RETP A HC 6

Measuring National Outputand

National Income
-Expenditure Method

Prepared by: Fernando Quijano

and Yvonn Quijano

© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
 Final Goods and Services

• The term final goods and

services in GDP refers to
goods and services produced
for final use or consumption

• Intermediate goods are

goods produced by one firm for
use in further processing by
another firm.
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 Value Added

• Value added is the difference

between the value of goods as they
leave a stage of production and the
cost of the goods as they entered
that stage.
• In calculating GDP, we can either sum
up the value added at each stage of
production, or we can take the value of
final sales.
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 The Expenditure Approach

Expenditure categories:
• Personal consumption
expenditures (C)—household
spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.
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 The Expenditure Approach

Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
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 The Expenditure Approach

• The expenditure approach calculates

GDP by adding together the four
components of spending. In
equation form:

G D = CP + I + G + ( E X− I M )
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 Components of GDP, 1999:
The Expenditure Approach

Components of GDP, 2002: The Expenditure Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP
Personal consumption expenditures (C) 7303.7 69.9
Durable goods 871.9 8.3
Nondurable goods 2115.0 20.2
Services 4316.8 41.3
Gross private domestic investment (l) 1543.2 14.8
Nonresidential 1117.4 10.7
Residential 471.9 4.5
Change in business inventories 3.9 0
Government consumption and gross investment (G) 1972.9 18.9
Federal 693.7 6.6
State and local 1279.2 12.2
Net exports (EX – IM) − 423.6 − 4.1
Exports (EX) 1014.9 9.8
Imports (IM) 1438.5 13.8
Total gross domestic product (GDP) 10446.2 100.0
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Note: Numbers may not add exactly because of rounding.

Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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 Personal Consumption Expenditures

• Personal consumption expenditures (C)

are expenditures by consumers on the
following:
• Durable goods: Goods that last a relatively
long time, such as cars and appliances.
• Nondurable goods: Goods that are used up
fairly quickly, such as food and clothing.
• Services: Things that do not involve the
production of physical things, such as legal
services, medical services, and education.
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 Gross Private Domestic Investment

• Investment refers to the purchase of

new capital.

• Total investment by the private

sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private sector.
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 Gross Private Domestic Investment

• Nonresidential investment includes

expenditures by firms for machines, tools,
plants, and so on.

• Residential investment includes

expenditures by households and firms on
new houses and apartment buildings.

• Change in inventories computes the

amount by which firms’ inventories change
during a given period. Inventories are the
goods that firms produce now but intend to
sell later.
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 Gross Private Domestic Investment

• Remember that GDP is not the

market value of total sales during a
period—it is the market value of total
production.

• The relationship between total

production and total sales is:
GDP = final sales + change in business inventories
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 Gross Investment
versus Net Investment

• Gross investment is the total value of all

newly produced capital goods (plant,
equipment, housing, and inventory)
produced in a given period.
• Depreciation is the amount by which an
asset’s value falls in a given period.
• Net investment equals gross investment
minus depreciation.

net investment=Gross investment -depreciation

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 Government Consumption
and Gross Investment

• Government
consumption and gross
investment (G) counts
expenditures by federal,
state, and local
governments for final
goods and services.
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 Net Exports

• Net exports (EX – IM) is the

difference between exports and
imports. The figure can be positive
or negative.
• Exports (EX) are sales to foreigners of
U.S.-produced goods and services.
• Imports (IM) are U.S. purchases of
goods and services from abroad).
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 The Income Approach

• National income is the total income

earned by the factors of production
owned by a country’s citizens.
• The income approach to GDP
breaks down GDP into four
components:
GDP = national income + depreciation + (indirect
taxes – subsidies) + net factor payments to the rest
of the world + other
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 The Income Approach

Components of GDP, 2002: The Income Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP

National income 8,199.9 80.3

Compensation of employees 6,010.0 58.9
Proprietors’ income 943.5 7.3
Corporate profits 748.9 7.3
Net interest 554.8 5.4
Rental income 142.7 1.4
Depreciation 1,351.3 13.2
Indirect taxes minus subsidies 739.4 7.2
Net factor payments to the rest of the world 11.1 0.1
Other − 96.1 − 0.9
Gross domestic product 10,205.6 100.0
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Source: See Table 18.2.

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