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L1 Part 1

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MD RADWAN AHAMED
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© © All Rights Reserved
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How do we track our economy’s booms and busts?

© 2013 Pearson
GDP, INCOME, AND EXPENDITURE

GDP Defined
Gross domestic product or GDP
The market value of all the final goods and services
produced within a country in a given time period.

© 2013 Pearson
GDP definition is made up of 4 parts:

1. Market Value
GDP considers the market value of the goods produced

2. Final Goods and services- What produced


Final good or service is a good or service that is
produced for its final user and not as a component of
another good or service.
Intermediate good or service is a good or service
that is produced by one firm, bought by another firm, and
used as a component of a final good or service.
GDP values the final goods and services

© 2013 Pearson
GDP definition is made up of 4 parts:

3. Where Produced
Only goods and services produced within the country is a part of a
country’s GDP.

4. When Produced
During a given time period. Usually quarterly or annually.

© 2013 Pearson
GDP and Circular Flow of Income
The Circular Flow of Income (CIF) is a theory that describes the
movement of expenditure and income throughout the economy

© 2013 Pearson
How does the CIF work

Firms make profit. Profits are then distributed to


households - e.g. wages for labours
Profit earned by firms are household’s
income (Y). The aggregate income received by all
households
Households buy Firms sells goods and
services- e.g. pizza, TV, dry-cleaning etc. The
payments made here are called Consumption
Expenditure (C)

© 2013 Pearson
How does the CIF work

However, not all production is consumed- firms add


unsold outputs in its stock investment (I)
Governments buy goods & services from firms
in the form of Government Expenditure (G)
Firms also sell- Exports (X) and
buy- Imports (M) goods and services from the world

© 2013 Pearson
Measuring GDP

GDP is equal to
Aggregate Income (Y) = Aggregate Expenditure (C+ I +G+ X-M)
Incomes:
>>Labor earns wages.
>>Capital earns interest.
>>Land earns rent.

>>Entrepreneurship earns profits.

Because firms pay-out incomes and everything they receive from sales
of their goods and services, Agg Income equals Agg Expenditure

As a result, Circular flow of Model is the foundation on which National


Economic Accounts are built

© 2013 Pearson
Measuring GDP- Expenditure Approach

Expenditure Approach- Measures GDP as the sum of


C+I+G+ X-M
C- expenditure of households on goods and services. e.g. food,
car-wash etc
I- expenditure on capital equipment and buildings by firms
G- expenditure of government on goods and services. e.g. street
lighting, equipments for defence but not unemployments
benefits because they are not purchases of goods and services
X-M - Net exports. When Bangladesh sells garments
internationally the value of the garment adds to the GDP and
when Bangladesh imports Japanese cars the value is getting
subtracted from the GDP

© 2013 Pearson
GDP comparison between Bangladesh and UK
UK Annual GDP

Bangladesh GDP

© 2013 Pearson
GDP composition
UK
Agriculture: 0.6%
Industry: 19.7%
Services: 79.6%
(2015 est.)

Bangladesh
agriculture: 16%
industry: 30.4%
services: 53.6%
(2015 est.)
Source: Central Intelligence Agency- The World Factbook

© 2013 Pearson
Essential Readings for Today!

Economics. Parkin, Powell, Matthews. 8th


Editions
Chapter 20. Pages- 460 to 464

© 2013 Pearson

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