5: Income and Expenditure

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country’s economy in a given period of time.

Income & Expenditure methods

The income of everyone in the country must equal the expenditure on the economy’s goods and services.

Components of GDP

GDP consists of consumption (C), investment (I), government purchases (G), and net exports (NX).

Consumption (C)

Spending by households on goods and services, accounting for approximately 2/3rds of the economy.

Investment (I)

Expenditures on goods that will be used for future production, comprising around 1/6th of the economy.

Government Purchases (G)

Spending on goods and services by all levels of government.

Net Exports (NX)

The difference between the value of exports and imports in the economy.

Nominal GDP

GDP calculated using current production levels and current prices.

Real GDP

GDP calculated using current production levels and base year prices.

GDP deflator

A measure of the current level of prices relative to the level of prices in a base year.

Inflation

The rate at which the overall price level of goods and services is rising.

Inflation rate formula

(GDP deflator in year 2 - GDP deflator in year 1) / GDP deflator in year 1.

Recession

Two or more consecutive quarters of falling real GDP.

Final goods

End products that are sold to final users and not used in the production of other goods.

Intermediate goods

Goods used to produce final goods and services, their value is included in the final goods' price. Not included in GDP.

Transfer payments

Payments made by the government that do not correspond to the production of goods and services.

Black markets

Illegal activity that is not included in GDP calculations.

Seasonal adjustment

The process of removing seasonal fluctuations from economic data.

Market value

The price at which goods and services are sold in the market.

Most volatile component of GDP

Investment

Household expenditures

Includes spending on durable and non-durable goods as well as services.

Rent value inclusion in GDP

Estimated rental value of owned homes is included as part of GDP.

Components of GDP formula

GDP = Y = C + I + G + (X - M), where X are exports and M are imports.

What GDP does not account for

Aspects such as health and education quality are not encompassed by GDP.

GDP growth importance

Growth in GDP is a growth in living standards.

Counting of used goods in GDP

Transactions involving used goods are not counted in GDP.