Economics: Expenditure and Investment Approach

Expenditure Approach

• Measures a nation's GDP by adding up all spending on final goods and services during a specific time period
• GDP = C + Ig + G + Xn
  • C: Consumption (household spending)
  • Ig: Gross Private Domestic Investment (business spending)
  • G: Government purchases
  • Xn: Net exports (exports minus imports)

Investment

• Gross private domestic Investment (Ig): The total amount of spending by firms on new capital goods
  • Includes residential and non-residential construction, machinery, equipment, and tools
  • Also includes changes in inventory
• Net investment: Gross investment minus depreciation
  • Depreciation is the wearing out of capital goods over time
  • When gross investment exceeds depreciation, the economy experiences positive net investment and growth
  • When gross investment is less than depreciation, the economy experiences negative net investment and shrinkage
  • When gross investment equals depreciation, the economy is said to be stationary

Income Approach

• Measures a nation's GDP by adding up all of the income earned by factors of production during a specific time period.
• National Income = Compensation of employees + Rent + Profit + Interest + Indirect Business Taxes
  • Compensation of employees: The largest component
  • Rent: Payments made to landlords for the use of land
  • Profit: Includes proprietors’ income and corporate profit
  • Interest: Payments made to lenders of capital goods and borrowed money
  • Indirect Business Taxes: Taxes on production and imports

Nominal GDP vs. Real GDP

• Nominal GDP: The value of goods and services produced in a country, calculated at current prices
• Real GDP: The value of goods and services produced in a country, calculated at constant prices
• Nominal GDP may increase due to inflation, while Real GDP may remain the same

Shortcomings of GDP

• GDP excludes non-market transactions
• GDP excludes the value of leisure time
• GDP doesn't account for improved product quality
• GDP doesn't account for underground economic activity
• GDP overstates overall economy because it doesn’t include the impacts of pollution ### Net Domestic Product (NDP)
• Measure of a country's total output that has been adjusted to account for depreciation
• NDP = GDP – Depreciation

National Income (NI)

• Measure of total income earned by the factors of production in the economy
• NI = NDP + Net Foreign Factor Income

Personal Income (PI)

• Measure of total income received by households and individuals
• PI = NI – (Undistributed Corporate Profits + Corporate Income Taxes + Social Security Contributions) + Transfer Payments + Net Interest

Disposable Income (DI)

• Measure of total income that households and individuals have available to spend or save
• DI = PI - Personal Taxes

Other Key Terms

• Net Foreign Factor Income (NFFI): Income earned by domestic residents from foreign sources, minus income earned by foreign residents from domestic sources
• Statistical Discrepancy: The difference between the expenditure approach and the income approach to GDP
  • This discrepancy arises because some income earned in the economy may not be fully captured in the income approach.
• Transfer Payments: Payments made by the government to individuals, such as social security, unemployment, and welfare, that are not earned income.

Example Data and Calculations

• GDP: $125 billion (from the first example data set)
• NDP: $120 billion (GDP – Depreciation = $125 - $5 = $120)
• Disposable Income: $77 billion (PI - Personal Taxes from the second example data set)

This quiz covers the Expenditure Approach to measuring GDP, which sums up consumer, investment, government spending, and net exports. Additionally, it delves into the significance of Gross Private Domestic Investment, its components, and the concept of net investment. Test your understanding of these vital economic concepts.