Measuring GDP Using Expenditure Approach

Overview

• GDP is measured by considering the market value of all final goods purchased in the economy.
• The expenditure approach considers the total expenditure of four groups: C, IG, G, and XN.
  • C: Consumer Expenditure
  • IG: Gross Private Domestic Investment
  • G: Government Purchases
  • XN: Net Exports

Components of GDP

1. Personal Consumption Expenditure (C)

• Durable Goods: Products with lifespan of 3+ years (e.g., cars, appliances).
• Non-Durable Goods: Products with lifespan less than 3 years (e.g., food, clothing).
• Services: Work done by service providers (e.g., teachers, doctors).
• Expenditure breakdown:
  • Durable goods: 10%
  • Non-durable goods: 30%
  • Services: 60%
• U.S. economy is service-oriented due to high service expenditure.

2. Gross Private Domestic Investment (IG)

• Includes new construction, machinery, and changes in inventories.
• Increase in inventories adds to GDP, decrease subtracts from GDP.
• Includes spending on R&D.
• Difference between Gross and Net Investment involves accounting for Depreciation (Consumption of Fixed Capital).

3. Government Purchases (G)

• Includes expenditure on goods/services for public and expenditure on public-owned capital.
• Does not include transfer payments (e.g., subsidies).

4. Net Exports (XN)

• Calculated as Exports minus Imports.

Calculating GDP and NDP

• GDP = C + IG + G + XN
  • Example Calculation: C = 4500, G = 950, IG = 800, XN = -20.
  • GDP = 4500 + 950 + 800 - 20 = 6230
• Net Private Domestic Investment = IG - Depreciation
  • Example: IG = 800, Depreciation = 150, Net Investment = 650
• Net Domestic Product (NDP) = GDP - Depreciation
  • Example: GDP = 6230, Depreciation = 150, NDP = 6080
• Real vs Nominal GDP
  • Real GDP accounts for inflation using a price index.

Relationship with Unemployment and Inflation

• Unemployment: High unemployment indicates a decrease in real GDP.
• Inflation: Increase in nominal GDP suggests potential inflation.
  • Real GDP reflects output changes, while nominal GDP reflects price level changes.

Key Points

• Higher unemployment correlates with decreasing real GDP.
• Indicators of inflation include rising nominal GDP.