Measuring

Question 1

Expenditure approach Y=C+I+G+NX

1. Consumption involves…
2. Investment involves…
3. Government spending involves…

Answer 1

1. Durables, non-durables, services
2. Business fixed investment: K used to produce
   Residential fixed investment: spending on housing units
   Inventory investment: change in value of all firms’ inventories
3. Excludes transfer payments as not government spending on goods and services

Question 2

GDP deflator given by nominal/real. Its one way of measuring prices and inflation, the other being the Consumer Price Index. What are the differences?

Answer 2

1. What kind of goods included?The GDP deflator measures P of ALL g+s (includes r, price K), whereas CPI measures value of consumption basket
2. Do we look at domestic only? GDP deflator looks at domestic prices, CPI includes prices of M consumer goods
3. Does basket change? GDP deflator allows basket to change as composition of GDP changes, CPI assigns fixed weights to prices of different goods.