Lecturers: Dr. Monica Lambon-Quayefio Dr. Nkechi S. Owoo Dr. William - - PowerPoint PPT Presentation

College of Education School of Continuing and Distance Education

2014/2015 – 2016/2017

Lecturers: Dr. Monica Lambon-Quayefio

• Dr. Nkechi S. Owoo
• Dr. William Bekoe

Session Overview

• This session introduces students to one of the very

important statistics that economists use to monitor the performance of an economy- Gross Domestic Product (GDP)/ National Income. This session provides students with an understanding of the various measurements and components of Gross Domestic Product.

– Goals and Objectives

• At the end of the session, the student will

– Identify the components of national income/GDP – Be able to describe the three main approaches to national income accounting

Slide 2

Reading List

• Refer to students to relevant text/chapter or reading materials

you will make available on Sakai

Slide 3

Components: National Income/GDP

• The National Income identity equates the national

with its components. Using the expenditure approach, the components of national income or GDP are given by the relationship

• Y = C + I + G + NX
• Y = GDP
• C = consumption
• I = investment
• G = government purchases
• NX = net exports

Slide 4

Components: Consumption (C)

• Consumption, C is spending by households on goods

and services.

• Consumption is the largest, making up about 70% of GDP.

It is the most important component of GDP and it is the

• bvious way through which income received by

households is returned to firms.

• Includes estimations for

– Food - self-produced and consumed – Rent - owner-occupied homes

• Excludes estimation for

– Used goods – Assets (stocks, bonds, land) – Newly constructed homes

Slide 5

Components: Gross Private Investment (I)

• Gross Private Investment refers to businesses

spending on the capital equipment, inventories and structures including purchases on new housing.

– It also includes inventory accumulation which refers to goods that have been produced but not yet sold.

• Gross Private Investment excludes expenditure on

government investment, consumer durables and human capital investment.

– Gross Private Investment also Ignores depreciation

Slide 6

Components: Government Expenditure ( G)

• When individuals pay taxes, those taxes are spent by

government on consumption goods and services and

• n gross investment. This is referred to as

government expenditure.

– Government expenditure may occur at the local level ( district, region) or national level

• Government expenditure does not include transfer

payments.

– Transfer payments are money redistributed from one group of citizens (taxpayers) to another (the poor, the unemployed, the elderly)

Slide 7

Components: Net Exports (N-X)

• Net Exports is defined as total exports minus total

imports.

– Net exports, NX = Exports – Imports

• Exports refer to spending on domestically produced

goods by foreigners.

• Imports refer to spending on foreign goods by

domestic residents or citizens.

Slide 8

Approaches: NI /GDP Measurement

• There are three main approaches to measuring National
• Income. These are

– Product or Value Added Approach

• GDP = Sum of value added by all firms

– Expenditure Approach

• GDP = C + I + G + NX

– Income/ Factor Payment Approach

• GDP = Wages and Salaries + interest + rent + profit
• Therefore Total Output= Total Income

Slide 9

Approaches: Value-added Approach

• In measuring GDP which is the value of all final goods and

services produced in a particular year, we must avoid counting intermediate goods and transfer payments in order to avoid double counting.

• To avoid counting intermediate goods, the value added

approach is used.

• The diagram on the next slide shows how the value-added

approach is applied.

Slide 10

Approaches: Value-added Approach

Production Generated Added Farmer harvest wheat $100 $100 Miller makes into flour 200 100 Baker makes into bread 300 100 $600 $300

GDP counts only the final $ value of the final good This is the same as the “value- added.”

Slide 11

Explaining the diagram

• The farmer produced the wheat and sold it at the market for $100.

So his value added is $100.

• The miller who bought the wheat from the farmer produced the

flour and generated $200. This means in processing the wheat into flour, the value added is $100.

• The baker who used the flour produced by the miller to bake bread

generated $300. This means that the baker added a value of $100.

• The total value of the baker’s product, which includes inputs from

the farmer and the miller is what is counted as the final value which equals the value added by each of these players ( the farmer, miller and baker)

Slide 12

Approaches: Expenditure

• Expenditure approach divides output into four categories according

to which group in the economy purchases it as final users

– Consumption goods and services (C)—purchased by households – Private investment goods and services (I)—purchased by businesses – Government goods and services (G)—purchased by government agencies – Net exports (NX)—purchased by foreigners

• When we add up the purchases of all four groups we get GDP.
• GDP = C + I + G + NX

Slide 13

Approaches: Income/ Factor Payment

• This approach measures the sum of income paid to

the factors of production owned by the households by firms.

• The factor payments made include payments to
• wners of resources that are used in the production
• f goods and services in the form of wages and

salaries to labour, interest and profit on capital and rent on land.

• Value added by a firm = Total factor payments made

by that firm

Slide 14

Trial Questions for Self Assessment

• Please refer to Trial Questions Folder on Sakai

to access the trial questions for this session

Slide 15