Download GDP – Expenditure Approach

Principles of Macroeconomics
ECON203
Lecture 3: A Measure of Production and Income
(GDP)
Instructor: Turki Abalala
Recap of Last Lecture
 Gross Domestic Product (GDP) the main macroeconomic
indicator.
 Explain and interpret GDP.
ECON203 - 2nd Semester 2014
Class Outline
 Measurement approaches of GDP.
 Expenditure approach:
• The components of expenditure
• Measuring GDP using expenditure approach
 Exercises.
ECON203 - 2nd Semester 2014
Gross Domestic Product (GDP)
To measure GDP, there are two approaches commonly used in
economics:
1- The expenditure approach
2- The income approach
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
 The Expenditure Approach
Measures GDP by using data on consumption expenditure,
investment, government expenditure on goods and services,
and net exports.
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
 The Components of Expenditure
• Consumption expenditure (C) by households
• Investment (I) by firms
• Government expenditures (G) by governments
• Net exports (NX) by the rest of the world
The sum of the four components is Total Expenditure on goods and
services. Total Expenditure = C + I + G + NX
 Thus, total expenditure on final goods and services = the value
of output of final goods and services = [GDP]
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
 The table below shows the calculation for GDP of the US in
2009
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
1. Consumption expenditure (C)
Consumption Expenditure (C)
Nondurable
Goods
(The goods that
last short amount
of time -cosmetics,
food, cleaning
products, fuel,
etc.)
Durable Goods
Service
(The goods that
last long timecars, appliances,
business
equipment,
electronic
equipment, etc.)
(utilities bills,
road tax, etc.)
ECON203 - 2nd Semester 2014
House &
Apartment
Rents
(the rental
value of
owner –
occupied
housing)
GDP – Expenditure Approach
2. Investment (I)
• The purchase of new capital goods (durable goods produced
by one firm and bought by another such as tools,
instruments, machines and building) produced by one firm
and bought by another and additions to inventory.
• New homes purchased by households are included in (I).
• Purchasing stocks and bonds are NOT included in (I).
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
3. Government Expenditure (G)
The expenditure by all levels of government on goods and
services. Example: Spending on defense, judicial and education
system. Yet, it excludes government transfers like social security
and unemployment.
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
4. Net Exports (NX)
• The value of exports (X) minus the value of imports (M).
• Export of Goods and Services are items that the firms in the
country produce and sell to the rest of the world.
• Imports of Goods and Services are items that households ,
firms ,and the government in the country buy from the rest
of the world.
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
 The Total (Aggregate) Expenditure of four groups as follows.
GDP = Total Expenditure
= C + I + G + (X-M)
= C + I + G + NX
NX refers to net exports that could be either positive or
negative
ECON203 - 2nd Semester 2014
GDP – Expenditure Approach
 Expenditures Not in GDP
• Used Goods
Expenditure on used goods is not part of GDP because these
goods were part of GDP in the period in which they were
produced and during which time they were new goods.
• Financial Assets
When households buy financial assets such as bonds and
stocks, they are making loans, not buying goods and services.
ECON203 - 2nd Semester 2014
Exercises
Which (if any) of the following transactions would be included
in Saudi Arabia’s measure of GDP?
1. Mohammed Abdullah spends SAR 2,000 buying shares
2. Talal Mohammed buys an old car at auction by SAR20,000
3. Khaled is a university student and receives an allowance of
SAR150 from his father each week
4. Khaled spends his SAR150 allowance on petrol and soft
drinks
5. Changes in stocks of furniture valued at SAR2 million
6. Lettuces grown in my vegetable garden but not selling
7. Timber purchased by the furniture manufacturer
8. Nizar purchase of a Saudi Airline ticket
ECON203 - 2nd Semester 2014
Reference
Chapter 5 of “Foundations of Macroeconomics”
Pages 119-120
ECON203 - 2nd Semester 2014
Now it’s over for today.
Any question?
ECON203 - 2nd Semester 2014