Introduction to Macroeconomics ECO 104- Lecture outline.

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The Components of GDP according to expenditure approach:

Consumption (C) Investment (I) Government Expenditure (G) Net exports (NX)

Let Y stands for GDP, Y = C + I + G + NX

This equation is called National Income accounts identity.

Consumption consists of goods and households bought by households. Divided into three sub categories. Nondurable Goods: that lasts only for short period of time. (Food and clothing) Durable goods: that lasts a long time.(Cars and televisions)

Services: Hair cuts and Doctor visits.

Investment consists of goods bought for future use (will be used in production process). This also has three sub categories: Business Fixed Investment: (Purchase of new plants and equipments by firms) Residential Fixed Investment: (Purchase of New housing by households and landlords) Inventory Investment: Firms Increase in Inventories.

Government purchases are goods and services bought by federal, state and local government. Such as Military equipments, highways and the services that the government workers provide. This does not include the transfer payments to citizens. Net Exports Value of goods and services exported to other countries less the Value of goods and services that foreigners provide us.

Gross National Product: (GNP)

GNP = GDP + Factor Payments from abroad Factor payments to abroad Factor payments from abroad: Receipts of factor Income (Wages , Profit and Rent) from the rest of the world. (These factors are owned by the resident country) Factor payments to abroad: Receipts of factor Income (Wages , Profit and Rent) to the rest of the world. (These factors are owned by the foreign countries)

GDP measures the total Income produced domestically and GNP measures the total Income produced nationally. Under what circumstances GDP exceeds GNP? And vice versa? And GDP equals GNP? Net National Product: NNP = GNP depreciation.

Depreciation of Capital because the economys stock of plants, equipments and residential structures wear out every year. This is sometimes called consumption of fixed capital. An approximate percentage of GNP , say 10%. Depreciation of capital is the cost of producing output of the economy.

National Income: Net National Product Indirect Business Taxes. (Income taxes and sales taxes) Taxes are not included in Income. So National Income is the measurement about how much everyone in the economy has earned.

Rough estimate of how the NI is split:

Compensation of employees (70%): Wages and Fringe benefits Proprietors Income (9%) : Income of non corporate businesses (small firms, Law partnerships)

Rental Income(2%) Landlords Income (Imputed rent)

Corporate Profits(12%) Income of corporations after payments to workers Net Interest (7%) Interest paid by businesses less interest earned by the Business

Deriving Personal Income from National Income:

Personal Income= National IncomeCorporate Profits- Social Insurance contributions- net interest+ dividends+ Govt. transfers + personal Interest Income. Personal Disposable Income: Personal Income Personal Tax and Nontax Payments.