Components of Gross Domestic Product (4 Components)
Consumption; Investment; Government Spending; Net Exports The difference between GNP and GDP is the income from the goods and services produced .. Relationship Between National Income, GDP and GNP, Gross Domestic Product (GDP) can be measured by taking into account all final Gross investment includes value of depreciation whereas net investment is It shows the difference between domestic spending on foreign goods (i.e., imports) . Relationship between consumption and savings. Income = Consumption + Savings net investment increases the capacity of production. Restitution Investment.
If the government were to reduce the hour work week there would be a decrease in GDP because of the reduction in production, income and spending. But, would we necessarily be worse off?
It depends on how much a few additional hours of leisure time is valued. Home and volunteer services are productive efforts that are not included in GDP. GDP does not include productive efforts that are not exchanged in a market e. The services of a hired housekeeper would be included in GDP, while the identical effort of someone doing their own housework is not. Hiring a contractor to remodel your home is included in GDP, do-it-yourself remodeling is not.
Volunteer charitable work, home education, child raising, and many other productive efforts for which an income is not paid are left out of GDP. GDP does not include market transactions that are not reported to the government.
The underground economy consists of transactions that are not documented for various reasons. For example, the transactions may be illegal e.
Government statisticians do make an attempt to include an estimate of the underground economy's size, but these estimates are not included in GDP.
The value of nonrenewable natural resources like petroleum, natural gas, coal, and nonfuel minerals extracted from the ground is included in GDP in the products produced from them. But, changes in the availability of resources is ignored in the national accounts. For example, when the Alaskan oil fields fields were developed in the s there was little initial impact on GDP.
As oil flowed from the Alaskan fields over the next 30 years GDP has steadily benefited. It could be argued that the real contribution to the welfare of the economy was when the oil fields were first found and developed and we have since then been falsely claiming credit for past efforts. Neither the economic importance of new discoveries nor the gradual depletion of the resource base is recognized. Exploration and development generate new subsoil mineral assets just as investment creates new produced capital assets.
Introduction to Macroeconomics - 4. Measuring Output of the Macroeconomy
Similarly, the extraction of mineral deposits results in the depletion of these assets just as use and time cause produced capital assets to depreciate. GDP accounts include the accumulation a positive impact and depreciation a negative impact of capital assets, but they do not consider the generation and depletion of subsoil assets.
Nonrenewable resources could also be thought of as inventory discussed later in this chapter. 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.
Components of Gross Domestic Product (4 Components)
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. Private Consumption Expenditure C 2. Investment Expenditure I 3. Government Purchases of Goods and Services G 4.V-49 Depreciation -- Investment -- Gross Investment -- Net Investment
Net Exports X — M! Gross Domestic Product GDP can be measured by taking into account all final expenditure made during a period of account in the economy. Private Consumption Expenditure C: Consumption spending by households —This component measures the money value of consumer goods and services which are purchased by households and non-profit institutions for current use during a period of account.
These are classified into consumer durables, semi-durables, non-durables and services; see Section 6. Private consumption expenditure includes expenditure on all these categories of goods and services.
Investment means additions to the physical stock of capital during a period of time: Gross Private Domestic Investment shows the aggregate value in this regard.