which of the following are included in the expenditure approach to measuring gdp? This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you Expenditure Approach to Measuring GDP. Following along are instructions in the video below:
“Everyone as you learned in the circular flow diagram video. You can measure gdp or or the size of the economy. Three different ways you can look at total amount income generated the total amount of stuff produced or you can go ahead and just look at the total amount of expenditures in the economy turns out this third way is going to be the most important one that we use throughout the course. I just wanted to spend a little bit of time clarifying things so first some abbreviations.
We re going to use capital. Why is our abbreviation for gross domestic product. That s pretty typical macroeconomics your book follows the same convention and that s the one. I m going to use as well so that s going to be total amount of gdp or the total amount of expenditures or total amount of income generated.
So at times. You re going to hear me refer to why is gdp you might hear me refer to it why is income or you might hear me refer to it as y as output. It s because if you think in terms of the circular flow diagram all three of those things are exactly the same so there s no real difference right next there s going to be for expenditure categories. It s going to be consumption expenditures.
So this is consumption and this is household consumption. So this is explain expenditures by people like you and me if we go out we buy a car if we go out and buy clothes we buy food we get a night in a hotel. We go on vacation. All those things are consumption expenditures.
So these are things that you spend money on them. And you get the benefit for them immediately now. There s two basic types of consumption expenditures that we might talk a little bit later on there are durable goods non durable goods and services so services are things like hotel services you run in a hotel room for hundreds and now you re getting the service you re consuming the service right as you purchase the good non durable goods are goods that last less than say three years is i believe a government official. Distinction and there are things like food where if you buy a bag of apples you re probably going to eat that within a year or you probably going to eat that within three years more than likely within a few days so these are goods that don t last.
Very long. They re they tend to be bought and then consumed in a relatively short period of time durable goods are things like cars refrigerators household electronic appliances things like that that are expected to last longer than three years okay so consumption also happens to be the largest category of expenditures. So you might hear people saying consumers derive. The us economy and to some extent.
That s true consumption expenditures are a little bit more of seventy percent of gdp right now all right well let me erase a little bit about this so we ve got consumption in addition. We also have the next big category is investment expenditures. Now one of the things that might make economics. A little confusing especially for those of you who know a little bit of finance is we don t use investment in the same sense here as you would in a finance class.
So for us investment is not the purchase of a stock or a bond. It s the purchase of a capital good so these are things such as computers factories machines robots assembly lines all those things that are used to produce other goods and services. That s generally what we re thinking of when we say investment. We re talking about investment in new capital goods investment in stocks and bonds so i would call purchasing stocks and bonds financial investment building a new factory that s investment in the sense that i m using the term and in this course.
We re going to go ahead and define investment basically three different types of expenditures or investment. They re either new plant and equipment. Which is the one i was just talking about inventories turns out are part of investment your book talks about why. But if firms spends a billion dollars this year building up its inventories of cars or phoo our cars or computers.
And that s considered investment likewise. If during the course of the year. The company lets its stock of cars or stock of let s say in goods and services selling fall by a billion dollars. Then inventory investment would be negative 1 billion and last new residential construction.
So if a house is it bought this year. And sold to the first owner who s going to occupy it that would count as investment expenditures. My investment expenditures usually between 15 and 20 percent of gdp all right so those are the first two major categories. Which are consumption and investment expenditures.
Now we re going to talk about government expenditures and these are on goods and services on goods and services. Okay meaning these are expenditures that when the government makes them it gets an actual honest to god good or service in exchange for its money. So for example. The government goes out it builds a road.
The government s getting the role of the road. So those expenditures count as part of government spending. If the government goes out and buys a tank. It s getting the tank in exchange for the money.
It spent on it therefore. It s that spending on the tank is counted as government expenditures. However not all government expenditures are on goods and services. So not all of them will directly affect gdp in this way that we re going to talk about in a minute.
So for the classic example of those would be things like unemployment insurance. If you re unemployed. The government s giving you money and by definition you re not producing a good or service. So expenditures and things like unemployment would not count as part of government expenditures here in fact we would call things like unemployment insurance welfare payments.
Social security. All those types of it spending. We actually call transfer payments and we ll talk more about those later on in the semester. But the important point to remember right now is there s basically two types of government spending.
One government expenditures on goods and services roads tanks bridges. That type of thing we re going to label as g and it s going to be a component of trust domestic product. The other type of government spending is transfer payments. These are expenditures that the government gets no good or service in exchange for and we ll talk about transfer payments later on all right.
So let s raise this so government spending is the third category of expenditures and the last. But not least is nx for net exports. It just means if you think about things from the point of view of the united states you just say net exports equal exports. All the goods and services that the us exports to other countries imports.
Which is all the goods and services that the united states imports from other countries whether it s japan mexico chopped. China korea canada wherever all right now i don t want to talk too much about this right now. But if net exports are greater than zero. Then that s a surplus trade surplus.
So right now china has a trade surplus. So that just means. It s exporting more goods and services that it s important if on the other hand that exports are less than zero. Then you ve got what we call a trade deficit.
So today the us economy imports more goods and services than it exports therefore we re running a trade deficit all right so these are the basic categories of expenditures. It s just these for consumption investment government and net exports and all together. They re going to make up gdp and i think it s worthwhile to go ahead and point out important equation. We re going to use repeatedly in this course and it s just this expenditures on excuse me the total amount of expenditures in the economy or gdp or the total amount of income that is generated is just going to equal the sum of consumption.
Plus investment. Plus. Government plus net exports and for the size of the economy. To increase either.
Consumption expenditures have to go up investment expenditures have to go up government spending. Our government expenditures on goods and services have to rise or net exports have to rise one of those four things has to happen for the economy to expand okay and so later on in the course when we build a model call of aggregate demand and aggregate supply side of the economy. We re going to be talking a lot about this and we ll be talking a lot more about it through early throughout the semester. So this is a pretty important equation use one of those things you should just go ahead and memorize so its gdp equals consumption.
Plus investment plus government plus net exports. All right so that is what i want to talk about for this just basic accounting identity. It s very important for one for you remember and as i said we ll come back to it ” ..
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