Hello everyone, in this video we are going to learn about measuring GDP using expenditure approach. In expenditure approach what we do is we try to consider the market value of all the final goods that are being purchased in the economy. That means all you need to do is consider the money amount final users paid for the goods and services.
If you consider everybody's expenditure that becomes GDP in the economy. We consider total of four different groups in the economy. That's what comes for GDP in the expenditure approach.
That is C, IG, G and XN. C representing consumers expenditure, IG is gross private domestic investment, G representing government purchases and last one XN representing net exports. First let's look at personal consumption expenditure. The expenditure of all the households or consumers in the country on three different goods, that is durable goods, non-durable goods, and services. So if you look into this one, durable goods, products that have expected life of three years or more, such as car or appliances in the house or furniture, those kinds of things.
Second thing that comes is non-durable goods, product with less than three years of expected life, such as food especially, and also clothing comes as part of it, most clothing. Services. So services is basically work done by the service providers, such as teachers, doctors, and realtors, financial analysts, those kind of things. All those services, what we spend money, also goes as part of the GDP. In any given year, if you're considering a typical year, Our personal consumption expenditure on durable goods is about 10%.
And non-durable goods, we spend a lot, that is 30%. And overall, 60% we spend on services. Since we spend more on services, US economy is also known as service-oriented economy or service economy.
Second part of GDP that comes is, after C, we're including IG. IG representing... investment expenditure by all the firms in the economy.
What all it includes? One of the important investment is purchase of new construction and machinery, purchase of new machinery. The other thing that also considered as part of the investment is suppose if a firm is able to produce a good and not able to sell, since the GDP is supposed to be the value of all the final goods and services produced. We also include any changes in the inventories. If inventories is increasing, that means it is added to the GDP as a positive number.
If inventories are decreasing, that means you're selling more, but the goods were produced in the previous year. So in that case, we subtract it. We'll take it as a negative. And also the other thing that comes is firms spend in research and development for developing the new products that also goes as part of the investment.
Now, Anytime GDP we are saying gross private sorry gross domestic product we want to look at the net domestic product that's where we have to look at depreciation. Depreciation is the amount of capital being used in each year. There is another name for this we also call this as consumption of fixed capital.
That means instead of gross investment if you want to calculate net investment all we have to do is from the investment you need to get rid of the depreciation. Third thing that comes as part of the GDP is government spending and also net exports. Net exports is exports minus imports, as you can see.
Let's look at the government purchases. Government purchases include expenditure on two main things. One is purchasing goods and services to provide public goods. Anytime public goods or public services need to be provided, that means they need resources. That means that resources could be...
purchase through the system. Since we don't add the value of public services directly, we need to add the value of the resources used in terms of providing public services. Second thing that comes is public owned capital, expenditure on public owned capital. The thing that government spends that we don't include in GDP is transfer payments.
Suppose if a government is giving subsidies or some kind of payments to the people or individuals or firms, that is not included if it doesn't provide any overall output to the economy. Next thing that we want to include here is net domestic product. All the difference that comes is getting rid of depreciation.
So take gross domestic product minus depreciation. The other thing that we need to look at in terms of NIPA calculation is converting nominal GDP into the real GDP. All we do is for converting, we use the price index and we adjust it because nominal GDP includes current year prices.
To adjust that one, to calculate real GDP, we need to divide that by a price index. Anytime you hear GDP without saying whether it's nominal or real, We need to assume that is real GDP. Now, let's use some calculation here.
Now, consider in this example, if you're giving these details, personal consumption expenditure, consumption of fixed capital, gross, private, domestic investment, government purchases, exports and imports. If you want to calculate these values, what we're going to do. First one is net exports.
If it is net exports, the formula we use is exports minus imports. Okay, so we have to take exports value, which is 65. Imports is 85. That means net exports is negative 20. Calculating GDP from expenditure method, that has to be C plus G plus IG plus XN. So consider all the values. C in this economy is 4500. That is personal consumption expenditure.
G government purchases. Government purchases is 950. IG is gross private domestic investment, which is 800. And finally, net exports, net exports is 20. If you add all of them together, the GDP in this economy is 6,230. That's what is the GDP.
Next one, we are looking at net private domestic investment. All we have to do is we need to get rid of depreciation. So depreciation in this economy, if you see the table, you have consumption of fixed capital which is given as 150 so ig is 800 getting rid of depreciation of 150 the net private domestic investment is 650. finally ndp okay so ndp is we have to take gdp again minus to get rid of the depreciation in this okay so gdp is 6230 that we calculated already minus depreciation is 150. if you do that The value of this one is going to be 6080. Okay, so 6080. That's the way we calculate using expenditure method in terms of GDP.
One last thing that we want to look at is what is the relationship between GDP and unemployment and GDP and inflation? So which of the following is most likely leads to higher unemployment? Higher unemployment means basically output. produced is decreased if you are focusing only on the output that should be represented by real gdp so if unemployment increasing that means real gdp is decreasing so answer to this has to be looking at the real gdp okay so real gdp in this case um is this one okay so that means answer is basically c which of the following is most likely to be an indicator of inflation inflation means price level has to increase So output may or may not increase. Okay, so to represent that one, we have to focus on nominal GDP.
So whenever nominal GDP increases, that's an indicator that inflation may be kicking in in the economy. So the answer for this is going to be B.