Transcript Lecture 5
GDP: Looking at GDP: Spending and Income How to determine the GDP? Alomar_111 1 Note that what is spent on making a product (wages, rents, interests) is income to those who participated in the production process of that product. Alomar_111 2 1. The Expenditure Approach To determine the GDP, we add up all the spending on final goods and services throughout the year: C+I+G+X-M Alomar_111 3 Personal Consumption Expenditure (C): All expenditures by households on durable consumer goods, nondurable consumer goods, consumer expenditures for services Alomar_111 4 Gross Private Investment (Ig): - - - Final purchases of machinery, equipments, tools by businesses All constructions Changes in inventories: Stock Alomar_111 5 Note that when good (A) is produced, it will be counted in GDP of that year, Alomar_111 6 Changes in Inventory: Positive change in inventories: Suppose that inventory increased by ($10) from 1999 to 2000. This means that in 2000, the economy produced ($10) more outputs than what was purchased in same year. Alomar_111 7 This ($10) was counted in GDP2000 even though it was not sold. The ($10) increase in inventory will be included now as investment in 2000. Alomar_111 8 Negative change in inventories: Suppose that inventory decreased by ($10) in 2000. This means that in 2000, the economy sold ($10) more outputs than what was produced in same year. (by selling goods produced last year that counted as last year’s GDP) Alomar_111 9 This ($10) was already counted in last year’s GDP. If we count the ($10) again in this year’s GDP: expenditure will overstate the GDP for this year. The ($10) decline in inventory will be included now as negative investment in 2000 and subtract it from total I of 2000. Alomar_111 10 What is investment? is the creation of new capital assets (assets that create jobs and income) Gross (I) vs. Net (I): NI = GI – Depreciation Depreciation: the amount of capital that is used up over the course of the year. Alomar_111 11 Government Expenditure (G): Two forms: - Expenditure for goods and services (Public services) - Expenditure for social capital (schools, hospitals) - No transfer payments Alomar_111 12 Net Exports (Xn) Xn = X - M Alomar_111 13 From Expenditure to GDP: GDP = C + I + G + Xn Alomar_111 14