Macroeconomics
● Within the Country’s Borders: Production in foreign countries adds up to the GDP of that respectivecountryand nottothedomesticGDP .Forexample,ifaJapanesecompanyislocated inGermanyandisproducingwatchesthere,theGermanGDPincreases,nottheJapaneseGDP. Transactions related to production and sale in other countries are not included in GDP measurements. Components of Gross Domestic Product and Approaches to Measure it There are three main approaches to measuring GDP. 1. TheIncomeApproach: Theincomeapproachisamethodthat assessesGDPintermsofwho receives it as income rather than who purchases it. It involves adding up all the incomes earned within a country's borders during the production of output . The valueofafnishedgoodorservice produced is based on the costs involved in its production.Thesecostsinclude rent,wages,interest, and profts paid as incomes to the owners of the factors of production: land, labor, capital, and enterprise, respectively. Therefore, GDP based on the income approach is the sum of the rewards received by the owners of factors of production withinthe country's borders, as follows: GDP = rents + wages + interest + profts It is important to include only payments received in return for producing a good or service , so payments such as subsidies and transfer payments are excluded. 2. The Expenditure Approach: In the expanded circular flow diagram, we have seen four main groups intheeconomy:households,frms,thegovernment,andtheforeignsector.Therearealso four main types of expenditure :personalconsumption(C),investmentspending(I),governmentspending (G), and net exports (X − M). The expenditure approach calculates GDP by addingup these four components of spending to measure the total amount spent on all fnal goods and services during a given period. GDP = consumption + investment + government spending + net exports ⟹ GDP = C + I + G + (X − M) ● Personal Consumption (C): Also known as consumption spending, personal consumption spending, or personal consumption expenditure. This is the largest component of GDP and includes households’ spending on durable goods (lasting more than three years such as furniture), non-durable goods (lasting less than threeyears such as food), and services . ● Investment Spending (I): Also known as gross private domestic investment. Investment spending encompasses business and non-governmental investments in capital goods that yield production and consumption in the future. It excludes spendingonfnancialproducts , which is categorized as savings rather than investment. Gross Private Domestic Investment represents the total spending on capital goods, including the following: ○ Purchasesofcapitalgoodsusedintheproductionofothergoodsandservices,suchas machinery, equipment, and tools used in the production process.
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