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Lecture 3 - National Income Accounting PDF

National income can be measured using three approaches: the expenditure approach, value-added approach, and factor payments approach. GDP is made up of consumption, investment, government purchases, and net exports. Consumption includes household spending on goods and services, while investment includes business spending on equipment and structures, inventory changes, and residential housing. Government purchases include government consumption and investment. Net exports are calculated as exports minus imports.

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0% found this document useful (0 votes)
157 views20 pages

Lecture 3 - National Income Accounting PDF

National income can be measured using three approaches: the expenditure approach, value-added approach, and factor payments approach. GDP is made up of consumption, investment, government purchases, and net exports. Consumption includes household spending on goods and services, while investment includes business spending on equipment and structures, inventory changes, and residential housing. Government purchases include government consumption and investment. Net exports are calculated as exports minus imports.

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David
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National Income Accounting_Pt2

• The Components of GDP


• Measurement of national income
– Expenditure Approach
– Value-Added Approach
– Factor Payments (or Income) Approach

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

• Capital is one of four factors of


production
– Itself produced; used to produce other
goods
– Oil drilling rigs, cash registers, factories,
etc
– Capital stock
• Sum of all capital goods in the country

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
17
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

• Net exports, NX = Exports - Imports


– Exports
• Spending on domestically produced goods
by foreigners
– Imports
• Spending on foreign goods by domestic
residents

20

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