CHAPTER 2: THE DATA OF MACROECONOMICS
GROSS DOMESTIC PRODUCT: EXPENDITURE AND INCOME
- To understand the meaning fully, we turn to national income accounting, the system used to
measure GDP and many related statistics
- GDP measures the flow of money and can be calculated by:
o Total income from production
o Total expenditure from production
- Total expenditure on domestically produced final goods and services
- Total income earned by domestically located factors of production
- Expenditure = income
- Ever rand spent becomes income for another
Circular flow expresses the
inflow/outflow between
firms and households
- A more precise definition of GDP:
Gross domestic product (GDP) is the market value of all final goods and services produced
within an economy in a given period of time
VALUE ADDED
- Value added is the value of output minus the value of the immediate goods used to produce
that output
- The production of goods has multiple stages, and each stage should be accounted for when
working out the value added to the production
- GDP = value of final goods and services = sum of value added at all stages of production
- The value of the final good already includes the value of the immediate goods
- By including immediate goods again -> Double Counting
EXPENDITURE COMPONENT OF GDP
- There are four expenditure components of GDP:
o Consumption (C)
o Investment (I)
o Government spending (G)
o Net exports (NX)
Y = C + I + G + NX
, - (Y) is the value of total output
- (C+I+G+NX) is the aggregate expenditure
- The equation is an identity – an equation that must hold because of the way the variables
are defined
- It is called the national income accounts identity
CONSUMPTION (C)
- The value of goods and services bought by households
- These include:
o Durable goods – goods that last a long time
Cars, home appliances
o Nondurable goods – goods that last a short time
Food, clothing
o Services – intangible items purchased by consumers
Dry cleaning, air travel
INVESTMENT (I)
- Spending on capital, a physical asset used in future production
- Includes:
o Business fixed investment – spending on plant and equipment
o Residential fixed investment – spending by consumers and landlords on housing
units
o Inventory investment – the change in the value of all firms’ inventories
GOVERNMENT SPENDING (G)
- Includes all government spending on goods and services
- Includes such items as military equipment, highways, and the services provided by
government workers
NET EXPORTS (NX)
- NX = exports – imports
- Exports: the value of goods and services sold to other countries
- Imports: the value of goods and services purchased from other countries
- Thus, NX = net spending from abroad on our goods and services
REAL GDP VS NOMINAL GDP
- Economists call the value of goods and services measured at current prices nominal GDP
- Nominal GDP can increase either because prices rise or because quantities rise
- Real GDP is the value of goods and services measured using a constant set of prices and
shows what would have happened to expenditure on output if quantities had changed but
process had not
Nominal GDP = Current year QTY x Current year price
Real GDP = Current year QTY x Base year price
REAL GDP CONTROLS FOR INFLATION
- Changes in nominal GDP can be due to:
GROSS DOMESTIC PRODUCT: EXPENDITURE AND INCOME
- To understand the meaning fully, we turn to national income accounting, the system used to
measure GDP and many related statistics
- GDP measures the flow of money and can be calculated by:
o Total income from production
o Total expenditure from production
- Total expenditure on domestically produced final goods and services
- Total income earned by domestically located factors of production
- Expenditure = income
- Ever rand spent becomes income for another
Circular flow expresses the
inflow/outflow between
firms and households
- A more precise definition of GDP:
Gross domestic product (GDP) is the market value of all final goods and services produced
within an economy in a given period of time
VALUE ADDED
- Value added is the value of output minus the value of the immediate goods used to produce
that output
- The production of goods has multiple stages, and each stage should be accounted for when
working out the value added to the production
- GDP = value of final goods and services = sum of value added at all stages of production
- The value of the final good already includes the value of the immediate goods
- By including immediate goods again -> Double Counting
EXPENDITURE COMPONENT OF GDP
- There are four expenditure components of GDP:
o Consumption (C)
o Investment (I)
o Government spending (G)
o Net exports (NX)
Y = C + I + G + NX
, - (Y) is the value of total output
- (C+I+G+NX) is the aggregate expenditure
- The equation is an identity – an equation that must hold because of the way the variables
are defined
- It is called the national income accounts identity
CONSUMPTION (C)
- The value of goods and services bought by households
- These include:
o Durable goods – goods that last a long time
Cars, home appliances
o Nondurable goods – goods that last a short time
Food, clothing
o Services – intangible items purchased by consumers
Dry cleaning, air travel
INVESTMENT (I)
- Spending on capital, a physical asset used in future production
- Includes:
o Business fixed investment – spending on plant and equipment
o Residential fixed investment – spending by consumers and landlords on housing
units
o Inventory investment – the change in the value of all firms’ inventories
GOVERNMENT SPENDING (G)
- Includes all government spending on goods and services
- Includes such items as military equipment, highways, and the services provided by
government workers
NET EXPORTS (NX)
- NX = exports – imports
- Exports: the value of goods and services sold to other countries
- Imports: the value of goods and services purchased from other countries
- Thus, NX = net spending from abroad on our goods and services
REAL GDP VS NOMINAL GDP
- Economists call the value of goods and services measured at current prices nominal GDP
- Nominal GDP can increase either because prices rise or because quantities rise
- Real GDP is the value of goods and services measured using a constant set of prices and
shows what would have happened to expenditure on output if quantities had changed but
process had not
Nominal GDP = Current year QTY x Current year price
Real GDP = Current year QTY x Base year price
REAL GDP CONTROLS FOR INFLATION
- Changes in nominal GDP can be due to:
