Lecture 3 - National Income Accounting PDF
Lecture 3 - National Income Accounting PDF
1
The Components of GDP
2
The Components of GDP
• Consumption
• Investment
• Government Purchases
• Net Imports
– Exports
– Imports
3
Consumption
• Consumption, C
• The part of GDP purchased by households as
final users
• Spending by households on goods and
services
• Largest component of GDP
• Includes estimations for
– Food, fuel, clothes, haircuts, concerts,
etc
4
Consumption
• Households buy but not part of Consumption:
– purchases of new housing
– Used goods
• why exempted?
– Stocks, bonds and land
• Why exempted?
• Part of Consumption but households do not
buy:
– Total value of food stuffs produced on farms and
consumed by farmers and families
– Total value of housing services produced by
owner-occupied homes
5
Private Investment
6
Private Investment
• Investment defined as purchase of
goods used to produce other goods
– Capital formation
• Three components:
– Business purchases of plant, equipment,
and software
– New-home construction
– Changes inventory stocks
• Goods that have been produced but not yet
sold
7
Private Investment
• Business purchases of plant, equipment,
and software
• Why not considered as intermediate goods?
8
Private Investment
• Business purchases of plant, equipment,
and software
• Why not considered as Intermediate goods?
– Intermediate goods used up in production of this
year’s goods and services
– Firm’s plants, equipment and software lasts for
many years
» Only a small part used to make up current production
• Therefore, new plant, equipment and software
regarded as final goods
9
Private Investment
• New Home Construction
– Most new homes purchased by
households
• Why not included in Consumption?
10
Private Investment
• New Home Construction
– Most new homes purchased by
households
• Why not included in Consumption?
– Residential housing an important part of
country’s capital stock
• Measure of Private Investment should
correspond with increase in nation’s capital
stock
11
Private Investment
• Changes in Inventory
– Inventory: Goods that are produced but
not yet sold
• Goods on store shelves
• Goods making their way through the
production process in factories
• Raw materials waiting to be used
– Count changes in firms’ inventories as
part of investment in measuring GDP
12
Private Investment
• If do not include, could underestimate total
production of goods and services in a year
• Scenario
– In a year, automobile industry produced
$100bn worth of automobiles
• $80bn sold to customers
• Remaining unsold $20bn added to inventories
– If count consumption alone, we underestimate total
production
• Contribution to GDP is
$80bn(consumption) + $20bn(private
investment)= $100bn
13
Private Investment
• What if Inventory stocks decline during the
year?
• Scenario
– Automobile industry produced $100bn this
year, but sold $120bn
• Extra $20bn must have come from inventory
stocks
– Excluded. Why?
• Total contribution to GDP
$120bn(Consumption) + [-20bn(Private
Investment)]= $100bn
14
Private Investment
• Inventory added to nation’s investment
because unsold goods part of a nation’s
capital stock
– Provide services in the future when
finally sold and used
• An increase in inventories
– Increase in nation’s capital stock
• A decrease in inventories
– Decrease in nation’s capital stock
15
Private Investment
• Excludes
– Government investment
• Police cars, courthouses, fire stations, schools, etc
– Consumer durables
• Fridges, computers, washing machines, etc
– Human capital
• Additional skills and training acquired by workforce
during the year
• E.g. surgeon, electrician, police detective, etc
• Ignores depreciation
– Capital used up during the year
• Other measures of total income
16
Government Purchases
• Spending by state and local governments on
goods and services
• Government Investment
– Capital goods purchased by government
agencies
• Roads, hospitals, schools, etc
• Government Consumption
– Spending on goods and services that are
used up during the period
• Salaries of gov’t workers, computer paper for
gov’t offices, fuel for gov’t vehicles, electricity
used in gov’t building, etc
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Government Purchases
• Includes goods and services
– Goods
• Fighter jets, police cars, school buildings
– Services
• Performed by police, legislators, military, etc
18
Government Purchases
• Distinction between government purchases and
government outlays
• Outlays= purchases + transfer payments
• Does not include transfer payments
– Any payment that is not compensation for
supplying goods, services or resources
– Money redistributed from one group of citizens
(taxpayers) to another (the poor, the
unemployed, the elderly)
• Example: unemployment insurance benefit, welfare
payments, money disbursed to homeless shelters,
etc
• Why not included?
19
Net Exports
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