Expenditure approach

• Determining GDP by adding up all the spending on final goods and services occuring throughout the year.
  • Personal consumption expenditures (C)
    • Covers all expenditures by household on durable consumer goods (automobiles, refrigerators, video recorders), nondurable consumer goods ( bread, milk, vitamins, pencils, toothpaste), and consumer expenditures for services (of lawyers, doctors, barbers).
      
  • Gross Private Domestic Investment (Ig)
    • All final purchases of machinery, equipment, and tools by business enterprises.
    • All construction.
      • includes residential construction b/c they can earn income when rented/leased
      • owner-occupied houses are also included b/c they have the potential to earn income
      • increases in inventories (unsold goods) represent 'unconsumed output' so they are also included
      • all new output that's not consumed is capital
      • an increase in inventories is an addition to capital, and this is investment
    • Changes in inventories.
      • Add positive or increased investment & subtract negative or decreased investment.
        
      • *: Net investment = gross investment - depreciation (amount of capital that is used up over the course of a year).
      • When gross investment > depreciation: stock at end of the year exceeds stock of capital at beginning of the year by the amount of net investment.
      • Gross investment = depreciation: no change in size of capital stock.
      • Gross investment <depreciation: economy is DISINVESTING (using up more capital than it is producing).
      • An example of disinvesting could be the Great Depression of the 1930s when the nations' stock of capital shrunk.
  • Government Purchase (G)
    • Expenditures for goods and services that the government consumes in providing public services.
    • Expenditures for social capital (i.e. schools and highways) which have long lifetimes.
    • Government transfer payments NOT included (transfering money, doesn't contribute to current production)
      
  • Net Exports (Xn)/"exports less imports"
    • GDP includes spending on U.S. output by people broad but excludes the value of imports from U.S. spending.
    • Exports (x) - imports (M).

• An easy way to remember the factors that make up the expenditures approach is by using the acrynom PING:
• Personal consumption expenditures
• Investment
• Net Exports
• Government Purchases

Income approach

• Determining GDP by adding up all the components of income that arises from the production of that output.
• Compensation of employees + rents + interests + proprietors' income + corporate profits + taxes on production and imports would equal the National Income.
• An easy way to remember the factors that make up the income approach is by using the acrynom WIRPS:
• Wages
• Interest
• Rent
• Profit
• Statistical discrepancy
• Total receipts attained from the selling of that total output are allocated to the suppliers of resources as wage, rent, interest and profit income (after statistical adjustments are made).
• Income approach takes into account all aspects of the profit put into the product but in a different form
• Income approach is also known as the earnings or allocations approach.
• Corporate Profits = earnings of owners of corporations, including:
  • corporate income taxes: These taxes are levied on corporations' net earnings and flow to the government.
  • dividends: These are the part of corporate profits that are paid to the corporate stockholders and thus flow to households--the ultimate owners of all corporations.
  • undistributed corporate profits: these are monies saved by corporations to be invested later in new plants and equipment. They are also called retained earnings.
• Taxes on Production and Imports.
  • general sale taxes, excise taxes, business property taxes, license fees, customs duties.

From National Income to GDP.

• The sum of employee compensation, rents, interest, proprietors' income, corporate profits, and taxes on production and imports yields national income.
• To achieve GDP from national income we have to add statistical discrepancy and consumption of fixed capital and subtract net foreign factor income

*Circular flow is the idea that a person's expenses is another person's income.*