ECON 001 Lecture Notes - Lecture 15: Income Approach, Intermediate Good, Macroeconomics
Chapter 23 Gross Domestic Product (GDP)
I. Gross Domestic Product
A. Measuring GDP: Income Approach vs. Expenditure Approach
Gross Domestic Product (GDP)- measure of all the transactions of goods and services in an
economy.
There are two ways it can be measured. One way is to add up the total income of every
individual in the economy. This is called the income approach of measuring GDP. The
other approach is called the expenditure approach. In this method, GDP is calculated by the
total expenditure on all goods and services produced in an economy.
Income Approach
(ex) Suppose that you spend $10 to hire Bob to mow your lawn. Under the expenditure
approach this transaction will be recorded as a $10 expenditure for the lawn mowing service.
GDP would increase by $10. If we used the income approach, this transaction would be
recorded as $10 in income received by Bob. GDP would have increased by $10.
B. Defining GDP: Expenditure Approach- Gross Domestic Product (GDP): is the total
market value of all the final goods and services produced within an economy in a given year.
Here are some of the key takeaways you should get out of the definition.
1. “FINAL GOODS AND SERVICES”: Most goods that are produced in the economy is
produced in stages. GDP only includes the value of the finished product that is sold.
The value of any inputs or goods that were used up in the production process
(intermediate goods) is not included in GDP. The reason we don’t include
intermediate goods is that it is assumed that the value of production is already
included in the final price of the end good. Example: Suppose that McDonald’s sells a
Big Mac for $2.50. In the process of making the Big Mac a farmer had to sell
McDonald’s the “meat” to make the burger. Suppose that McDonald’s purchases the
meat for $1 from the farmer. The transaction between the farmer and McDonald’s is
not included in the measure of GDP. The $1 transaction involved an intermediate
good (the beef patty) that was used up in the production process to make the Big
Mac. Presumably, the cost of the beef patty is factored in the final price of the Big
Mac. To add the beef patty transaction in addition to the Big Mac would result in
double counting.
2. “WITHIN AN ECONOMY”: GDP only includes the value of products that are
produced within the borders of an economy. Example: A Mexican national who
works in the United States would see his income included in U.S. GDP because his
work occurred within the country. On the other hand, if Ford Motor Company
opened a car factory in Mexico, the value of the production of the factory would not
be included in U.S. GDP even though Ford is an American company.
Document Summary
Chapter 23 gross domestic product (gdp: gross domestic product, measuring gdp: income approach vs. Gross domestic product (gdp)- measure of all the transactions of goods and services in an economy. There are two ways it can be measured. One way is to add up the total income of every individual in the economy. This is called the income approach of measuring gdp. The other approach is called the expenditure approach. In this method, gdp is calculated by the total expenditure on all goods and services produced in an economy. Income approach (ex) suppose that you spend to hire bob to mow your lawn. Under the expenditure approach this transaction will be recorded as a expenditure for the lawn mowing service. If we used the income approach, this transaction would be recorded as in income received by bob.
