Review of National Income Accounts and Measurement Macroeconomic Theory and Policy (Froyen Ch. 2, 2013)
RECAP: Gross Domestic Product•The gross domestic product is the total value of all final goods and services produced within the boundaries of a country in a particular period (usually one year) – Expenditure Method •A firm’s value added is the value of its output minus the value of the intermediate goods the firm used to produce that output – Production Method •Total the incomes earned during the various stages of the production process by the owners of the factors of production – Income Method Mohr & Fourie (2015)
Class Exercise•A farmer grows a bushel of wheat and sells it to a miller for R2.00. •The miller turns the wheat into flour and sells it to a baker for R6.00. •The baker uses the flour to make a loaf of bread and sells it to an engineer for R8.00. •The engineer eats the bread. Compute & compare value added at each stage of production and GDP
Final goods, value added, and GDP•GDP = value of final goods produced = sum of value added at all stages of production.•The value of the final goods already includes the value of the intermediate goods, so including intermediate andfinal goods in GDP would be double-counting.
The expenditure components of GDP•consumption•investment•government spending•net exportsMacroeconomic Theory and Policy (Froyen Ch. 2, 2013)
Consumption (C)•durable goodslast a long time ex: cars, home appliances•nondurable goodslast a short time ex: food, clothing•serviceswork done for consumers ex: dry cleaning, air travel.Definition: The value of all goods and services bought by households. Includes:
Investment (I)Definition 1: Spending on [the factor of production] capital.Definition 2: Spending on goods bought for future useIncludes:•business fixed investmentSpending on plant and equipment that firms will use to produce other goods & services.