Previous Lecture Summary

1. Want to study production without looking at

inflation: real GDP.

2. GDP deflator gives a measure of aggregate prices.

3. Arithmetic trick to work with percentage changes.

ECON 102 Lecture 3: Components of GDP 1

Learning Objectives for Today
• How the real GDP per-capita is useful to compare
wealth.

• The expenditure components of the GDP

• Consumption
• Investment

• Next class: Remaining expenditure components of

the GDP: Government Spending and Net Exports.

ECON 102 Lecture 3: Components of GDP 2

Real GDP per-capita
• What if we want to compare wealth between countries?

• Real GDP per-capita is the real GDP divided by the

population size.

𝐑𝐞𝐚𝐥 𝐆𝐃𝐏
𝐑𝐞𝐚𝐥 𝐆𝐃𝐏 𝐩𝐞𝐫 − 𝐜𝐚𝐩𝐢𝐭𝐚 =
𝐏𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧 𝐬𝐢𝐳𝐞

ECON 102 Lecture 3: Components of GDP 3

Real GDP per-capita
• Question: what was the percentage change in Real GDP
per-capita in 2021 if Real GDP grew 1% and the
population grew 3%?

• Remember: Last class’s arithmetic trick.

𝐑𝐞𝐚𝐥 𝐆𝐃𝐏
𝐑𝐞𝐚𝐥 𝐆𝐃𝐏 𝐩𝐞𝐫 − 𝐜𝐚𝐩𝐢𝐭𝐚 =
𝐏𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧 𝐬𝐢𝐳𝐞

ECON 102 Lecture 3: Components of GDP 4

Quality of life and real GDP per-capita.

ECON 102 Lecture 3: Components of GDP 5

The Circular Flow
Income ($)

Labor

Households Firms

Goods

Expenditure ($)
ECON 102 Lecture 3: Components of GDP 6
The Expenditure Components of GDP
Y = C + I + G + NX
aggregate expenditure

value of total
output

- Consumption (C)<-today’s class

- Investment (I)<-today’s class

- Government spending (G)

- Net exports (NX)

Consumption (C) (About 70% of GDP)
žConsumption: The value of all goods and services
purchased by households (consumers), excluding
new housing.
1. Durable goods (8%)
– last a long time (ex: cars, home appliances)
2. Nondurable goods (21%)
– last a short time (ex: food, clothing)
3. Services (41%)
– work done for consumers (ex: dry cleaning, air travel)
Investment (I)
•Two Definitions:
• Definition 1: Spending on [the factor of production]
capital.
• Definition 2: Spending on goods bought for future use.
• Neither of these definitions involves the buying/selling of
financial assets.
• Buying/selling of a stock involves a transfer of ownership of an
existing physical asset.
• Firms typically sell financial assets to raise funds, in order to
purchase physical capital.
Investment (I) (About 16.7% of GDP)
• Types of investment
1. Business Fixed Investment (10.5%)
• Spending on plant and equipment that firms will use to produce
other goods & services.
2. Residential Fixed Investment (5.8%)
• Spending on housing units by consumers and landlords.
3. Inventory Investment (0.4%)
• The change in the value of all firms’ inventories.
• This is how we account for goods that are produced in one year
but sold in another.
Example on consumption and
investment
How does GDP, consumption and investment change if….

1. Debbie spends $200 to buy her husband dinner at the

finest restaurant in Boston.
Consumption and GDP rise by $200. Investment does
not change.
Exercises on consumption and
investment
How does GDP, consumption and investment change if….

2. Jane spends $1200 on a computer to use in her editing

business. She got last year’s model on sale for a great price
from a local manufacturer.
Exercises on consumption and
investment
How does GDP, consumption and investment change if….

2. Jane spends $1200 on a computer to use in her

editing business. She got last year’s model on sale for
a great price from a local manufacturer.
Current GDP and investment do not change because the
computer was built last year.
Exercises on consumption and
investment
How does GDP, consumption and investment change if….

3. General Motors builds $500 million worth of cars,

but consumers only buy $470 million of them.
Exercises on consumption and
investment
How does GDP, consumption and investment change if….

3. General Motors builds $500 million worth of cars,

but consumers only buy $470 million of them.
Consumption rises by $470 million; inventory investment
rises by $30 million, and GDP rises by $500 million.
Lecture Summary
1. Real GDP per-capita

2. Expenditure components of the GDP

Consumption

Investment

ECON 102 Lecture 2: Real and per-capita GDP 16

Next class…
1. Recall: GDP is also total expenditure

• Expenditure by households.
• Expenditure by businesses.
• Expenditure by the government.
• Exports and Imports.

ECON 102 Lecture 2: Real and per-capita GDP 17