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Expenditure approach to calculating GDP examples | AP Macroeconomics | Khan Academy - YouTube
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what i hope to do in this video is even
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more examples to make sure we really
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understand how various things would be
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accounted for in the expenditure
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approach to gdp now we have talked about
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this in other videos there's many
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different ways of calculating gdp but in
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the expenditure approach you can break
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it down as being made up of consumption
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by households plus investment by firms
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plus government spending on goods and
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services by the government and net
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exports and so with that out of the way
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pause this video and look at each of
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these statements and think about what
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effect would it have on gdp if we have
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the expenditure approach and how would
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it be accounted for in these various
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categories
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okay now let's work through this
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together so this first scenario it says
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ford pays 1 million dollars for a
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us-made robot for its factory in
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california
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so we have a firm right over here it is
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ford and it's investing in physical
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capital and in most cases especially if
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you're looking at some type of a
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standardized test on an ap exam
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investment is firms investing in
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physical capital although it can also be
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on intellectual capital things like
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software but this is very clear it's
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ford buying a us-made robot physical
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capital this robot is going to help ford
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make more cars or trucks whatever it's
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trying to make so this is a very clear
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that it would increase gdb so gdp
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would go up by one million dollars
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because of this
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one million dollars and the place that
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it would be accounted for is in
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investment so i could say investment
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would go up one million dollars or the
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reason why gdp goes up one million
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dollars or you would add one million
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dollars to gdp is because you would add
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one million dollars to investment this
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is a clear investment by a u.s firm all
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right now let's look at the next
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scenario a u.s car rental company spends
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1 million dollars to buy 30 new fords
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that were made in the u.s
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so pause this video again see if you can
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think of that
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well this is a very similar scenario a
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u.s car rental company and it is
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investing in physical capital right over
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here by buying those 30 new fords it can
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rent those out to create future benefit
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and so once again it would be the same
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thing in that first case gdp would be
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would go up by a million because
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investment goes up by a million and in
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this case as well gdp would go up by a
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million dollars because investment went
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up by a million dollars
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now let's look at this third scenario a
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u.s car rental company spends 1 million
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dollars to buy 30 new toyotas that were
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made in japan
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so how is this different
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well in this scenario you still would
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have a u.s firm investing in physical
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capital spending a million dollars so
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you actually would you would actually
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have investment go up by one million
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dollars but it's not investing on in
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things that aren't made in the united
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states it's investing in things that are
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made in japan so in this particular
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scenario it will be counteracted by net
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exports
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here we are importing a million dollars
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worth of things and so that would take
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net exports so net exports would go down
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by one million dollars a one million
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dollar import is the same thing as a
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negative one million dollar net export
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and sen and so because of these two this
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will have no impact on gdp no
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impact
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on
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gdp and the reason why this makes
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intuitive sense is remember gdp is
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supposed to
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measure how much a
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how much was produced
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and in this scenario a car rental
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company is investing but it was produced
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someplace else it wasn't produced in the
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united states
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now this third scenario a japanese car
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rental company spends one million
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dollars to buy 30 new fords that were
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made in the united states so this is
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almost a symmetrically opposite scenario
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so we would not add to investment here
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because this was a japanese car rental
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company and we're calculating gdp for
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the united states or at least that's the
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assumption
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but because the u.s would export these
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30 new fords four million dollars that
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would add to net exports so in this case
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net exports let me do the net export
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color
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net
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exports would go up by
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1 million dollars and because net
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exports went up by 1 million dollars and
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nothing else here is impacted gdp
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gdp would go up by one million dollars
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and once again the reason why this makes
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sense is the united states produced one
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million dollars worth of stuff it
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happened to export them out and that's
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where it got accounted for but
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definitely gdp is one million dollars
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higher because of this
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so this next one is interesting you buy
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a hundred thousand dollars of ibm stock
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what do you think this is pause this
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video again
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so you in traditional language you might
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say i invested a hundred thousand
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dollars of ibm stock but i'm a household
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so how does this work well it turns out
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that this does not move any of these
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dials right over here because at least
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the assumption here is that you are
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buying that hundred thousand dollars of
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ibm stock from someone else it is not it
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is not because something is being made
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in the united states there's some new
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productivity that's happening and so
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even though in everyday language we
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sometimes think of this as an investment
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this has no impact on any of these
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categories so no
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no impact and i really want to emphasize
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that
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investment is sometimes associated with
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things like buying stocks but investment
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in the gdp sense is when a firm is
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buying some type of of capital that'll
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give it some future benefit help it make
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things better
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oftentimes it's physical capital more
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and more it's often things like software
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or or some type of intellectual capital
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microsoft buys 100 million dollars of
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ibm stock
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this one might be even more tempting to
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put in the investment category because
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microsoft for sure is a firm and it
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looks like it's investing in another
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firm but once again microsoft isn't
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buying some type of physical machinery
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or it isn't buying an accounting system
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or some type of intellectual capital
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it's just buying shares from someone
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else so once again nothing new is being
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produced in the country so this has no
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impact i really want to emphasize these
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last two because this shows up on some
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exams where it says oh this kind of
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feels like an investment at least in
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everyday language so people would
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account for it there but remember no new
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capital microsoft isn't buying something
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that's going to help microsoft produce
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more of whatever microsoft is trying to
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produce
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all right this next one the social
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security administration makes a two
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thousand dollar payment to a retiree
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what do you think is going on there
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so you might be tempted to say hey
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that's a government expenditure the
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social security administration they're
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spending two thousand dollars but we
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have to remind ourselves this g category
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is government expenditure on goods and
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services not a transfer payment like
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this and so this would have no
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no impact another intuitive way to think
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about it and we've been talking about
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this for a while
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nothing new is being produced in the
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united states because of this payment
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now we can contrast that with the next
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scenario right over here
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the social security administration buys
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a new accounting system well in this
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scenario the government is buying a good
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or service it might be a combination of
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both they might have to buy some
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computers some software maybe hire some
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consultants to implement it for them so
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it is the government paying for goods
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and services so in this situation our
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government category would go up by
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however much they're spending let's say
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they spent let's say this was i don't
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know one million dollars again so then
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the government would
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the government category would go up by
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one million dollars because it's a good
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or services spending and because of that
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gdp would go up by
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one million dollars hopefully you
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enjoyed that
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