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Course: Macroeconomics > Unit 1
Lesson 3: Components of GDPComponents of GDP
Explore GDP from an expenditure perspective as you learn about entities that contribute to GDP, including firms, households, the government, and foreign buyers. Learn why it's important to subtract imports in order to accurately measure goods and services produced within a country. Finally, learn about the traditional formula for calculating GDP, which incorporates investment, consumption, government spending, and net exports. Created by Sal Khan.
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Does each company have economists who calculate GDP or is it done by the government?
And if it is done by the government how do they know what is the value of products which are only intermediate stages of other products?(15 votes)
GDP is calculated on a quarterly basis (every 3 months) and presented in the National Income and Products Accounts (NIPA) by adding up both the total expenditures of the country and the total income of the country through double entry accounting. The NIPAs report two numbers (though theoretically they should be the exact same because income = expenditure), that reflect the total value of all expenditure or income in those 3 months multiplied by 4, and adjusted for seasonal differences between the different times of year. NIPAs are published by the Bureau of Economic Analysis of the Department of Commerce. So yes it is the government.
As to your second question, the government can differentiate between intermediate and final products by looking at who the goods are being sold to. As a general rule, if the goods are being sold to a firm, then it is an intermediate product and if they are being sold to households then they are a final product. You have to be careful with the firm side of things though because the products being sold to firms could also be considered investment if the product is capital (such as a piece of machinery). An example of this would be the production of a car. A car manufacturer buys materials such as metal, leather, plastic, etc. to be used in the production of the car. The purchase of these materials by the manufacturer would not be counted in the GDP because they will be directly used in the production of their new car. The value of these materials will be incorporated into the final cost of the car when the manufacturer sets his price and when the new car is sold to a consumer, we count the final cost of the car in GDP. This cost of the car would then include labor, raw materials, and whatever intermediate products that went into its production. I know this was long-winded, but I hope it helps!(50 votes)
- Wait so I'd like to clarify something. Initially the household expenditure (HH exp) on goods and services was considered a way to measure GDP. This was HH exp = Revenue (by firms) = Profit+ Investments(wages/rent etc). If each of these are good measures of GDP then won't adding them all together create duplicates as we do in this "Expenditures equation" for GDP? It appears here we are adding Firm investments and HH consumption on goods and services together which doesn't make sense to me. Clarification would be most appreciated.(23 votes)
The question to be asked is - "If GDP is the total expenses in an economy, then who are all incurring those expenses?"
In the earlier model all the consumption was done by households only. But in reality firms do spend some money on the things they need to produce. They spend money mainly on two types of goods and services: 1. For raw materials for producing the current products: which is accounted in the household consumption as a final product
2. For equipment and other resources: Which is an investment and also an expenditure, hence counted.(11 votes)
if example Apple makes its ipads in China and then sells it in US.Are the ipads considered imports?(11 votes)
Yes, a certain portion of the final sale price of the iPad is counted in imports(M), but the retail sale amount is added in Consumer goods and services(C)(12 votes)
When was the last time the USA had a positive "net export" for the year?(5 votes)
In 1975, http://usinfo.org/enus/economy/trade/docs/06s1288.xls.
Since then the absolute value of the negative net exports was growing constantly, especially during booms, and there were some reductions during recessions. Actually, it's not that bad, because, as far as I understand, it indicates about higher standards of leaving in the US. For instance, if USA wants to import Chinese furniture, it's not because Americans cannot produce furniture, but because the salaries in China are much lower, so it's chipper to produce it in China and to be consumed by Americans with lower price that as if it were produced in the USA. But of course the question is not that simple, there are also downsides of negative net exports.(13 votes)
so BMW's that are bought in America are assembled in BMW factories in South Carolina. The parts for assembly are made in Germany. Thus, since BMW is foreign car company, would American BMW purchases go toward GDP?(2 votes)- A guess here: The parts would be considered imports, but the assembled car would be household consumption. It's likely that the price paid for the car would be marked up over the cost of the parts, and since this model views GDP as the market value of products, that markup would add to the GDP even after the value of the parts are removed by subtracting imports.(12 votes)
Why we add exports? Isn't it our income? I thought that import is our expenditures and therefore when calculating GDP by expenditures we should add import and subtract export.(4 votes)
GDP is the market value of everything that was produced within a country in a year or any other given period of time. It is not the value of expenditures accumulated by the people of the country. It is the value of all the goods and services that were produced within that country. When we import, we use our money to buy goods that were produced in other countries (contributing to those other countries' GDP). When we export, we sell goods and services that were produced in our country to the interested party of another country. That is the reason why we subtract total imports from exports. Think of it as a leakage and injection of value of goods, not money :)(6 votes)
