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Bienvenuto
Measuring the
“When you can measure what you are speaking about,
and express it in numbers, you know something about
economy
it; when you cannot measure it, when you cannot
express it in numbers, your knowledge is of a meager
and unsatisfactory kind; it may be the beginning of
knowledge, but you have scarcely, in your thoughts,
advanced to the stage of science.”
-Lord Kelvin
GNP vs. GDP
Aggregate expenditure
- Total expenditure on final goods and services, equals the
value of output of final goods and services, which is GDP.
- Total expenditure= C+ I+ G+ (X–M).
The circular flow demonstrates how GDP
can be measured in two ways.
Aggregate income
- Aggregate income earned from production of final goods,
Y, equals the total paid out for the use of resources, wages,
interest, rent, and profit.
- Firms pay out all their receipts from the sale of final
goods, so income equals expenditure,
- Y= C+ I+ G+ (X–M).
Gross Domestic Product ( GDP )
Expenditure approach
The expenditure approach measures GDP as the sum of
consumption expenditure, investment, government purchases of
goods and services, and net exports.
GDP(E)= household final consumption expenditure + final
consumption expenditure of non-profit serving households +
general government final consumption expenditure + gross
capital formation + exports – imports
The Bureau of Economic Analysis uses
two approaches to measure GDP :
Y= C + I + G + NX
Consumption ( C )
Y= C + I + G + NX
The Bureau of Economic Analysis uses
two approaches to measure GDP :
Income approach
The income approach measures GDP by summing the incomes
that firms pay households for the factors of production they hire.
The National Income and Product Accounts divide incomes into five
categories:
• Compensation of employees
• Net interest
• Rental income
• Corporate profits.
• Proprietors’ income.
The sum of these five income components is net domestic income at
factor cost.
The Bureau of Economic Analysis uses
two approaches to measure GDP :
Income approach
Production approach
The production approach to GDP, known as GDP (P), is the sum of
all production activity within an economy. In the form of an
equation, this is described by:
GDP(P)= output- intermediate consumption + taxes on products-
subsidies on product
Output is all the goods and services produced
Intermediate consumption comprises all the goods and services
consumed or transformed in production process
Taxes and Subsidies are included in order to put all three
approaches on a consistent valuation basis.
Two adjustments must be made to get
GDP
𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
GDP deflator= 100 x 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