Business Economics

Project Paper 2

Travelle Taylor

Keller Graduate School Of Management

GM 545-Business Economics

Fall Session A

Instructor: Paul Musselman

February 5, 2011

Chapter 15, Question 11

According to (Stone, G.W., p. 414) the gross domestic product (GDP) is made of four different components, consumption (C), investment (I), government (G), and net exports, which are exports minus the imports (X-M). As Stone states, consumption is considered o be personal consumer spending, investment are gross private domestic investment , government is the impact of government spending which includes federal, state, and local employees, purchases of products and services from private businesses as well as the rest of the world and government purchases of new structures, equipment and software. Net exports are calculated by taking all the products we sell overseas, for the current period, and subtract that from all the products we bring into the country.

In reference to the chart below, the component of GDP that seems to be most stable, with a variance of .08, are private investments, also known as gross private domestic investment (GPDI). These investments are things such as residential and nonresidential structures, equipment, and software and changes to the private business industry. According to (Stone, G.W., p. 413), private investment is the key factor for driving economic growth. The most unstable, volatile component as a percentage of GDP seems to be consumption. Consumption also the component that seems to be growing the fastest as a percent of GDP since 1965, this can be seen when the economy was booming, people were extending their credit to buy homes ,cars and other objects for recreational use. When the economy went into a recession, consumption also dropped, very drastically. During this recession, consumption has drastically reduced, private investments has reduced as well, in response to the lack of consumption that has taken place. Government spending is the one thing that is keeping the GDP where it currently is.

Year GDP C I G X-M C(%) I(%) G(%) X-M(%)

1965 719.1 443.8 118.2 151.5 5.6 61.71603 16.43721 21.068 0.778751

1975 1638.3 1034.4 230.2 357.7 16 63.13862 14.05115 21.83361 0.976622

1895 4220.3 2720.3 736.2 879 -115.2 64.4575 17.44426 20.8279 -2.72966

1995 7397.7 4975.8 1144 1369.2 -91.4 67.26145 15.46427 18.50846 -1.23552

2005 12455.8 8742.4 2057.4 2372.8 -716.7 70.18738 16.51761 19.04976 -5.75395

Chapter 15, Question 14

NIPA stands for The National Income and Product Accounts. "It lets economists judge our nation's economic performance, compare American income and output to that of other nations, and track the economy's condition over the course of the business cycle (Stone, G.W., p. 408).

NIPA is important because it provides the potential for converting economic policy making from a rule-of-thumb based guessing game to a quantitatively based science. It provides an objective statement and assessment of economic policies, but NIPA also provides some limitations in its data output. For one GDP does not account for non-market in the household for example, meal preparation, cleaning, laundry, and child care. "For instance, the