14230_Measuring National -ExpenditureMethod

8/14/2019 14230_Measuring National -ExpenditureMethod

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HAPTE

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Prepared by: Fernando QuijanoPrepared by: Fernando Quijano

and Yvonn Quijanoand Yvonn Quijano

2004 Prentice Hall Business Publishing 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair

Measuring National OutputandNational Income

-Expenditure Method


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2004 Prentice Hall Business Publishing 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 2 of 38

Final Goods and Services

The term final goods and

services in GDP refers to

goods and services producedfor final use or consumption

Intermediate goods are

goods produced by one firm foruse in further processing by

another firm.


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Value Added

Value addedis the difference

between the value of goods as they

leave a stage of production and the

cost of the goods as they entered

that stage.

In calculating GDP, we can either sum

up the value added at each stage ofproduction, or we can take the value of

final sales.


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The Expenditure Approach

Expenditure categories:

Personal consumption

expenditures (C)householdspending on consumer goods.

Gross private domestic

investment (I)spending by firms

and households on new capital:

plant, equipment, inventory, and new

residential structures.


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Government consumption and

gross investment (G)

Expenditure categories:

Net exports (EX IM)net

spending by the rest of the world, or

exports (EX) minus imports (IM)


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The expenditure approach calculates

GDP by adding together the four

components of spending. In

equation form:

G D PC I G E X I M = + + + ( )


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P 2004 Prentice Hall Business Publishing 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 7 of 38

Components of GDP, 1999:


Components of GDP, 2002: The Expenditure ApproachBILLIONS OF

DOLLARSPERCENTAGE

OF GDP

Personal consumption expenditures (C) 7303.7 69.9

Durable goods 871.9 8.3

Nondurable goods 2115.0 20.2Services 4316.8 41.3

Gross private domestic investment (l) 1543.2 14.8

Nonresidential 1117.4 10.7

Residential 471.9 4.5

Change in business inventories 3.9 0

Government consumption and gross investment (G) 1972.9 18.9

Federal 693.7 6.6

State and local 1279.2 12.2

Net exports (EX IM) 423.6 4.1Exports (EX) 1014.9 9.8

Imports (IM) 1438.5 13.8

Total gross domestic product (GDP) 10446.2 100.0

Note: Numbers may not add exactly because of rounding.Source: U.S. Department of Commerce, Bureau of Economic Analysis.


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Personal Consumption Expenditures

Personal consumption expenditures (C)

are expenditures by consumers on the

following:

Durable goods: Goods that last a relatively

long time, such as cars and appliances.

Nondurable goods: Goods that are used up

fairly quickly, such as food and clothing.

Services: Things that do not involve the

production of physical things, such as legal

services, medical services, and education.


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Gross Private Domestic Investment

Investmentrefers to the purchase of

new capital.

Total investment by the privatesector is called gross private

domestic investment. It includes

the purchase of new housing, plants,

equipment, and inventory by the

private sector.


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Gross Private Domestic Investment

Nonresidential investmentincludes

expenditures by firms for machines, tools,

plants, and so on.

Residential investmentincludes

expenditures by households and firms on

new houses and apartment buildings.

Change in inventories computes theamount by which firms inventories change

during a given period. Inventories are the

goods that firms produce now but intend to

sell later.


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Gross Investment

versus Net Investment

Gross investmentis the total value of all

newly produced capital goods (plant,

equipment, housing, and inventory)

produced in a given period. Depreciation is the amount by which an

assets value falls in a given period.

Net investmentequals gross investment

minus depreciation.

net investment=Gross investment -depreciation


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Government Consumption

and Gross Investment

Government

consumption and gross

investment (G) countsexpenditures by federal,

state, and local

governments for final

goods and services.


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Net Exports

Net exports (EX IM) is the

difference between exports and

imports. The figure can be positive

or negative.

Exports (EX) are sales to foreigners of

U.S.-produced goods and services.

Imports (IM) are U.S. purchases of

goods and services from abroad).


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The Income Approach

National income is the total income

earned by the factors of production

owned by a countrys citizens.

The income approach to GDP

breaks down GDPinto four

components:

GDP= national income + depreciation + (indirect

taxes subsidies) + net factor payments to the rest

of the world + other


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2004 P ti H ll B i P bli hi 2004 P ti H ll B i P bli hi P i i l f E i 7/P i i l f E i 7/ K l C R F iK l C R F i 16 f 38

The Income Approach

Components of GDP, 2002: The Income Approach

BILLIONS OFDOLLARS

PERCENTAGEOF GDP

National income 8,199.9 80.3

Compensation of employees 6,010.0 58.9

Proprietors income 943.5 7.3

Corporate profits 748.9 7.3

Net interest 554.8 5.4

Rental income 142.7 1.4

Depreciation 1,351.3 13.2Indirect taxes minus subsidies 739.4 7.2

Net factor payments to the rest of the world 11.1 0.1

Other 96.1 0.9

Gross domestic product 10,205.6 100.0

Source: See Table 18.2.

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14230_Measuring National -ExpenditureMethod