Expenditure Approach
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Transcript Expenditure Approach
Section 3- Module 10
MEASURING THE ECONOMY’S PERFORMANCE
BY J. A. SACCO
MODULE 10
The Simple Circular Flow
National Income Accounting
Three Main Methods of Measuring GDP
MEASURING THE ECONOMY’S PERFORMANCE
National Income Accounting : To measure a
nations income and its components. To measure
an aggregate performance.
This module deals with the methods of measuring
an economy's performance and economic activity
First need to look at the flow of goods and services from
businesses to consumers and payments from consumers to
businesses that constitutes economic activity.
THE CIRCULAR FLOW DIAGRAM
Two Markets
Product Market
Households
are the buyers
Businesses are the sellers
Households buy consumers
goods/services
Pay money to businesses for those
goods/services
Households create the demand
Businesses are the suppliers
Total Output- Total Monetary value
of all goods and services
Resource Market
Businesses are the buyers
Households are the sellers
Households sell their resources
such as labor, land, capital, and
entrepreneurship.
Businesses are the buyers of
these resources. These
expenditures (payments) become
income for households
Total Income- wages, rents,
interest, profits. The cost of
producing entire output of goods
and services
THE CIRCULAR FLOW OF
INCOME AND PRODUCT
Businesses
Households
THE CIRCULAR FLOW OF
INCOME AND PRODUCT
Businesses
Households
THE CIRCULAR FLOW OF
INCOME AND PRODUCT
Businesses
Households
THE CIRCULAR FLOW OF
INCOME AND PRODUCT
Businesses
Households
THE CIRCULAR FLOW OF
INCOME AND PRODUCT
Businesses
Households
THE SIMPLE CIRCULAR FLOW
Two Observations
1) In every economic exchange, the seller receives
exactly the same amount that the buyer spends
2) Goods and services flow in one direction and
money payments flow in the other.
Total Income = Total Output
THE SIMPLE CIRCULAR FLOW
Product Markets
Businesses
Households
Transactions in which
households buy goods
THE SIMPLE CIRCULAR FLOW
Final Goods and
Services
Businesses
Households
Goods and services
that are at their final
stage of production
and will not be
transformed into yet
other goods or
services
THE SIMPLE CIRCULAR FLOW
Factor Markets
Businesses
Households
Transactions in which
business buy
resources
THE SIMPLE CIRCULAR FLOW
Total Income
Businesses
Households
The yearly amount
earned by the nation’s
factors of production
THE SIMPLE CIRCULAR FLOW
Question
Businesses
Households
Why must total
income be identical to
the dollar value of
total output?
WHY THE DOLLAR VALUE OF OUTPUT MUST
ALWAYS EQUAL TOTAL INCOME?
Problem:
Total output (Product Market) = $1,000
Total income (Resource Market)- wages, rents, interest for
that output = $900
Why the discrepancy?
Profit
Always the residual item that makes
Total output = Total Income
GDP- THREE METHODS
Method 2Expenditure
Approach
Method 3Income
Approach
Method 1- Value Added
Approach
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NATIONAL INCOME ACCOUNTING
Gross Domestic Product (GDP)
The
total market value of all final goods and services
produced by factors of production located within a
nation’s borders during a given period .
GDP measures the dollar value of output
GDP measures the dollar value of final goods and
services
GDP is a Flow!
The key to calculating GDP is in determining
what is counted and what is not counted.
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NATIONAL INCOME ACCOUNTING
Stress of Final Output
What
is a final good?
Wheat?
Steel?
Oil?
Bread?
Automobile?
Gasoline?
NATIONAL INCOME ACCOUNTING
Intermediate Goods not counted!
Goods
used up entirely in the production of final
goods
Only final goods are counted in GDP. If you count
intermediate goods you are guilty of double
counting
We must look at the value added (METHOD 1)
The amount of dollars contributed to a product at
each stage of development, not the dollar value of
each sale.
GDP- VALUE ADDED APPROACH
Value Added Approach
SALES VALUE AND VALUE ADDED AT EACH
STAGE OF DONUT PRODUCTION
Stage of Production
Dollar Value of Sales
Value Added
$.01
Stage 1: Fertilizer and Seed
$.01
Stage 2: Growing
.02
Stage 3: Milling
.04
Stage 4: Baking
.10
Stage 5: Retailing
.15
Total dollar value of all sales
$.32
$.01
$.02
$.06
$.05
Total value added
$.15
Value added is what must be calculated!
NATIONAL INCOME ACCOUNTING
NOT INCLUDED – NOTHING BEING PRODUCED!
Financial Transactions
1) Securities
Stocks
and bonds
2) Government Transfer Payments
Social
security
Unemployment compensation
3) Private Transfer Payments
Individual
gifts
Corporate gifts
NATIONAL INCOME ACCOUNTING
Transfer of Secondhand Goods
Why
not count the sale of a used car, stereo, or
snowboard as part of GDP?
Other Excluded Transactions
Household
production
Legal underground transactions
Illegal underground transactions
What Should Be Included in GDP?
A painter purchases new paintbrushes for his business.
The services of an accountant.
