Consumption is personal consumption expenditures (e.g. purchases of final goods and services). Consumption is the largest component of GDP and it includes nondurable and durable goods. Investment (Gross Private Domestic Investment) is spending on new capital goods and on net additions to inventories. It also includes new residential construction. It includes inventories. Gov. purchases include government spending for goods and services. It excludes transfer payments. Net exports are Exports-Imports.
The value added is the income earned by resource suppliers. “The value added at all stages sums to the market value of the final good, and the value added for all final goods sums to GDP based
Tracking the U.S. Economy
National Income Accounts
GDP (Gross Domestic Product)
What is it???
It measures the market value of all final goods and
services produced during a year by resources
located in the U.S., regardless of who owns the
National Income Account
It is based on the simple fact that one person’s spending
is another person’s income.
It is measured in two ways: Total spending of the U.S.
production or by the Total income received from that
What is included in GDP?
It includes only final goods and services, i.e. goods sold
to the final user.
Intermediate goods and services are not included.
These are goods that are purchased for resale.
This approach adds up spending on all final goods and
services produced during the year.
For the expenditure approach, its components are
divided into four:
This approach adds up earnings during the year by those
who produce all that output.
The income approach sums, or aggregates, income
arising from production.
Aggregate Income equals the sum of all the income
earned by resource suppliers in the economy.
SO… we can say :
Aggregate Expenditures = GDP=Aggregate Income
Value Added: At each stage of production, the value added to
the product. This is the selling price of the product minus the
cost of the intermediate goods purchased from other firms.
Disposable Income (DI)
The income households have available to spend or to
save after paying taxes and receiving transfer payments.
This is income that is adjusted for net taxes(NT).
This subtracts taxes and adds back transfer payments.
Take-home pay for households.
Expenditure Half of the Circular Flow
Where does DI (Disposable Income) go?
Part is spent on Consumption (C ) and part is spent on
Savings ( S).
Consumption remains in the circular flow
However, savings flows to financial markets- banks and other
Some Production is not included in GDP
It ignores all do-it-yourself production
Home maintenance and repair
It ignores off-the-book production
Some Other Limitations
Leisure, Quality, and Variety
It does not take into account depreciation
Net domestic product.
GDP does not reflect all costs.
GDP and Economic Welfare
It is based on the prices prevailing when production
Since, price levels change over time, then nominal GDP
cannot be compared across years.
It does not adjust for inflation!!
Base year- the point of reference year
Prices in other years are expressed relative to the base-year
A price index is constructed by dividing each year’s price in
the base year and then multiplying by 100.
The price index in the base year is ALWAYS 100.
Consumer Price Index (CPI)
The CPI measures changes over time in the cost of
buying a “market basket” of goods and services purchased
by a typical family.
The government used the 36 months of 1982 thru 1984
as the base period for calculating the CPI for a market
It is reported monthly.
Problems with CPI
It overstates inflation
It ignores the substitution effect.
It overstates inflation
Widely used products
GDP Price Index
It measures the average price of all goods and services
produced in the economy.
(Nominal GDP/Real GDP)*100
Fixed-weighted system; base year 1987
Chain-weighted system; base year 2000