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Cheat Sheet GDP and Its Component (From The Economy's Spending/expenditure Point of View)

GDP is the total market value of all final goods and services produced within a country in a given period. It is equal to the total expenditures (C + I + G + NX) in the economy. Only goods and services transacted in the formal market through buyers and sellers are counted in GDP. Self-serving housework and illegal transactions are not included. When a new house is purchased, it is counted as an investment (I) that produces housing services, which are counted as consumption (C). Transfer payments like welfare are not considered government spending (G) because they do not create new goods or services. Imports are deducted from components of GDP like C, I, and G since they are goods and services

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Nguyen Trung Kien ( Swinburne HN)
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417 views3 pages

Cheat Sheet GDP and Its Component (From The Economy's Spending/expenditure Point of View)

GDP is the total market value of all final goods and services produced within a country in a given period. It is equal to the total expenditures (C + I + G + NX) in the economy. Only goods and services transacted in the formal market through buyers and sellers are counted in GDP. Self-serving housework and illegal transactions are not included. When a new house is purchased, it is counted as an investment (I) that produces housing services, which are counted as consumption (C). Transfer payments like welfare are not considered government spending (G) because they do not create new goods or services. Imports are deducted from components of GDP like C, I, and G since they are goods and services

Uploaded by

Nguyen Trung Kien ( Swinburne HN)
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Cheat Sheet

GDP and its component (from the economy’s spending/expenditure point of


view)
- GDP is the market value of all final goods & services produced within a country
in a given period of time. This market value of goods & services hence equals the
total expenditures (spending) that the economy spends on them (Total expenditures
include: C+I+G+NX).
- Since GDP reflects market value of final goods and services, only goods and
services which are transacted in the formal market (then have the buyer and the
seller and price, in other words a market) are counted in GDP.
- Below are some special cases to remember:
 Self-serving house works or underground transactions (for example,
transactions of illegal drugs or illegal prostitution) which cannot be observed
are not counted.
 In the national income and product accounts, a house is considered a piece
of capital that is used to produce a flow of services – housing services.
Households need to pay a rental price for housing services. This rental price
paid by households is considered as a households’ consumption (C). When
someone buys a new house to live in, she is both a producer and a consumer.
As a producer, she has made an investment (the purchase of the house
causes an increase in I in GDP) that will produce a service. She is also the
consumer of this service, which is valued at the market rental rate for that
type of house. So, the accounting conventions treat this situation as if the
person is her own landlord and rents the house to/from herself (even though
there is no real market transaction between the renter and the rentee here).
 In economics, a transfer payment (or government transfer or simply transfer)
is a redistribution of income and wealth by means of the government making
a payment, without goods or services being received in return (hence there is
no exchange of money for goods and services or no transactions here). These
payments are considered to be non-exhaustive because they do not directly
absorb resources or create output. Examples of transfer payments include
welfare, financial aid, social security, and government making subsidies for
certain businesses. For the purpose of calculating gross domestic product
(GDP), government spending (G) does not include transfer payments, which
are the reallocation of money from one party to another rather than
expenditure on newly produced goods and services.

 Imports are the portions of C, I, and G that are spent on g&s produced
abroad; we need cross out imports when calculating GDP:

GDP=Y= C+I+G+NX
=C+I+G+EX-IM
=(Cdo+Cim)+(Ido+Iim)+ (Gdo+Gim)+EX-IM
IM= Cim+Iim+Gim
do: domestic produced goods

im: import goods

If Samsung builds a new factory (which is worth of 1 mil. dollars) in Vietnam, if we assume

that

 A. all equipment and factory buildings was made in Vietnam, in the same year,

 I rises by 1 mil. dollars and GDP increases by 1 mil.

 B. factory buildings was made in Vietnam, in the same year, worth 0.5 mil., while

other equipment and machines are imported for 0.5 mil.

 I rises 1 mil., net export reduces by 0.5 mil., GDP in the end rises by 0.5.

Investment increases by 1 mil. (Ido=0.5 ; Iim= 0.5), NX decreases by 0.5 mil. (-0.5

mil); net changes in GDP is 0.5 mil.

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