A purchase of a new automobile.
A Social Security check paid to a retired worker.
The sale of a new home.
An increase in business inventories.
The government’s purchase of a new fighter jet.
Unemployment paid to a laid-off worker.
The wood the carpenter purchases to build a cabinet.
The money you get from your parents for cutting the lawn.
GDP-EXPENDITURE APPROACH
Method 2Expenditure
Approach
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EXPENDITURE APPROACH
Expenditure Approach
A
way of computing national income by adding up
the dollar value at current market prices of all final
goods and services.
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EXPENDITURE APPROACH
Businesses
Expenditure Approach
Households
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EXPENDITURE APPROACH
Deriving GDP by the Expenditure Approach
Consumption
Expenditure
(C)
Durables
Life
span of more than three years
Nondurables
Life span of less than three years
Services
Intangible commodities
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TWO MAIN METHODS
OF MEASURING GDP
Deriving GDP by the Expenditure Approach
Gross
Private Domestic Investment
What
(I)
producers do to add to productive capacity
The creation of capital goods, such as factories and
machines, that can yield production and hence
consumption in the future
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TWO MAIN METHODS
OF MEASURING GDP
Deriving GDP by the Expenditure Approach
Gross
Private Domestic Investment
Fixed
(I)
Investment- Producer durables/capital goods
Inventory Investment- Final product that is held in
inventory waiting to be sold. Hold inventories of their
product to meet future expected orders. Inventories
include all finished goods on hand, goods in process, and
raw materials. Counted towards present GDP but
subtracted when sold.
New Residential Structures are part of I, not part of C.
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TWO MAIN METHODS
OF MEASURING GDP
Deriving GDP by the Expenditure Approach
Government
State,
Expenditures
local, and federal
Valued at cost
(G)
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EXPENDITURE APPROACH
Deriving GDP by the Expenditure Approach
Net
Exports (Foreign Expenditures)
(X-M)
Net exports ( X ) total exports - total imports
THE COMPONENTS OF GDP
Repetez: GDP is total spending. (Expenditure)
Four components:
Consumption
(C)
Investment (I)
Government Purchases (G)
Net Exports (X-M)
These components add up to GDP (denoted Y):
Y = C + I + G + (X-M)
MEASURING U.S. GDP
The Expenditure Approach
Measures
GDP by using data on consumption
expenditure, investment, government expenditure on
goods and services, and net exports.
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GDP AND ITS COMPONENTS
GDP BY THE INCOME APPROACH
Called GDI (Gross Domestic Income)
We have looked at GDP through the “product
market” of the Circular Flow Diagram. Now look
at the Resource (Factor) Market or the Income
Approach to determine national accounting of
the macroeconomy.
GDI=GDP
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TWO MAIN METHODS
OF MEASURING GDP
Income Approach
A
way of measuring national income by adding up
income received by all factors of production
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GDP BY THE INCOME APPROACH
Income Approach
Businesses
Households
GDP- INCOME APPROACH
Method 3Income
Approach
GDP BY THE INCOME APPROACH
Gross Domestic Income (GDI)
1) Wages- All wages, salaries, incentive payments,
social security taxes of both employer/employee
2) Interest (Net Interest)
Interest Received ───
Interest Paid
• Savings accounts
Interest on mortgages
• CD’s
Credit Cards
• Interest Bearing Acc’ts
Loans
GDP BY THE INCOME APPROACH
3) Rent- All income earned by individuals for the
use of their assets
• Farms, Houses, Stores, royalties from
copyrights/patents, oil wells
4) Profits- Total Gross Corporate Profits plus
proprietor’s income or unincorporated
businesses such as sole proprietorships,
partnerships, and producer’s cooperatives.
GDP BY THE INCOME APPROACH
W+I+R+P
Actual factor payments made to owners of the
factors of production.
GDP AND GDI
Regardless: GDP
=
(Expenditure)
GDI
(Income)
GROSS DOMESTIC PRODUCT AND
GROSS DOMESTIC INCOME, 1998
(IN BILLIONS OF 1998 DOLLARS PER YEAR)
Expenditure Point of View--Product Flow
Expenditures by Different Sectors:
Household sector
Personal consumption expenses
$5,659.4
Government sector
Purchase of goods and services
1,466.4
Business sector
Gross private domestic investment
(including depreciation)
1,329.8
Foreign sector
Net exports of goods and services
-123.4
Gross Domestic Product
$8,332.2
GROSS DOMESTIC PRODUCT AND
GROSS DOMESTIC INCOME, 1998
(IN BILLIONS OF 1998 DOLLARS PER YEAR)
Income Point of View--Cost Flow
Domestic Income (at Factor Cost):
Wages
All wages, salaries, and supplemental
employee compensation
Rent
All rental income of individuals plus
implicit rent on owner-occupied dwellings
Interest
Net interest paid by business
Profit
Proprietorial income
Corporate profits before taxes deducted
Nonincome expense items
Indirect business taxes and other adjustments
Depreciation
Statistical discrepancy
Gross Domestic Product
$4,901.4
142.8
464.7
519.7
701.3
730.8
951.3
-79.8
$8,332.2