ECON1102 Study Guide - Final Guide: Net Domestic Product, Gross National Income, Consumer Spending
Gross Domestic Product
• GDP - the market value of the final goods and services produced in an economy over a certain period.
• A crude measure of individual well-being is to divide GDP by the total population to arrive at measure
called GDP per capita.
• This measure is very simplistic as it assumes that GDP is divided equally across individuals.
• When comparing per capita GDP by country, local currencies are converted to purchasing power
parities (PPP) which is meant to measure how much a local currency can buy locally in terms of real
goods and services.
Three ways to measure GDP and its components
• Production = expenditure = income
Expenditure
Approach
• Expenditure approach - the sum of the total expenditure on final goods and services
by households, investors, government and net exports.
• Aggregate Demand (AD) - spending by different groups in that economy.
• This measures spending by broad components of spending in the economy organised
along core categories - Consumption (C), investment (I), Gov. (G) and net
exports/trade (NX = domestic exports – domestic imports).
• The national income accounting identity states that Y = C + I + G + NX.
Depreciation and Net Domestic Product (NDP)
• Depreciation is the deterioration of the capital stock due to wear and tear.
• With capital stock for a whole economy, if we subtract depreciation from gross
domestic product, we get net domestic product: NDP = C + I + G + (X-M) -
depreciation change.
Income
Approach
• Income approach - the sum of the income generated from the production of goods
and services, which includes profits, wages and other employee payments, income
from rent and interest earned.
• A typical division is to calculate the share of income that goes to labour (L) as
opposed to capital (K).
• The total share of GDP to L in most developed economies is approx. 2/3 while the
total share of GDP to K is approx. 1/3.
Gross National Income (GNI)
• GNI = the total domestic and foreign output claimed by residents of a country.
• GNI = (GDP) + factor incomes earned by foreign residents (factor = input, thus
referring to income residents earn off their labour (L) and capital (K) contributions,
minus income earned in the domestic economy by non-residents.
Production
Approach
• Production method - the sum of the value added by the industries.
• Value added is the revenue generated by each producer minus the value of
intermediate products.
• The idea is that there are stages of production: Primary producer + Intermediate
producer = Final producer.
• Each stage of production 'adds value' and only that added value (new production of
goods and services at a particular stage) counts towards GDP.
Two Production Accounting Approaches to GDP
• There is no "double counting" in GDP; only the final sale of goods and services count.
This is an issue for the production approach and there are two ways of dealing with
it:
o Calculate only final output (goods and services purchased for final use).
- A firm would report how much it sold to consumers and how much it sold
to producers (intermediate goods).
o Follow the value-added approach (much more commonly used).
- Value added is the increase in value that a firm contributes to a product
or service.
- It is calculated by subtracting intermediate goods from the value of its
sales.
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Document Summary
Three ways to measure gdp and its components. Expenditure approach - the sum of the total expenditure on final goods and services by households, investors, government and net exports: aggregate demand (ad) - spending by different groups in that economy. This measures spending by broad components of spending in the economy organised along core categories - consumption (c), investment (i), gov. (g) and net exports/trade (nx = domestic exports domestic imports). The national income accounting identity states that y = c + i + g + nx. Depreciation and net domestic product (ndp: depreciation is the deterioration of the capital stock due to wear and tear, with capital stock for a whole economy, if we subtract depreciation from gross. Approach domestic product, we get net domestic product: ndp = c + i + g + (x-m) - depreciation change. The total share of gdp to l in most developed economies is approx.
