- Circular flow of income and expenditures
- Parsing gross domestic product
- More on final and intermediate GDP contributions
- Investment and consumption
- Income and expenditure views of GDP
- Value added approach to calculating GDP
- Components of GDP
- Expenditure approach to calculating GDP examples
- Examples of accounting for GDP
- Measuring the size of the economy: gross domestic product
- Lesson summary: The circular flow and GDP
- The circular flow model and GDP
Thinking about how different types of expenditures would be accounted for in GDP. Created by Sal Khan.
Want to join the conversation?
- The formula for calculating GDP in the Expenditure method seems to very easily allow for double counting to happen, as others have pointed out with regard to Khan Academy employing a software engineer and paying him $100k; it would be counted as Investment, but should he then spend all of that earned money on goods/services, that would also mean $100k being counted as Consumption.
How does one avoid double counting? It almost seems to me that, to avoid doing that, you'd actually have to betray the formula at times, especially when it's so easy to double count when the example of the software engineer sounds like such a basic scenario.(44 votes)
- The software engineer's salary is counted because Khan Academy is a non-profit that serves households. This is a special case of a good or service that has no "market value" being counted in GDP by simply including all the non-profit firm's expenditures.
Human capital is not included in GDP and a regular firm's salary payment's are not included in GDP.
Government employees' salaries are included in GDP under the same type of rationale as the non-profit, government provides services and by including Government expenditures you are assigning and including the market value of those services.(16 votes)
- At4:04, Sal says that "household spending for the most part is considered Consumption, unless it is a purchase of a NEW home." Therefore, is the purchase of an old/preexisting home considered Consumption? If so, in example #3, his mother sells her home to a Swedish woman in New Orleans (i.e. the Swedish woman SPENDS 200k on that house), why wouldn't this be considered consumption by the Swedish household, and thus also added to GDP?(13 votes)
- I might be wrong, but Sal said in previous videos that infrastructure that was made beforehand was already counted on the GDP of the year when it was sold as new, and the change of ownership of existing infrastructure is not counted.
Maybe it can be seen that the 'net consumption' of the households is zero in that case, since one household is gaining +200k and another is losing 200k on an existing infrastructure (hence no money was really spent on an investment of a new good or service created(28 votes)
- I don't quite understand why the software engineer is considered investment. The firm is paying for the software engineer's time and that time will be used to create some final product. In the jeans example wages were explicitly excluded, because their contribution showed up in the value of the final product.(16 votes)
- I think the key point here is that KhanAcademy is not Microsoft, it's a non-profit organization, like government, it's not market based, and the services it produces are free of charge. So the salaries of those working at Government or non-profit organizations are considered investments (government expenditure in case of government) for the production of services which are for everybody. Yes, those employees' salaries are double counted when they consume for final goods, but the economic impact of these salaries is negligible anyways.(12 votes)
- I have a question. If I am looking after my children. This activity does not account for in calculation of GDP. If I allow my neighbour to look after my children, and in return pay her(say $5), and she also does the same by allowing me to look after her children and pay me back(say $5), will the overall GDP increase by $10?(12 votes)
- No, because personal transactions are not calculated in GDP. (mostly because it's totally impossible) If this profit is actually accounted into her personal income as wages (and then documented and taxed), then it would be a part of the GDP.(8 votes)
- If we count the GDP for the whole USA than Accenture revenue should be counted twice? We count it as a REVENUE of Accenture but not as a Expense of government, why?(6 votes)
- It depends on what method of calculating GDP we are using. If we use the expenditure method, then we view the transaction as a government purchase, but if we use the income method then we see the transaction as a revenue earned by the company. Either way, it is still a single purchase and only counted once towards GDP.(13 votes)
- 2:41This question also deals with the japanese lawnmower example. Suppose a dealer buys a lawnmower in Japan for $200 and then sells it for $210 in the US. Should one add $200 or $210 to imports? If the answer is $200, would $10 be added to the GDP?(6 votes)
- The $200 would be added to imports (reducing the net trade by $200)
The $10 would be captured by adding the entire $210 expenditure under C (consumer goods and services expenditures).
This would produce a net change of only +$10 to GDP once both C and NX were considered.(5 votes)
- What if the software engineer spends his salary. We would count that as consumption and then wouldn’t we be double-counting?(2 votes)
- The software engineer's salary would count toward GDP because Khan Academy is a non-profit firm serving households. All non-profit expenditures get counted in GDP.
So the value of the service provided would include the Engineer's salary.
The engineer's consumption would also be counted.
This same type of situation arises from salaries of government employees. The government provides a service which is valued by certain types of it's expenditures. Another way of saying this is the government is consuming labor which is the final good/service.(6 votes)
- Are drugs and other illegal narcotics counted in GDP? And if so, how are they calculated if all the sales arnt recorded?(2 votes)
- No. They are taken as unaccounted product and is added to the black economy of a country.(3 votes)
- If Khan Academy is a non-profit, surely it should not be included in GDP at all. If GDP is the "market value of all final goods and services" then isn't the market value of the service that Khan Academy provides effectively zero (i.e. free)?(2 votes)
- If the value is zero then why are we here consuming it?
