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GDP Expenditure Approach

This article explores the concept of Gross Domestic Product (GDP), detailing its calculation through two primary approaches: the Expenditure Approach and the Income Approach. The Expenditure Approach breaks down GDP into key components: Personal Consumption (C), Gross Private Domestic Investment (Ig), Government Purchases (G), and Net Exports (Xn). In contrast, the Income Approach highlights the factors of production contributing to national income. Additionally, we touch upon the measures of nominal and real GDP and their importance in economic analysis.

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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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