ECON1102 Study Guide - Final Guide: Net Domestic Product, Gross National Income, Consumer Spending
Gross Domestic Product
ā¢ GDP - the market value of the final goods and services produced in an economy over a certain period.
ā¢ A crude measure of individual well-being is to divide GDP by the total population to arrive at measure
called GDP per capita.
ā¢ This measure is very simplistic as it assumes that GDP is divided equally across individuals.
ā¢ 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
ā¢ Production = expenditure = income
Expenditure
Approach
ā¢ Expenditure approach - the sum of the total expenditure on final goods and services
by households, investors, government and net exports.
ā¢ Aggregate Demand (AD) - spending by different groups in that economy.
ā¢ 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 ā domestic imports).
ā¢ The national income accounting identity states that Y = C + I + G + NX.
Depreciation and Net Domestic Product (NDP)
ā¢ Depreciation is the deterioration of the capital stock due to wear and tear.
ā¢ 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
ā¢ 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.
ā¢ A typical division is to calculate the share of income that goes to labour (L) as
opposed to capital (K).
ā¢ 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)
ā¢ GNI = the total domestic and foreign output claimed by residents of a country.
ā¢ 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
ā¢ Production method - the sum of the value added by the industries.
ā¢ Value added is the revenue generated by each producer minus the value of
intermediate products.
ā¢ The idea is that there are stages of production: Primary producer + Intermediate
producer = Final producer.
ā¢ 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
ā¢ 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.
find more resources at oneclass.com
find more resources at oneclass.com
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.
