GDP From the Expenditure Side : GDP = C + I + G + (X - IM)

(calculated by adding up the expenditures needed to purchase the final output)

• Consumption expenditure (C)
• Investment expenditure (I)
» Inventories or stocks
» Plant and equipment
» Residential investment
» Gross investment or total investment (divided into two parts : replacement
investment and net investment)
• Government purchases of goods and services (G)
» Cost versus market value (government output is typically valued at cost rather
than at market value)
» Government purchases versus government expenditure (only government
purchases of currently produced goods and services are included as part of GDP,
transfer payments are not made in return for currently produced goods and
services)
• Net exports
» Imports (IM)
» Exports (X)
GDP From the Income Side
(involves adding up factor incomes and other claims on the value of output until all
of that value is accounted for)
• Factor payments
» Wages (compensation to employees)
» Rent (the payment for the services of land and other factors that are rented)
» Interest (earned on bank deposits, loans to firms, and other investment income)
» Profits (paid out as dividends to firms’ owners, the rest are retained for use by
firms)

• Non-factor payments
» Indirect taxes (taxes on the production and sale of goods and services)
» Subsidies (it is necessary to subtract government subsidies on goods and services,
since these payments allow incomes to exceed the market value of output)
» Net domestic product (the sum of wages, rent, interest, profit, and indirect taxes
net of subsidies)
» Depreciation (the distinction between net investment and gross investment)
• Total product (GDP is the sum of the factor incomes that are generated in the
process of producing final output plus indirect taxes net of subsidies plus
depreciation)
GDP and GNP
• GDP measures the total output produced in the country and the total income
generated as a result of that production
• GNP measures the total amount of income received by the residents, no matter
where that income was generated
• GDP is superior to GNP as a measure of domestic economic activity
• GNP is superior to GDP as a measure of the economic well-being of domestic
residents
• Disposable personal income is the part of national income that is available to
households to spend or to save
• Total GDP that is valued at current prices is a nominal measure, often called
nominal national income
• GDP that is valued at based-period prices is a real measure, referred to as real
national income
• Implicit price index or implicit GDP deflator is the most comprehensive available
index of the price level because it includes all the goods and services that are
produced by the entire economy

Implicit GDP deflator = (GDP at current prices / GDP at base-period prices) x 100
Output and Productivity
• Per capita GDP gives a measure of how much output there is on average for each
person in the country
• Labor productivity : GDP divided by the number of employed persons or average
output per employed worker
• Changes in overall living standards are better measured by changes in productivity
than by changes in per capita output

Omissions From GDP

• Illegal activities
• Unreported activities (underground economy)
• Non-market activities
• Economic “Bads”