GROSS DOMESTIC PRODUCT
• The market value of all goods and services
produced within a country in a given period of
time.
• It can be measured as all the EXPENDITURES
to buy the goods and services produced.
• It can also be measured as all the INCOME
earned from producing the goods and services.
• Since every dollar spent is someone’s income,
the two measures give the same result.
Gross Domestic Product
»The circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world.
Gross Domestic Product
Firms hire factors of production from households. The blue
flow, Y, shows total income paid by firms to households.
Gross Domestic Product
–Households buy consumer goods and services. The red
flow, C, shows consumption expenditures.
Gross Domestic Product
Households save, S, and pay taxes, T. Firms borrow some of
what households save to finance their investment.
Gross Domestic Product
–Firms buy capital goods from other firms. The red flow I
represents this investment expenditure by firms.
Gross Domestic Product
–Governments buy goods and services, G, and borrow or
repay debt if spending exceeds or is less than taxes
Gross Domestic Product
The rest of the world buys goods and services from us, X and
sells us goods and services, M—net exports are X - M
Gross Domestic Product
And the rest of the world borrows from us or lends to us
depending on whether net exports are positive or negative.
Gross Domestic Product
–The blue and red flows are the circular flow of income and
expenditure. The green flows are borrowing, lending, and taxes.
Gross Domestic Product
The sum of the red flows equals the blue flow.
Gross Domestic Product
–That is: Y = C + I + G + X - M
Expenditures
• Expenditures are purchases of goods and
services.
• Expenditures are
–
–
–
–
Consumption (C)
Investment (I)
Government spending (on goods and services) (G)
Net Exports (X-M)
• Exports (X)
• Imports (M)
Expenditures equal Income
• Expenditures= C + I + G + X – M
• All expenditures become someone’s
income so
• Y (income) = C + I + G + X – M
Government
• Government spending:
– Goods and services (G)
• Roads, health care, education, helicopters, police officers
salaries, judges salaries.
• Government revenue:
–
–
–
–
Taxes
(Income from Crown corporations)
(Tariffs)
Less Transfers to persons (part of net taxes)
• GST rebates, unemployment insurance, pensions, subsidies
• Interest on the debt (substantial)
• NOTE: The gov’t is not buying services, so transfers are not
an expenditure.
Budgetary Deficits and Surpluses
• Spending
– Goods and services
(G) + Transfers to
persons (Tr)
• Revenue
– Taxes (Tx)
• Net Taxes
– Tx – Tr = NT
• Surplus
 G + Tr < Tx
 G < Tx – Tr
 G < NT
• Deficit
 G + Tr > Tx
 G > Tx – Tr
 G > NT
Savings and Investment
• Investment is financed by savings
• Savings have three sources:
– Savings by households
• The part of income households do not spend on
consumption or net taxes.
• (S = Y - C - NT)
– Savings by governments
• NT – G = savings
– Savings of foreigners
• M – X = foreign borrowing
STOCKS AND FLOWS
• FLOWS
– Income : the goods and
services produced each
year
– Deficits: The excess of
spending over income each
year
– Investment: Goods
produced to be used in
production each year
– Surpluses: The excess of
revenue over expenditures
each year.
• STOCKS
– Wealth: All the goods a
person owns. Wealth is the
sum of past net saving.
– Debt: the sum of all past
deficits less all past
surpluses
– Capital: All the investment
goods owned. Capital is
the sum of past net
investment