Presentation on theme: "Principles of Macroeconomics"— Presentation transcript:
1 Principles of Macroeconomics ECON203, Lecture 4: A Measure of Production and Income (GDP) Instructor: Turki Abalala
2 Recap of Last Lecture Measurement approaches of GDP. Measuring GDP using Expenditure approach.
3 Class OutlineIncome Approach to measure GDPStatistical Discrepancy
4 GDP – Income ApproachGDP: the aggregates of all the incomes earned by resource suppliers in the economy.The Income approach measures GDP by summing the incomes that firms pay households for the factors of production they hire (wages for labor, interest for capital, rent for land, and profit for entrepreneurship)To measure GDP using income approach, the Bureau of Economic Analysis uses income data collected by the Internal Revenue Service and others.BEA takes the incomes that firms pay households for the services of the factors of production they hire- wages for labor, interest for the use of capital, rent for the land, and profit for entrepreneurship~ and sum those incomes.
5 GDP – Income ApproachThe national Income can be divided into two big categories:Wage Income “Compensation employees”: payments for labor services“Interest, Rent and Profit Income “Net operating surplus”: other factors of production incomes:Net interest.Rental income. (including imputed rent)Profit income: Corporate profit and Proprietors’ income.The sum of wage, interest, rent, and profit equals Net Domestic Product at Factor Cost (not GDP yet!!).
7 GDP – Income ApproachNet Domestic Product at Factor Cost is the sum of wages, interest, rent, and profits. Net Domestic Product is Not GDPTo arrive to GDP, it needs two further adjustments:From factor cost to market price:Add indirect taxesSubtract subsidiesFrom net product to gross product:Add depreciation to total incomeDepreciation is the decrease in the value of capital that results from its use and from obsolescence.
9 GDP – Income ApproachWhy GDP using Expenditure approach is different from GDP using Income approach?
10 GDP – Income ApproachIn fact, the income approach and the expenditure approach do not deliver exactly the same estimate of GDP because there is a statistical discrepancy.Statistical discrepancy: the discrepancy between the expenditure approach and income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total.
12 GDP – Income Approach Productions that are not included in GDP: With some minor exceptions, GDP includes only those products that are sold in marketsIgnores “do-it-yourself” household production an economy in which householders are largely self-sufficient will understate GDPIgnores the underground economy: all market activity that goes unreported because it’s illegal or those involved want to evade taxes
13 ReferenceChapter 5 of “Foundations of Macroeconomics” Pages
14 Exercises on measuring GDP using both approaches Basic QuestionsWhat does GDP stand for?Define GDP?Why do we need to study GDP?How to measure GDP?What are the components of GDP using the expenditure approach?ECON203; Section: EA
15 Exercise 1Classify each of the following items as a final good or service or an intermediate good or service and identify which is a component of consumption expenditure, investment, or government expenditure on goods and services:Banking services bought by a student.New cars bought by Hertz, the car rental firm.Newsprint bought by USA Today .The purchase of a new limo for the president.New house bought by Al Gore.ECON203; Section: EA
16 Exercise 2Use the figure below, which illustrates the circular flow model, to work Problems 1 and 2.Problem 1: During 2008, in an economy:■ Flow B was $9 trillion.■ Flow C was $2 trillion.■ Flow D was $3 trillion.■ Flow E was –$0.7 trillion.Name the flows and calculate the value of1. Aggregate income.2. GDP.Aggregate Income = = 13.3GDP= aggregate expenditure = aggregate income = 13.3ECON203; Section: EA
17 Exercise 2 Problem 2: During 2009, Flow A was $13.0 trillion, Flow B was $9.1 trillion,Flow D was $3.3 trillion,Flow E was –$0.8 trillion.Calculate the 2009 values of1. GDP.2. Government expenditure1- GDP = Flow A = 13 trillion2- Government Expenditure = G = Flow CF.A = F.B + F.D + F.C + F.E13 = FC – 0.8FC = 1.4ECON203; Section: EA
18 Exercise 3The table below gives the values of different expenditures in the United States during Q1. What was the value of net exports in 1999? Q2. What was GDP using income approach in 2009? Q3. What was the statistical discrepancy in 2009? and the value of total production?ItemBillions of dollarsInvestmentNet domestic product at factor costConsumption expenditureGovernment expenditure on goods and servicesIndirect taxes less subsidiesExports of goods and servicesImports of goods and servicesDepreciation1,57688007,9451,6306697681450700Q1. NX = Export – Import= 768 – 1450 = -682Q2. Net Domestic Product at Factor cost + Indirect taxes less subsidies + Depreciation= = 10169Q3. Statistical Discrepancy = Total Expenditure – Total Income= – = 300Value of total production = 10469ECON203; Section: EA
19 Exercise 4The table below shows some items in the US National Income and Product Accounts in Calculate GDP in 2005 using expenditure approach.The Commerce department reported that sales of nondurable goods fell 0.6%, while sales of durable goods decreased 1.5% in August. Inventories of durable goods increased 1.4%.Which component of GDP will be affected for each change?ItemBillions of dollarsConsumption expenditureGovernment expenditure on goods and servicesIndirect taxes less subsidiesDepreciationNet factor income from abroadInvestmentNet exportStatistical discrepancy126.96.36.199.50.12.0-0.7Nondurable goods fell 0.6% = consumption expenditure fell by 0.6%Durable goods decreased 1.5% = consumption expenditure fell by 1.5%Inventories of durable goods increased 1.4%. = investment increased by 1.4%ECON203; Section: EA
20 Exercise 5The following table shows some of the items in Saudi Arabia’s National Income and Product Accounts in 2012.Calculate Saudi Arabia’s GDP using Income approach?ItemValue in Billions of RiyalsExpenditure on used goods370Subsidies (benefits from the government to firms)300Gross Investment1200ImportsGovernment Expenditure2500Wages (compensation of employees)5000Indirect Taxes800Exports2000Expenditure on durable goods1900Consumption Expenditure6500Statistical discrepancy500GDP = GDP using expenditure approach – statistical discrepancy= [ (2000 – 1200) ] – 500= – 500= 10500
21 Exercise 6Use the following data to calculate aggregate expenditure and imports of goods and services.Government expenditure: $20 billionAggregate income: $100 billionConsumption expenditure: $67 billionInvestment: $21 billionExports of goods and services: $30 billion* Aggregate Expenditure = Aggregate Income = 100 billion100 = ( 30 – M )M = – 100M = 38ECON203; Section: EA
22 Now it’s over for today. Any question? HBC608ECON582HBC608HBC608Now it’s over for today.Any question?Finance NotesFinance notesFinance notes22