Lecture Notes: Calculating GDP

Introduction

• Two ways to measure GDP:
  • Expenditure Approach
  • Income Approach
• Focus: Expenditure Approach (most preferred by economists)
• Next video: Income Approach

Expenditure Approach

• GDP Formula: Y = C + I + G + (X - M)
  • Y: GDP (also represents income in economics)
  • C: Personal Consumption Expenditures
  • I: Gross Private Domestic Investment (GPDI)
  • G: Government Spending
  • X - M: Net Exports (Exports - Imports)

Personal Consumption Expenditures (C)

• Main driver of U.S. economic growth (~70% of GDP)
• Three categories:
  1. Durable Goods
     • Useful life of at least 3 years
     • Examples: Cars, computers, appliances
  2. Non-durable Goods
     • Useful life less than 3 years
     • Examples: Clothing, food, soap
  3. Services
     • Consumed at time of purchase
     • Examples: Haircuts, car washes, financial services

Gross Private Domestic Investment (I)

• Includes:
  • Investment in structures (residential and business)
  • Equipment and software purchases
  • Changes in business inventories
• Accounts for ~15-20% of GDP
• Fluctuates with the business cycle (higher in good times, lower during recessions)

Government Spending (G)

• Comprises federal, state, and local government spending
• Includes wages, goods and services from private businesses, and public investment
• Accounts for ~20% of GDP
• Varies with political administration and policies

Net Exports (X - M)

• Exports (X): U.S. goods sold overseas (e.g., tech, cars, agriculture)
• Imports (M): Foreign goods bought by U.S. (e.g., cars, oil, textiles)
• Generally, imports exceed exports in the U.S., leading to a negative net export figure (~ -3% to -5% of GDP)

Summary

• Components of GDP: Consumption, Investment, Government Spending, Net Exports
• Expenditure approach provides a framework to understand GDP calculation
• Further details and analysis to be covered in subsequent lectures