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GDP Expenditure Approach

GDP Expenditure Approach. GDP = C + Ig + G + Xn C = Personal Consumption Ig = Gross Private Domestic Investment G = Government Purchases of Goods & Services Xn = Net Exports = (EX – IM) EX = Exports IM = Imports. C = Personal Consumption. Largest of the accounts 2/3 of GDP

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GDP Expenditure Approach

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  1. GDPExpenditure Approach • GDP = C + Ig + G + Xn • C = Personal Consumption • Ig = Gross Private Domestic Investment • G = Government Purchases of Goods & Services • Xn = Net Exports = (EX – IM) • EX = Exports • IM = Imports

  2. C = Personal Consumption • Largest of the accounts 2/3 of GDP • All consumer spending • Durable goods • Non-durable goods • Services

  3. Ig = Gross Private Domestic Investment • Purchases of machinery, equipment, tools by businesses • All construction – including housing • All changes in inventory

  4. G = Government purchases • All levels – Federal, State, Local • Does not include transfer payments • Figured at cost, not market value

  5. Net Exports Xn= (EX – IM) • Add Exports (EX) • Spending on goods & services by foreigners • Subtract Imports (IM) • Personal Consumption on goods & services produced in a foreign country

  6. GDP doesn’t measure • Social Welfare • Bads & Disservices • Drug trade • Prostitution • Gambling • Add 15% ? (estimates 5% – 25%)

  7. GDP – Income Approach • Alternate way of calculating GDP • Four Factors of Production + Compensation of Employees (labor) + Rents (land) + Interest (capital) + Proprietors income (entrepreneurship) • Corporate Profits + Corporate Income Taxes + Dividends + Undistributed Corporate Profits • = NI = National Income

  8. GDP – Income Approach • National Income + Indirect business taxes • Sales & Excise Taxes, other Business taxes + Consumption of Fixed Capital Depreciation Government capital expenses (buildings, highways) = GNP + Net Foreign Factor Income • Subtract income earned by US citizens abroad • From income earned by foreigners in the US • = GDP

  9. Other Income Accounts • GDP - Consumption of Fixed Capital • = NDP Net Domestic Product - Net foreign factor income - Indirect business taxes • NI = National Income - Social Security contributions - Corporate Income taxes - Undistributed corporate profits + Transfer payments • PI - Personal Income - Personal taxes • DI - Disposable Income

  10. Nominal GDP Current dollarsReal GDP Inflation adjusted dollars • Develop a Price Index. • How Index numbers work. • Year 1 or base year = 100 • Year 2 10% inflation = 110 • Year 3 10% inflation = 121 • Year 4 10% inflation = 133.1

  11. Nominal GDP Current dollarsReal GDP Inflation adjusted dollars • Develop a Price Index. Prices of market basket in a specific year _________________ Price Index = X 100 Prices of market basket in base year

  12. Nominal GDP Current dollarsReal GDP Inflation adjusted dollars • Finding REAL GDP Nominal GDP __________________ Real GDP = Price Index (in hundredths)

  13. Nominal GDP Current dollarsReal GDP Inflation adjusted dollars • Finding REAL GDP • The actual GDP price index the U.S. uses is called: Chain-type annual-weights price index • Currently chain weighted 2005 dollars

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