1. Introduction & The Expenditure Approach
GDP
Introduction & The Expenditure Approach

2. The Circular-Flow Diagram

3. Wages, rents, interest, profits
The Circular Flow
Wages, rents, interest, profits
Firms (production)
Household
Factor services
Goods
Government Spending
Other countries
Financial markets
Government
Taxes
Savings
Investment
Personal consumption
Exports
Imports
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

4. The National Accounts
Households earn income via the factor markets from wages, interest on bonds, dividends on stocks, and rent on land.

5. An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy

6. Income from the Factor Market
Income received by Households
Wages
Rent
Interest
Profit
Factors of Production
Labor
Land
Financial Capital
Physical Capital

7. The National Accounts
Via the financial markets, private savings is channeled to firms for investment spending (I).

8. An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy

9. Investment Spending
Spending on productive physical capital and changes to inventories
Inventories seen as contributing to the future sales of the firm
Spending on additional inventory adds to Investment spending
Drawing down inventories is counted as fall in Investment spending

10. The National Accounts
Government purchases of goods and services (G) is paid for by tax receipts as well as by government borrowing.

11. An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy

12. The National Accounts
Exports (X) generate an inflow of funds into the country from the rest of the world
imports (IM) lead to an outflow of funds to the rest of the world. Foreigners can also buy stocks and bonds in the U.S. financial markets.

13. An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy

14. GDP=C+I+G+(X-IM) C I G X IM Consumer spending Investment Government
Exports
Imports

15. What Is GDP?
GDP is the nation’s expenditures on all FINAL goods and services produced during the year at market prices.
9-3
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

16. The Flow Not Stock
With GDP we are measuring a Flow or a movement NOT a Stock
The store of wealth is a stock concept.

17. How Much is a Stock Concept A Stock Concept
An adult male of average size normally has about 6 quarts (5.6 liters) of blood.
This is an stock concept.
How Much is a
Stock Concept

18. GDP is a flow concept
The same way your blood pressure is the same on both arms
In Macroeconomics
Expenditures
Equals
Income
Income Arm
Measuring GDP is similar to taking your blood pressure.
Expenditure Arm

19. How GDP Is Measured?
Income (wages, salary, rent, interest, profits) $
Households
Firms $
Expenditures by Consumers, Investors, Government, and Net Exports
9-6
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

20. How GDP Is Measured? $ Same As $
Income (wages, salary, rent, interest, profits) $
Same As
Households
Firms $
Expenditures by Consumers, Investors, Government, and Net Exports
9-7
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

21. How GDP Is Measured? $ Same As $
Income (wages, salary, rent, interest, profits) $
Value of what is produced
Same As
Households
Firms
Value of what is spent $
Expenditures by Consumers, Investors, Government, and Net Exports
9-8
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

22. How GDP Is Measured? $ Same As $
Income (wages, salary, rent, interest, profits)
Flow of Income Approach $
Value of what is produced
Same As
Households
Firms
Expenditures Approach
Value of what is spent $
Expenditures by Consumers, Investors, Government, and Net Exports
9-9
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

23. How GDP Is Measured? $ Same As $ (GDP = C + I + G + Xn )
Income (wages, salary, rent, interest, profits)
Flow of Income Approach $
Value of what is produced
Same As
Households
Firms
Expenditures Approach
Value of what is spent $
Expenditures by Consumers, Investors, Government, and Net Exports
(GDP = C + I + G + Xn )

24. The Components of GDP, 2000 (in $ billions)
Consumption
Durable goods …………$ 820
Nondurable goods …….. 2,010
Services ……………….. 3,929
Total C …………………………….$6,759
Investment
Plant & Equipment …….$ 1,361
Residential Housing ……
Inventory change ………
Total I ……………………………….1,834
Government Purchases
Federal ………………….$
State and Local …………. .1,148
Total G ……………………………..$1,743
Net Exports (Xn)
Exports ………………….$ 1,099
Imports …………………..- 1,466
Xn …………………………………$ - 370
GDP …… …………………………$9,966
The Components of GDP, 2000 (in $ billions)
9-4
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

25. The Components of GDP, 2000 (in $billions)
Consumption
Durable goods …………$ 820
Nondurable goods …….. 2,010
Services ……………….. 3,929
Total C …………………………….$6,759
Investment
Plant & Equipment …….$ 1,361
Residential Housing ……
Inventory change ………
Total I ……………………………….1,834
Government Purchases
Federal ………………….$
State and Local …………. .1,148
Total G ……………………………..$1,743
Net Exports (Xn)
Exports ………………….$ 1,099
Imports …………………..- 1,466
Xn …………………………………$ - 370
GDP …… …………………………$9,966
The Components of GDP, 2000 (in $billions)
GDP = C I G Xn
GDP =6,759+1,834+1,743+(-370)
GDP = 9,966
9-5
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

26. GDP is a flow concept In Macroeconomics Expenditures Equals Income Arm
Expenditure Arm

27. What’s measured on the income side?
Income received by Households
Wages
Rent
Interest
Profit
Factors of Production
Labor
Land
Financial Capital
Physical Capital