1. Principles of Macroeconomics ECON203 Lecture 3: A Measure of Production and Income (GDP) Instructor: Turki Abalala

2. Recap of Last Lecture  Gross Domestic Product (GDP) the main macroeconomic indicator.  Explain and interpret GDP. ECON203 - 2nd Semester 2014

3. Class Outline  Measurement approaches of GDP.  Expenditure approach: The components of expenditure Measuring GDP using expenditure approach  Exercises. ECON203 - 2nd Semester 2014

4. 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

5. 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

6. 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

7. GDP – Expenditure Approach  The table below shows the calculation for GDP of the US in 2009 ECON203 - 2nd Semester 2014

8. GDP – Expenditure Approach 1. Consumption expenditure (C) Consumption Expenditure (C) Nondurable Goo ds (The goods that last short amount of time -cosmetics, food, cleaning products, fuel, etc.) Durable Goods (The goods that last long time- cars, appliances, business equipment, electronic equipment, etc.) Service (utilities bills, road tax, etc.) House & Apartment Rents (the rental value of owner – occupied housing) ECON203 - 2nd Semester 2014

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Reference Chapter 5 of “Foundations of Macroeconomics” Pages 119-120 ECON203 - 2nd Semester 2014

16. Now it’s over for today. Any question? ECON203 - 2nd Semester 2014