![]() ![]() When the government raises taxes, private spending decreases. This would match the product approach, at least in theory.If an increase in government spending leads to an increase in total spending and GDP, then an increase in taxes must lead to a decrease in total spending and GDP, and vice versa. Real GDP = Overall Consumption + Change in Private Inventories = $21 trillion - $1 trillion = $20 trillion RFI = Residential Fixed Investment Spending. NRFI = Nonresidential Fixed Investment Spending. * Overall Consumption = C + NRFI + RFI + G + NX In this case, overall consumption was greater than overall production, so the change in private inventories would be -$1 trillion. Suppose overall production was $20 trillion, while overall consumption* was $21 trillion. Do this calculation for all goods in the economy and you come up with the total net change in private inventories for the period, which is then included in the calculation of investment spending and real GDP. ![]() Similarly, if the consumption of a certain good is lower than production, the change in private inventories for the period will be positive. If consumption of a certain good is higher than production, the change in private inventories for the period will be negative. Inventory levels would be tallied using the product approach. In other words, what is consumed (flow), as opposed to what is produced (stock). The reason that only the change in private inventories is included is that investment spending is part of the calculation of real Gross Domestic Product (GDP) using the expenditures approach. The change in private inventories from one period to the next is included in investment spending, but only the change in private inventories, not the level of private inventories. 3 - House Investment Spending: Change in Private Inventoriesįinally, stacks of lumber in a warehouse or stockyard are considered inventories. Now that you know the definition of investment spending and its components, let's take a look at some examples. The change in the physical volume of inventories owned by private businesses, valued at average prices of the period. Primarily private residential construction. Intangible fixed assets used repeatedly or continuously in the process of production for at least a year. Things used in the production of other products. This category includes new construction as well as improvements to existing structures. Categoryįixed investment in items not for residential use.īuildings that are constructed at the location where they are used and have long lives. This will help in our analysis going forth. What are all of these components? Have a look at Table 1 below to see the definitions of all of these terms. ![]() Investment spending, otherwise known as gross private domestic investment, includes private nonresidential fixed investment, private residential fixed investment, and the change in private inventories. ![]() Measuring Domestic Output and National Income.Sources of Revenue for State Government.Sources of Revenue for Local Government.Monetary Policy Actions in the Short run.Long-Run Consequences of Stabilization Policies.Expansionary and Contractionary Fiscal Policy.Factors Influencing Foreign Exchange Market.Comparative Advantage vs Absolute Advantage.Expansionary and Contractionary Monetary Policy.Equilibrium in the Loanable Funds Market. ![]()
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