2. The Components of GDP and Related Measures
a. calculate and explain gross domestic product (GDP) using expenditure and income approaches;
b. compare the sum-of-value-added and value-of-final-output methods of calculating GDP;
c. compare nominal and real GDP and calculate and interpret the GDP deflator;
d. compare GDP, national income, personal income, and personal disposable income;
What are the two (high level) methods for measuring GDP?
1. Expenditure approach - totals the expenditures spent on all final goods and services produced during the year
2. Income approach - a measure of aggregate income
Which approach to measuring GDP (expenditure vs income) gives a better number?
Either, GDP derived by these two approaches will be equal.
What is the math formula, and what are the four components used to measure GDP using the expenditure approach? (Hint: There is a good acronym for it!)
GDP = C + I + G + (X - M)
C = personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment
X - M = net exports to foreigners
- Remember: "GDP is the output of CIGarettes plus net eXports"
How do you measure the income approach of measuring GDP?
Under the income approach, GDP is a measure of aggregate income. It is calculated by summing the income payments to resource suppliers and the other costs of producing those goods and services. It includes employee compensation (wages and salaries), self-employment income, rents, profits and interest, etc.
What is personal income vs disposable personal income?
Personal income is the total income received by domestic households and non-corporate businesses. It is available for consumption, saving, and payment of personal taxes. Personal disposable income is an individual's available income, after personal taxes are paid, that can be either consumed or saved.