The market value of a non-profit that serves households is typically valued by simply including all the non-profit's expenditures in GDP.
This makes sense if you think about it, the value of the service is simply the amount spent to provide it.(2 votes)
- At1:10the $100K salary of the software engineer is considered Investment. I'm still a bit confused here. If he pays 25K in Tax - of which the Gov't spends all 25K, and uses 75K for Consumption, then don't we end up adding $200K to GDP? Double dipping in sense. I + C + G = 100 + 25 + 75 = 200.(4 votes)
- Don't follow the money, look at what new thing the money produces within the given period...it is not being counted twice.(1 vote)
What I've done here is listed a bunch of events that might occur in a given period. And what I want to think about in this video is how, if at all, they might be accounted for in GDP, especially in this expenditure view of GDP. And I encourage you to pause this video and try it out yourself. See how, if each of these events happen in the period for which we are trying to calculate GDP, how would they be accounted for, according to the buckets we thought about, the composition of the expenditure view of GDP. So now I'm assuming that you have unpaused, you've tried it yourself, and so let's try to go through it. So Khan Academy is a firm. It's a not-for-profit firm. No one really owns Khan Academy. I guess society owns Khan Academy, but it is a firm. So Khan Academy employs a software engineer and pays them $100,000. Well, this is a firm making the expenditure. And arguably and even conceptually, this also is an investment. Because this $100,000 is going to be used to develop code that has future benefit. So this is going to be the investment category. Let me do it in that same color. So I, investment, is going to get plus $100,000. In general, the spending by firms goes into investment. Now, let's look at the second scenario. Accenture, which is another firm, and this is a for-profit firm, earns $10 million-- or maybe I should say gets $10 million in revenue, just to be clear what we're talking about-- by building a new IT system for California. And the important thing to think about, you might say, oh, OK, wait, this is OK, Accenture is a firm, but California is clearly the government. So how do you account for this? And it's the expenditure view of GDP. So in this situation, California is spending $10 million in the period for a new IT system. So this is going to be government. The government category is going to be increased by $10 million, because of this expenditure. Now next one. My mother sells her house in New Orleans to a Swedish woman for $200,000. Once again, a house is being sold from someone in the country to someone who was foreign, what do we do? But the important thing to realize is that this is not a new house. This is a transfer of an existing house. Nothing was produced here. So this has no contribution to GDP. It doesn't matter it's a Swedish woman or anything like that. The house existed before. It just changed hands. A new house did not get produced. So nothing happens to GDP here. Next one. I-- and I'm assuming that I am here, sitting here in Mountain View, California, American citizen-- I buy a Japanese made lawn mower for $200. Now this one is interesting. Because if you think about it theoretically, nothing was produced in the United States, so nothing should be added to GDP on a net-net basis. And we'll see that that is actually the case. But it's going to show up by adding to consumption and then taking away from net exports. So two things are going to happen here. We'll say, OK, Sal is an American consumer. If we just look at how much more he spent, he spent $200 more, so it's going to be added there. But then we're going to take it out of net exports. So net exports-- let me do it in that same green color-- net exports. Everything else is neutral. So in this thing right over here, there was no foreign purchases. But there is me buying a foreign product. And let me subtract that out. So I'm going to subtract out $200 right over there. So net exports will be lower by $200, because essentially this was a $200 import. And that completely cancels out the $200 increase in consumption. And so this will have zero net effect on GDP. These two terms will cancel out. Now I buy a new home in California for $500,000. Now household spending for the most part is considered C, except when you are buying a new home. So even though I am not a firm, because I am buying a house, a new house, this will go into investment. So investment will go up by $500,000. And then finally American Airlines buys a new Airbus jet, and Airbus jets are made in Europe. So what's going to happen here? So once again, net-net, nothing was produced in the United States. So on a net basis, this should not contribute to GDP. And we'll see that on net basis, it will break out, it will be neutral, but it will be like this situation. There's an American firm that made a purchase-- and actually, I didn't put the amount here. So let's say it was $100 million. I think that's actually about what a passenger plane might actually cost, for $100 million. So the way we would account for it, investment would go up by $100 million. You have an American firm making a purchase, $100 million. Conceptually, it makes sense. It's going to provide future goods and services, going to give transportation to people. But it's going to be netted out, because you have a net import. So what this is going to do to net exports, on this side of it, you're going to have $100 million, because this was an import. So you're going to have negative $100 million, when you think of it from an export point of view. And you had no corresponding positive export. So you're going to have net exports-- net exports is going to go down $100 million. This was a net import of $100 million, so it makes sense that net exports would go down. It would be negative net exports. And these two, once again, are going to cancel out with each other, so that you have no net GDP, which makes sense, because this plane was not produced in the United States.