What is GDP?

GDP= C + I + G + (NX or X - M)
C = consumer spending
I = investment
G = government spending
NX = Net Exports = exports(X) - imports(M)

Consumer Spending: measure of all spending a nations consumers make on goods and
services during a year. Includes: purchase of consumable goods like food and clothing, durable
goods like tools and furniture, and services such as haircuts and doctor visits.
Investment: The purchase of capital goods (including machinery, technology, and new
buildings) that are used to produce goods and services. In personal finance, the amount of
money invested in stocks, bonds, mutual funds, and other investment instruments. Includes:
materials or contracting services used when a business builds a new factory, equipment
purchases and software to help a business run efficiently.
Government Expenditures: goods and services provided by the government and paid for by
taxing and borrowing. Federal government expenditures include national defense and a system
of justice. State and local government expenditures include police, roads, and schools.
Exports: goods and services produced in one nation and sold in other nations.
Imports: goods and services bought from sellers in another nation.

Part A. Is This Counted as Part of GDP?

Which of the following are INCLUDED and which are EXCLUDED in calculating this years GDP? Explain
your decision.
1. The governments purchase of a new submarine for the Navy.
2. A farmers purchase of a new tractor.
3. An increase in business inventories.
4. The services of a mechanic in fixing the radiator on his car.
5. A barbers income from cutting hair.

Part B. Is It Counted and Where?

For each of the items below, write one of the following in the space provided.
C if the item is counted as consumption
I if the item is counted as investment
G if the item is counted as government
N if the item is not counted in GDP
1. You spend $7.00 to see a movie. _____
2. A family pays $75,000 for a house built three years ago. ______
3. The government increases its defense expenditures by $1,000,000,000. ______
4. A homemaker works hard caring for her spouse and two children. ______
5. Ford buys new auto-making robots. ______
6. You pay $300 a month for rent. ______
7. A local library purchases new audio books. ______
8. You pay tuition to attend college. _____

Part C. Calculating GDP

Use the formula for GDP to calculate the answer.
1. A small island nation has a total population of 100, all of the population earning an
average of $50 per year. Each worker spends a total of $40 per year buying goods and services
of which $3.00 goes to buying imported goods. The island exports a total of $800 worth of goods.
The government tax rate is 10% and all government money from those taxes is spent on building
infrastructure and supporting schools. There is only one industry on the island and it employs all
of the workers. This industry spends $600 each year on new equipment. What is the GDP?

2. RowLAND is a small nation off the coast of Florida. It has a total population of 600, and it
has 200 wage earners who earn an average of $75 per year. Each wage earner spends $60 per
year buying goods and services of which $7.00 goes to buying imported goods. The nation
exports a total of $1300 worth of goods. The government tax rate is 8% and all government
money is spent on libraries, schools, and roads. The only industry on the island (fishing) employs
every wage earner. The industry spends $900 each year on new fishing equipment. What is the
GDP?