Measuring united states GDP

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Intros
Lessons
  1. The Expenditure Approach
    • The sum of C,I,G,Xβˆ’MC,I, G, X-M
    • Personal Consumption Expenditures
    • Gross private domestic investment
    • Government expenditure
    • Net Exports of Goods and Service
  2. The Income Approach
    • The income that firms pay households
    • Compensation of employees
    • Net Operating surplus
    • Indirect Tax and Depreciation
    • Statistical discrepancy
  3. Nominal and Real GDP
    • The Meaning of "Gross"
    • Depreciation
    • Gross & Net Investment
    • Gross & Net Profit
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Examples
Topic Notes
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The Expenditure Approach

The expenditure approach states that we use the following formula to calculate GDP:

GDP=C+I+G+(Xβˆ’M)GDP=C+I+G+(X-M)


Where:

C = Consumption Expenditure: the total payment of goods and services paid by U.S. households.
(Note: This does not include the purchase of new homes)

I = Investment: the total amount of money spent on capital equipment and building, and including business inventories.

G = Government Expenditure: the total payment of goods and services paid by the government, such as national defense.

X = Exports on Goods: the values of exports that are exported to the rest of the world.

M = Imports on Goods: the values of imports that are imported from the rest of the world.

The Income Approach

The income approach states that we can calculate GDP by using the following formula

GDP=W+R+I+P+SAGDP=W+R+I+P+SA


Where:

W = Wages: the total amount that is compensated to employees for their work.

R = Rent Income: payment for the use of land or other rented resources

I = (Net) Interest: the interest households receive on loans they made subtracted by the interest households pay on their own borrowing.

P = Profit: profits of corporations, which some are distributed to households in the form of dividends.

SA= Statistical Adjustments: There are 3 types.
  1. Depreciation: the decrease in fixed capital over time
  2. Indirect Tax: This is the sales tax
  3. Net foreign factor income: income that foreigners earn in the US minus the income Americans earn from other countries)

Note: When calculating the GDP through both approaches, you will see that they won’t equal. The difference between the expenditure approach GDP and income approach GDP is called the statistical discrepancy.

Note 2: Net Operating Surplus is sum of Rent, Interest, and Profit.

Nominal and Real GDP

Nominal GDP: The value of finished goods and services in a specific year are valued at the current market price.

Suppose there are goods xx and yy, and the current year is 2018.

To calculate nominal GDP, we use the following formula:

Nominal GDP = Px, 2018Qx+Py, 2018QyP_{x, \,2018} Q_{x} +P_{y, \,2018} Q_{y}


Where:

Px, 2018 P_{x, \, 2018} \,   \, price of good xx in the year 2018.

Qx Q_{x} \,   \, quantity of good xx

Py, 2018 P_{y, \, 2018} \,   \, price of good yy in the year 2018.

Qy Q_{y} \,   \, quantity of good yy


Real GDP: The value of finished goods and services in a specific year are valued at the price of a base year.

Suppose there are goods xx and yy. The current year is 2018, and the base year is 2017.

To calculate Real GDP in the year 2018, we use the following formula:

Real GDP = Px, 2017Qx, 2018+Py, 2017Qy, 2018P_{x, \, 2017} Q_{x, \,2018} +P_{y, \, 2017} Q_{y, \,2018}


Where:

Px, 2017 P_{x, \,2017} \,    \, \ price of good xx in the year 2017.
Qx, 2018 Q_{x, \, 2018} \,   \, quantity of good xx in the current year 2018.
Py, 2017 P_{y, \,2017} \,    \, \ price of good yy in the year 2017.
Qy, 2018 Q_{y, \, 2018} \,   \, quantity of good yy in the current year 2018.