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GDP Measurement: Two Major Approaches: Expenditure and Income

There are two major approaches to measuring GDP - expenditure and income. The expenditure approach measures GDP as the total value of final goods and services purchased in an economy. It includes consumption (C), investment (I), government spending (G), and net exports (X-M). Consumption accounts for around 2/3 of US GDP. Investment includes business and residential investment. Government spending includes expenditures on goods and services. The income approach measures GDP as the total income earned from production of goods and services. It includes compensation to employees, corporate profits, interest, and rental income. GDP and GNP are the primary measures of national output, with GNP including foreign sources of income.

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41 views

GDP Measurement: Two Major Approaches: Expenditure and Income

There are two major approaches to measuring GDP - expenditure and income. The expenditure approach measures GDP as the total value of final goods and services purchased in an economy. It includes consumption (C), investment (I), government spending (G), and net exports (X-M). Consumption accounts for around 2/3 of US GDP. Investment includes business and residential investment. Government spending includes expenditures on goods and services. The income approach measures GDP as the total income earned from production of goods and services. It includes compensation to employees, corporate profits, interest, and rental income. GDP and GNP are the primary measures of national output, with GNP including foreign sources of income.

Uploaded by

ChandreshSingh
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© © All Rights Reserved
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Download as PPT, PDF, TXT or read online on Scribd
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GDP Measurement

Two major approaches:


Expenditure and Income.
Expenditure Components of GDP

Consumption Expenditure (C)


 Purchase of both durable and non-durable
goods and services by people.
 Personal consumption expenditure in the US
typically accounts for 2/3rd or more of GDP. A
reduction in consumer spending, therefore,
can spell trouble for the economy.
 It excludes investment made on new houses.
Expenditure Components of GDP

Investment Expenditure (I)


 Investment is the purchase of final products by
business firms for use in production or
additions to inventories and the purchase of
new homes by households.
 Gross private domestic investment includes
purchases of new machinery, equipment and
structures by businesses, purchases of new
homes by households and change in business
inventories during the year.
Expenditure Components of GDP

Investment Expenditure (I)


 Reduction in business inventories = negative
investment.
 It includes only investments within the
borders of the country.
 Net Domestic Private Investment = Gross
Domestic Private Investment – Depreciation.
 GDPI accounts for 12% to15% of US GDP.
Expenditure Components of GDP
Government Expenditure (G)
 Government purchases include expenditure on final
products of business firms, and all input costs,
including labour costs incurred by all levels of the
Government.
 Government produces valuables, goods and
services – national defense, education, law and
order, etc. They are indirectly valued.
 It does not include transfer payments (social
security pensions, welfare payments and subsidies)
 Government Exp. accounts for about 20% of GDP
in the US.
Expenditure Components of GDP

Net Exports (NE)


 Excess of expenditure on exports over imports.
 Net exports account for a negative share of GDP in the
US.

 GDP = C + I + G + NE = Aggregate Expenditure.


 Aggregate Production will always be equal to
Aggregate Expenditure.
 Aggregate Expenditure represents Aggregate Demand
GDP COMPOSITION OF INDIA:
EXPENDITURE APPROACH
Expenditure Approach (at 2004/05 prices) 2005/06 2012/13 2016/17
(Rs. Billion) (2011/12 prices)

Private Consumption (C) 20833.09 34667.23 68066.24


% to total 58.80 59.63 55.84
Government Expenditure (G) 3860.07 6592.36 13400.86
% to total 10.89 11.34 10.99
Gross Fixed Capital Formation 10817.91 19299.88 36020.41
(GFCF) (I)
% to total 30.53 33.20 29.55
Change in Stocks (%) 2.86 3.84 2.39
Valuables (%) 1.14 2.02 1.22
Exports 7174.24 14200.94 24860.47
% to total 20.25 24.43 20.39
Net Exports (X – M) (%) -3.18 -10.04 -0.68
Total GDP 35432.44 58136.64 121898.54
Income Components of GDP
 GDP is also gross domestic income. The total income
generated from production of final products = the
value of those products.
when aggregate expenditure is valued at base year
market prices, aggregate expenditure measures real
GDP.
 Real GDP = Aggregate Real Income.
1. Compensation of Employees: Accounts for about 60% of the
GDP each year in the US.
2. Net Interest: It excludes interest paid by the government.
3. Rental Income
4. Profits
• Indirect business taxes
• Consumption of fixed capital (CFC)
Other Measures of Aggregate Expenditure and
Income

 GNP: The market value of final output


produced annually by all labour and property
supplied by a nation’s households, no matter
where those resources are employed.

 GNP = GDP + Foreign sources of income of


Indian households – Income earned by
foreigners in India.
Other Measures of Aggregate Expenditure
and Income

 Net National product (NNP) = GNP – CFC


 National Income (NI) = GNP – CFC – Indirect
Taxes
 Personal Income (PI) = NI – Net Interest –
Corporate Profits - Social Security
Contributions + Personal Interest Income +
Personal Dividend Payments + Payments
Received through Government Transfers and
Business Transfers.
 Disposable PI = PI – Personal Taxes
GDP and GNP in India
Year At Current At Constant
Prices Prices
GDP 2005/06 Rs.36933.69b Rs.35432.44
illion billion
2011/12 Rs.89749.47 Rs.56313.79
billion billion
GNP 2005/06 Rs.33643.87 Rs.32281.77
billion billion
2011/12 Rs.82766.65 Rs.51968.48
billion billion
National Output: Expenditure and Income Flows

Pers
Compensation of employees
onal Disposable
C Rents
National Inco Income
Interest
Net Income me
Gross Dividends
National
G National Proprietors income
Product
Product Corporate income taxes
Undistributed corporate profits
I Indirect business taxes
Personal taxes

Capital consumption
allowance Social security contributions

Investment Expenditures
BUSINESSES GOVERNMENT HOUSEHOLDS

Transfer of payments
Government purchases of goods and services Personal Saving

Personal consumption expenditures


Circular Flow of Expenditure and Income
In je c tio n s o f S p e n d in g A g g re g a te e x p e n d itu re L e a k a g e s o f s p e n d in g
I = In v e s tm e n t GDP = C + I + G + NE S = S a v in g
G = G o v e rn m e n t p u rc h a se s T = N e t ta x e s
E = E x p o rt p u rc h a se s M = Im p o rts
G
+
+
I
+ NE

C o n s u m p tio n C

Government Purchases
A g g re g a te
E x p e n d itu re

Imports
Investment

Exports
H o u s e h o ld s F in a n c ia l G o v ern m e n t In te rn a tio n a l B u s in e s s F ir m s
S y ste m T ra d e

Net Taxes = Taxes – Transfers


Saving

N e t F o re ig n In flo w o f S a v in g s

D is p o s a b le
In c o m e
A g g re g a te
In c o m e

A g g re g a te in c o m e
GDP = C + S + T

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