How does this model allow us to measure GDP?

4 GROUPS WHO SPEND: 1. HOUSEHOLDS 2. FIRMS 3. GOVERNMENT 4. THE REST OF THE WORLD  What we already know…  Expanded: Include Gov’t, Rest of World, and Financial Markets  Households and Firms interact with financial Markets (savings) and each other (investments)  Businesses and Firms pay taxes…receive government transfers  Gov’t borrows from financial markets and buy goods and services  The rest of the world: export U.S. goods, import foreign goods, financial market borrowing and investing (monetary imports/exports)

How does this model allow us to measure GDP?

GDP CALCULATION: 1. EXPENDITURE APPROACH 2. INCOME APPROACH 3. VALUE ADDED APPROACH  Expenditure Approach*  Y = C + I + G + Nx  Y is GDP  C is household consumption of goods/services  I is investment of firms in capital goods in hopes of future benefit from initial payments  G is government spending—agency consumption or investment  Transfer payments do not count!  Nx is net exports of goods/services (exports – imports)

INCOME AND VALUE ADDED APPROACHES RULE: ALL APPROACHES WILL YIELD SIMILAR RESULTS DUE TO CIRCULAR FLOW MODELS “CLOSED” NATURE NOW: COMPLETE LAST PAGE IN GDP PACKET  Income Approach:  Sum of resource payments  Y = wages + rent + interest + profit (labor + land + capital + entrepreneurship)  Value Added Approach:  Firms production value after sales AFTER we account for cost of inputs…  Ford Mustang: 1. Ore 2. Steel 3. Car  Ore costs $4,200….Steel cost $9,000….Car costs $$21,500  Ore value $4,200…to Steel we gain $4,800…to car we gain $12,500 = Total Value Added of $21,500

WHAT IS HAPPENING IN VENEZUELA?