Principles of Macroeconomics
ECON203,
Lecture 4: A Measure of Production and Income
(GDP)
Instructor: Turki Abalala
1
Recap of Last Lecture
• Measurement approaches of GDP.
• Measuring GDP using Expenditure approach.
Class Outline
Income Approach to measure GDP
Statistical Discrepancy
GDP – Income Approach
GDP: the aggregates of all the incomes earned by resource
suppliers in the economy.
The Income approach measures GDP by summing the
incomes that firms pay households for the factors of
production they hire (wages for labor, interest for capital,
rent for land, and profit for entrepreneurship)
GDP – Income Approach
The national Income can be divided into two big categories:
1. Wage Income “Compensation employees”: payments for
labor services“
2. Interest, Rent and Profit Income “Net operating surplus”:
other factors of production incomes:
• Net interest.
• Rental income. (including imputed rent)
• Profit income: Corporate profit and Proprietors’
income.
• The sum of wage, interest, rent, and profit equals Net
Domestic Product at Factor Cost (not GDP yet!!).
GDP – Income Approach
GDP – Income Approach
Net Domestic Product at Factor Cost is the sum of wages,
interest, rent, and profits. Net Domestic Product is Not GDP
To arrive to GDP, it needs two further adjustments:
1. From factor cost to market price:
Add indirect taxes
Subtract subsidies
2. From net product to gross product:
Add depreciation to total income
Depreciation is the decrease in the value of capital that
results from its use and from obsolescence.
GDP – Income Approach
GDP – Income Approach
Why GDP using Expenditure approach is different from GDP
using Income approach?
GDP – Income Approach
In fact, the income approach and the expenditure approach
do not deliver exactly the same estimate of GDP because
there is a statistical discrepancy.
Statistical discrepancy: the discrepancy between the
expenditure approach and income approach estimates of
GDP, calculated as the GDP expenditure total minus the GDP
income total.
GDP: INCOME APPROACH
GDP – Income Approach
Productions that are not included in GDP:
• With some minor exceptions, GDP includes only those products
that are sold in markets
• Ignores “do-it-yourself” household production an economy
in which householders are largely self-sufficient will understate
GDP
• Ignores the underground economy: all market activity that goes
unreported because it’s illegal or those involved want to evade
taxes
Reference
Chapter 5 of “Foundations of Macroeconomics”
Pages 121 - 122
Exercises on measuring GDP using both
approaches
Basic Questions
1.What does GDP stand for?
2.Define GDP?
3.Why do we need to study GDP?
4.How to measure GDP?
5.What are the components of GDP using the expenditure approach?
ECON203; Section: EA 14
Exercise 1
Classify each of the following items as a final good or service or an
intermediate good or service and identify which is a component of
consumption expenditure, investment, or government expenditure on
goods and services:
Banking services bought by a student.
New cars bought by Hertz, the car rental firm.
Newsprint bought by USA Today .
The purchase of a new limo for the president.
New house bought by Al Gore.
ECON203; Section: EA 15
Exercise 2
Use the figure below, which illustrates the circular flow model, to work
Problems 1 and 2.
Problem 1: During 2008, in an
economy:
■ Flow B was $9 trillion.
■ Flow C was $2 trillion.
■ Flow D was $3 trillion.
■ Flow E was –$0.7 trillion.
Name the flows and calculate the
value of
1. Aggregate income.
2. GDP.
ECON203; Section: EA 16
Exercise 2
Problem 2: During 2009,
Flow A was $13.0 trillion,
Flow B was $9.1 trillion,
Flow D was $3.3 trillion,
Flow E was –$0.8 trillion.
Calculate the 2009 values of
1. GDP.
2. Government expenditure
ECON203; Section: EA 17
Exercise 3
The table below gives the values of different expenditures in the
United States during 1999.
Item Billions of dollars
Investment 1,576
Net domestic product at factor cost 8800
Consumption expenditure 7,945
Government expenditure on goods and services 1,630
Indirect taxes less subsidies 669
Exports of goods and services 768
Imports of goods and services 1450
Depreciation 700
Q1. What was the value of net exports in 1999?
Q2. What was GDP using income approach in 2009?
Q3. What was the statistical discrepancy in 2009? and the value
of total production?
ECON203; Section: EA 18
Exercise 4
1. The table below shows some items in the US National Income and
Product Accounts in 2005. Calculate GDP in 2005 using expenditure
approach.
Item Billions of dollars
Consumption expenditure 8.7
Government expenditure on goods and services 2.3
Indirect taxes less subsidies 0.8
Depreciation 1.5
Net factor income from abroad 0.1
Investment 2.0
Net export -0.7
Statistical discrepancy 0
2. The Commerce department reported that sales of nondurable goods
fell 0.6%, while sales of durable goods decreased 1.5% in August.
Inventories of durable goods increased 1.4%.
Which component of GDP will be affected for each change?
ECON203; Section: EA 19
Exercise 5
The following table shows some of the items in Saudi Arabia’s
National Income and Product Accounts in 2012.
Item Value in Billions of Riyals
Expenditure on used goods 370
Subsidies (benefits from the government to firms) 300
Gross Investment 1200
Imports 1200
Government Expenditure 2500
Wages (compensation of employees) 5000
Indirect Taxes 800
Exports 2000
Expenditure on durable goods 1900
Consumption Expenditure 6500
Statistical discrepancy 500
Calculate Saudi Arabia’s GDP using Income approach?
Exercise 6
Use the following data to calculate aggregate expenditure and
imports of goods and services.
Government expenditure: $20 billion
Aggregate income: $100 billion
Consumption expenditure: $67 billion
Investment: $21 billion
Exports of goods and services: $30 billion
ECON203; Section: EA 21
Now it’s over for
today.
Any question?
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