Chapter 6 Presentation 2- GDP Calculation

Two Ways of Calculating GDP 1. The Expenditures Approach- looks at all of the money spent buying a product 2. The Income Approach- looks at the income derived from producing the product

The Expenditures Approach Add up all of the spending on final goods and services throughout the year GDP = Personal Consumption Expenditures + Gross Private Domestic Investment + Government Purchases + Net Exports GDP = C + I + G + X n

Personal Consumption Expenditures (C) Includes expenditures by households on durable goods (cars appliances etc), nondurable goods (bread, milk etc.) and services (law fees, doctors, mechanics)

Gross Private Domestic Investment (I) Includes: 1. Final purchases of machinery, equipment and tools by businesses 2. All construction 3. Changes in inventories

Gross Private Domestic Investment (I) Contd. 1. Additions to inventories mean that goods produced during a given year were not purchased---they are still added to GDP 2. Decrease in inventories means that goods produced the previous year are sold and should be subtracted from GDP since their value was already counted in a previous year

Government Purchases (G) Includes: 1. Expenditures for goods and services the government consumes in providing public services 2. Expenditures for social capital such as schools and highways

Net Exports (X n ) Net exports (X n ) = exports (X) – imports (M) If imports are greater than exports, the number is subtracted from GDP Ex- in 2005 the US imported $727 B more than we exported, so net exports were minus $727 B