The Income and Expenditure Approaches Calculating and Tracking GDP.

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Presentation transcript:

The Income and Expenditure Approaches Calculating and Tracking GDP

Expenditure Approach Determining GDP by adding up all the spending on final goods and services. Personal Consumption Expenditures (C) Gross Investment (Ig) Government Purchases (G) Net Exports (Xn) Therefore, GDP = (C + Ig + G + Xn)

Personal Consumption (C) Covers all expenditures by household on durable consumer goods (like automobiles and refrigerators), nondurable consumer goods ( like bread and toothpaste), and expenditures for services (barbers etc.).

Gross Investment ( Ig ) All final purchases of machinery, equipment, and tools by businesses. All construction (includes residential construction b/c they can earn income when rented/leased Changes in inventories (unsold goods) represent 'unconsumed output' so they are also included. We add positive or increased inventory & subtract negative or decreased inventory. Net Investment = Gross Investment - Depreciation (amount of capital that is used up).

Government Purchases (G) Expenditures for goods and services that the government makes providing public services. Expenditures for social capital (i.e. schools and highways) which have long lifetimes. Government transfer payments not included (transferring money doesn't contribute to current production)

Net Exports (Xn) Net Exports (Xn) = exports (X) – imports (M) GDP includes spending on Canadian output by people abroad, but we have to minus what we buy from them.

Remember This An easy way to remember the factors that make up the expenditures approach is by using the acroynom PING: Personal consumption expenditures Investment Net Exports Government Purchases

Domestic Income Determined by adding up the income earned by Canadian-supplied resources. Wages, Salaries, and Supplements. Corporation Profits Before Taxes Interest & Miscellaneous Investment Income Farmers’ Income Rents and Unincorporated Business Income

The Income Approach to GDP Arrived at by making the following adjustments to Domestic Income: Net Domestic Income + (Indirect Taxes + Depreciation/CCA) +/- Statistical Discrepancy

Key Question # 8 (Page 149) Assignment 2.2 Utilizing the data listed on page 149: A)Determine GDP by both the Expenditure and Income Methods. Hint: (215 = 215) B)Determine Net Domestic Income Once you work with these questions a few times, they become relatively easy marks.