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Calculating GDP using the Expenditure or Income Approach - YouTube
Channel: Economics with Dr. A
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hope you are well
another interesting topic to work on
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today in the last class we looked at how
nominal GDP and real GDP are calculated
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we use a simplified model and assumed
only four products in the economy
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you probably were thinking about how
hard the calculation would be with large
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number of products and services that the
U.S. produces
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it is complicated work and economists
working with the us government
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manage this data and update it frequently
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in today's class we will talk about
another way to calculate GDP
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the approach we'll introduce today is
called the expenditure model
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the expenditure model relies on the
assumption that what is produced
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generates income and therefore spending
or expenditure must have taken place
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so instead of calculating the products
calculate the spending
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the expenditure model breaks the economy to four sections
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and can be presented in this equation
Y equals C plus I plus G
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plus NX this states that the
co the economic output represented by Y
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is the sum of C I G
and NX our goal today is to discuss what
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these expenditure components are
and how they they contribute to the GDP
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let's start with C C stands for
consumption and it reflects
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all the spending by consumers in the U.S.
it is normally the largest component of
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GDP in the U.S. consumption by private
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individuals accounts for roughly 68%
of GDP this graph
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shows the share of GDP for personal
consumption from 2001
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to 2019 roughly two-thirds of the U.S.
economy is based on consumer spending
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this is why we often refer to the U.S. as
a consumer economy
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consumer spending can be broken down to three types
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spending on durable goods spending on
non-durable goods
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and spending on services
durable goods are goods that last long
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periods of time
goods like cars electronics furniture
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appliances are examples of durable goods whereas
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non-durable goods are goods that need to
be replaced in
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a short period of time usually within
three years
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examples are food clothing or cosmetics
services is consumer spending where
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physical goods are not exchanged
usually to pay for someone's advice or
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assistance this lesson is a good example of a
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service you are paying for the
opportunity to learn from me
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economists interested in the health of
the economy will follow overall consumer
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expenditure but also will look into consumer
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spending on durable non-durable
and services they are usually interested
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in spending on durable goods specifically
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changes in durable goods spending are
considered leading
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indicators of what will happen to the us
economy in the future
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when consumers reduce their spending on durable goods
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it is a signal that the U.S. economy is
heading towards trouble in the future
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this is a graph of quarterly U.S.
personal consumption on
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durable goods from 2006 to 2020
spending on durable goods started to
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fall before the U.S. officially went into recession
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we can see a fall in spending on durable
goods in the first quarter of 2020.
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then the next component of GDP
in Y equals C plus I plus G plus NX
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is I or investment, investment
relates to spending by businesses to
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increase their business activity
it includes purchases of building also
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referred to as capital
or spending on building in inventory
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or other spending by businesses in
investment
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we also include spending by consumers on
new residential housing
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that spending does not fall under
personal consumption it is included in
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investment one note to make here in macroeconomics
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when we say investment we do not mean purchasing of
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stocks and bonds
it refers to purchasing of goods for
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production purposes
this is private domestic investment
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expenditure from 2001 to 2020 reported quarterly
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you can see that since 2009 there has
been an increase in investment spending
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in the U.S. also investment fell during the 2008
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recession
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the next component of GDP is government spending
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this is spending by state local and
federal government on goods and services
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when calculating this number we exclude
transfer payments
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transfer payments are payments to people
like social security medicare
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unemployment insurance welfare programs and subsidies
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these are examples of transfer payments
they are not including GDP because they
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are not payments for goods or services
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government spending as a fraction of GDPin the U.S. in 2020 is about 17%
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for an international comparison let's
compare the government share of GDP in
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Oman on a personal note I am from Oman I
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highly recommend a visit to oman one day
it is a beautiful country and welcoming
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if you are into outdoor adventure Oman
should be top on your list
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in Oman government expenditure accounts
for 25% of GDP
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the final component of GDP has to do
with trade
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NX stands for net exports
it is calculated as the difference
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between exports and
imports exports labeled X
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are the goods and services that the
domestic economy
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sells internationally and imports
labeled M are goods we buy from other
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countries we add the spending on exports and
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subtract out the spending on imports the reason
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we subtract imports
is because they are already counted in
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spending by C I and G so we do not want to double
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count them this calculation has actually caused
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confusion in markets
seeing that imports have a negative sign
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in front of it some have argued that we can increase
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GDP by eliminating
imports mathematically that looks
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correct however we need to be clear that when we
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eliminate imports we are also reducing spending by
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consumers businesses
and governments being aware of why there
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is a negative sign in front of imports
is important for policies towards
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trade to recap
the GDP in the U.S. economy can be
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calculated by following the spending
in the economy in this class we learned
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that GDP can be calculated by
Y equals C plus I
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plus G plus X minus
M and we call this the expenditure model
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we also have a better idea of what the trends
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are for each of these components and how they look like in the United States
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we are starting to get a good
understanding of GDP and its impact on
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the health of the economy
make sure to reach out if you have any
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questions see you next class
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