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 + Xn

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 (Xn)

• Net exports (Xn) = 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