the
GDP equals consumption plus investment plus government purchases plus net
exports.
But what, you might ask, about goods produced during a given year that are still
unsold at its end? The value of these goods should be counted in GDP—after all,
they were produced during the year—but how can they be counted in final sales if
the firms that produced them have not sold them by December 31? An example will
help illustrate how this problem is solved in the National Income and Product
Accounts. Suppose Dell Computer produces a new laptop on December 1, 2004, but
the laptop has not been sold by the end of the year. Instead, it remains in the firm’s
inventory. This is treated by NIPA as a final sale to the firm itself—it is as if Dell
purchased the laptop for its own use. The increase in firms’ inventories is counted
as part of final sales to firms and included in investment. If Dell sells the laptop to
a consumer in January 2005, the sale adds to consumption but it reduces inventory
holdings. Thus, when we add together consumption purchases and inventory investment,
the two transactions cancel each other out—the laptop is correctly counted
in 2004 GDP and not in 2005 GDP.
The final goods approach to calculating GDP in the United States can be illustrated
using the figures for 2003. According to the Bureau of Economic Analysis, 2
the values for the components of GDP were as follows:
Category Billions of $
Consumption 7,609.8
+ Investment 1,596.6
+ Government purchases 2,041.4
+ Exports 1,019.8
− Imports 1,523.0
= GDP 10,744.6
By adding these components together, we find that the value of all final goods
and services produced within the borders of the United States during 2003 was
$10,744.6 billion.
2 www.bea.gov.
490 ∂ CHAPTER 22 MEASURING OUTPUT AND UNEMPLOYMENT