Principles of Macroeconomics
ECON203,
Lecture 2: A Measure of Production and Income
(GDP)
Instructor: Turki Abalala
Lessons Objectives
 After taking the lessons of this topic you should be
able to:
• Explain and interpret the main macroeconomic
indicator GDP.
• Measure GDP using two approaches: Expenditure
and Income.
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Class Outline
• Definition of GDP:
•
•
•
•
Value Produced
What produced
Where Produced
When Produced
• The Components of Expenditure.
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Gross Domestic Product (GDP)
 GDP Defined
Gross domestic product of GDP is the market value of all final
goods and services produced within a country in a given time
period.
 GDP is measured to assess the state of an economy.
 GDP definition has four parts:
1. Value Produced (Market value).
2. What produced (Final goods and services).
3. Where produced (Produced within a country).
4. When produced (In a given time period).
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Gross Domestic Product (GDP)
1. Value Produced (Market value of a good or a service)
• The price at which the item is traded in the market
multiplied by its quantity.
2. What Produced (A final good or a service)
• Final good or service is a good or service that is produced
for its final user and not as a component of another good
or service.
• Intermediate good or service is a good or service that is
produced by one firm, bought by another, and used as a
component of a final good or service. (NOT part of GDP)
• GDP includes only those items that are traded in markets.
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Gross Domestic Product (GDP)
• GDP counts only the items that are traded in the market.
(NOT the value of everything that is produced).
• GDP does not include the value of goods and services that
people produce for their own use (such as Cleaning house
by any family members nut not paid), non-productive
transactions (such as sales of second-hand goods) and
the purchase of stocks and bonds.
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Gross Domestic Product (GDP)
3. Where Produced ( within a country)
• GDP counts only the values of goods and services that are
produced within a country.
• For example, a Kuwaiti businessman owns apartment
buildings in Saudi, the rental income he earns is part of our
(Saudi) GDP because it is earned in Saudi Arabia.
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Gross Domestic Product (GDP)
4. When Produced (a given period of time)
• GDP counts only the value of goods and services that are
produced during a given period of time.
• If the time period is a quarter, it is called “the quarterly
GDP data” . These data are used by central banks to track
the short- run evolution of the economy.
• If the time period is a year, it is called “the annual GDP
data”. These data are used by economists to examine the
long- term trends.
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Gross Domestic Product (GDP)
 Circular Flows in the U.S. Economy
• Consumption expenditure is the expenditure by households
on consumption goods and services.
• Investment is the purchase of new capital goods (tools,
instruments, machines, buildings, and other constructions)
and additions to inventories.
• Government expenditure on goods and services is the
expenditure by all levels of government on goods and
services.
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Gross Domestic Product (GDP)
• Net exports of goods and services is the value of exports of
goods and services minus the value of imports of goods and
services.
• Exports of goods and services are the items that firms in
in the United States produce and sell to the rest of the
world.
• Imports of goods and services are the items that
households, firms, and governments in the United States
buy from the rest of the world.
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Gross Domestic Product (GDP)
 Total expenditure is the total amount received by producers
of final goods and services.
•
Consumption expenditure: C
•
Investment: I
•
Government expenditure on goods and services:
•
Net exports: NX
 Total expenditure = C + I + G + NX
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Gross Domestic Product (GDP)
 Income
• Labor earns wages.
• Capital earns interest.
• Land earns rent.
• Entrepreneurship earns profits.
Households receive these incomes.
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Gross Domestic Product (GDP)
 Expenditure Equals Income
Because firms pay out everything they receive as incomes to
the factors of production, total expenditure equals total
income.
That is:
Y = C + I + G + NX
The value of production equals income equals expenditure.
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Gross Domestic Product (GDP)
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Gross Domestic Product (GDP)
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Reference
Chapter 5 of “Foundations of Macroeconomics”
Pages 114-117
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Now it’s over for today.
Any question?
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