- At3:17, is the purchasing of bonds or stocks by a company considered to belong to the category of "investing to make future goods and services" ?(1 vote)
- This is a common misconception for students, since people frequently use the word "investments" to refer to such financial assets transactions. In formal macroeconomics teaching, however, any such transactions -- even by a company -- are not considered Investment for GDP purposes, as they are not actually purchasing final goods or services used "to make future goods and services". The financial transactions are instead simply transferring money (in some form) between two entities.(7 votes)
What about wages, do wages, that firms are paying to employees, are included into Investment (3'20" on the video) ? Thanks(1 vote)- There are different methods of computing GDP. In this method, no, wages are not counted, because this wages later are used by employees to consume final goods, if it included, that would have been double counting. The only exception is when the employee works for government. Then his/her salary is counted as government expenditure.(6 votes)
I'd like to re-ask a question because it isn't clear to me yet. For a firm, the wages it gives to its laborers + land rent etc, are they counted as investment or expenditure?(2 votes)
Wages, land, and rent for a firm are all expenditures in the form of investments. They are all things that are bought in order to produce a final good.(4 votes)
Do private schools count as firms?(2 votes)- Yes, a private school is an organisation providing educational services with the aim of making a profit so that would be defined as a firm.(2 votes)
3:17Video transcript
What I want to do in this video
is take an expenditure view of GDP, so that we can think
about how GDP can be accounted for, how it can be
measured, and how we can see how active the
different parts of an economy actually are. So GDP, market value of all
final goods and services produced, not just
changed hands, produced within a country
in a given period. And the symbol we use for
GDP, and I don't know why, but the symbol is Y. Y is GDP. And so let's think about it from
an expenditure point of view, to think about what
are all the pieces. Well, if we're thinking
about expenditure, who are all of the players
that might have spent money on the goods and services,
on final goods and services, produced in our country? Who are all the people
that might have done it? Well, you could have your firms. The firms might have spent money
on these goods and services produced in a country. You also have your households. They obviously could've
spent some money on goods and services
produced in this country. Then you also have
in most countries, in fact in all countries,
you have the government. The government could have
spent some of the money on the goods and services
produced in this country. And if we assume that we're
trading with other countries, there are other countries
that might have spent money on goods and services. Other, outside, so let's
just write foreign. People outside of the country
might have spent money on goods and services,
so foreign purchases. And another way to
think about this would have been this is exports. Our country is exporting it to
people outside of the country and they are purchasing it. Now, this is almost complete. But if we looked
at all of the money that firms are spending and all
the money that households are spending and all the money
that governments are spending, some of what they're
spending might not be on goods and services that
are produced in this country. They might be spending
some of their stuff on things that are produced
outside of this country. So we would have
to subtract it out if we really want to have the
goods and services produced within the country. So what we're
going to want to do is subtract out
foreign products. Or another way, the more typical
way of thinking about it, we would subtract out imports. So if we think about all of
the goods and services that meet this classification,
the final goods and services produced in a country
in a given time, that firms spent
money on, and add that to all the goods and services
that households spent money on, and add that to all the goods
and services that government spent on, and all the goods and
services that were purchased by foreigners, the
exports, and then make sure we're not counting
the goods and services that other countries produce--
so we subtract those out-- this would give you a
pretty good measure of all of the goods and services
produced within a country. And this is pretty close to
the way the economists actually do measure it. So what they do is they say
Y is equal to investment. And we saw in a previous
video, investment in the macroeconomics
term isn't quite what it means in
the everyday term. It really essentially means
the spending by firms. So pretty much everything
that a firm spends in theory, you're spending that money to
make future goods and services, or to make the
goods and services-- so that's all
considered investment. And then a little bit of
the household spending is considered investment. And that is just new houses. But the bulk of
household spending is considered to be consumption. And then everything that
the government spends on, whether it's the military and
all the salaries for police people and whatever
they do, you know, the groundskeeping
at the White House, whatever else, if we
thinking about the US, that goes straight to G,
government spending. And this thing
right over here, you have foreign purchases,
exports, minus foreign imports. So you have exports
minus imports. So you could view
this as net exports. If this number is positive,
the net exports are positive. We're exporting more
than we're importing. If this number is negative,
net exports is negative. That means we are importing
more than we are exporting. But in traditional
expenditure view of GDP, this whole part
right over here will be referred to as net exports. And so you sum up these things,
which are very closely related to maybe the slightly
more intuitive versions that we started off
with, and you essentially have broken down the
expenditure view of GDP in the traditional sense. Then in the next few
videos, I'm going to start thinking of a
bunch of different examples. And we'll think about which
bucket it would fall into or how it would affect
one of these buckets.