GDP, Saving and Consumption

8/10/2019 GDP, Saving and Consumption

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GDP and its determinants

Economic Environment of Business

Session 1


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Objectives of economic policy

Sustained growth in GDP

Price stability

Economic tools for achieving objectives Fiscal PolicyGovernment expenditure,

Taxes

Monetary PolicyMoney supply in theeconomy


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Macro variables affected by

Govt. Policies Aggregate demand

Prices

Interest Rates Tax Rates

Exchange Rates

Savings

Investment


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Gross domestic product (GDP)is a

measure of the income and expenditures

of an economy.

It is the total market value of all final

goods and services produced within a

country in a given period of time.

Gross Domestic Product


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The Measurement of GDPOutput is valued atmarket prices.

It records only the value offinal goods, notintermediate goods(the value is counted only once).

It includes goods and servicescurrently

produced,not transactions involving goods

produced in the past.

It measures the value of productionwithin thegeographic confines of country.


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What Is and What Is Not Counted in

GDP?

GDP includes all items produced in the economy and sold legally in

markets.

Non-Market Activities:GDP does not include items produced and

consumed at home that never enter the marketplace.Underground Activities: It does not include items produced and sold

illicitly, such as illegal drugs, smuggling etc.


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The Economys

Income and Expenditure

For an economy as a whole, income must

equal expenditurebecause:Every transaction has a buyer and a seller.Every rupee of spending by some buyer is a

rupee of income for some seller.


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Factor Payments

(Wages, rent, and profit)

The circular flow of income

The inner flow

(1) Incomes

(2) Production

(3) Expenditure

The Circular-Flow

Diagram

Prices of ProductsSupply of Factors


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The Circular Flow of Income

The inner flowWithdrawals

net savings

net taxes

import expenditure

Injections

investment

government expenditure

export expenditure


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Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

BANKS, etc

Investment(I)

Net

saving (S)


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The inner flow

Withdrawals

net savings

net taxes

import expenditure

Injections investment


export expenditure


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Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

BANKS, etc GOV.

Investment(I)

Net

saving (S)

Nettaxes (T)


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Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

BANKS, etc GOV.

Investment (I)

Government

expenditure (G)

Net

saving (S)

Nettaxes (T)



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a) The inner flow

b) Withdrawals

net savings

net taxes

import expenditure

c) Injections investment


export expenditure


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Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

BANKS, etc GOV. ABROAD

Investment (I)

Government

expenditure (G)

Net

saving (S)

Nettaxes (T)

Import

expenditure (M)



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Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

BANKS, etc GOV. ABROAD

Investment (I)

Government

expenditure (G)

Export

expenditure (X)

Net

saving (S)

Nettaxes (T)

Import

expenditure (M)


WITHDRAWALS

INJECTIONS


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3- Methods of Computing AnEconomys Income

1.Resource Cost or Income Approach:Sum the total wages and profit paid by firms

for resources (see the circular flow).

2.Value Added or Production MethodSum the value addedat each stage of

production process

3.Expenditure Approach:Sum the total expenditures by households

(from the top portion of the circular flow).


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Gross National Product

The total market value of allfinal goods and services

produced during a given

period of time by the nationsresidents, regardless of the

place produced.


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National Income & Related Aggregates

Between a Gross Concept and a Net Concept

GDP Vs NDP (Depreciation)

Between GNP (GDP) at Factor Costs Concept andGNP (GDP)at Market Prices Concept GNPfc Vs

GNPmp(Net Indirect Taxes)

Between a domestic Concept and a National

Prices Concept - GDP Vs GNP (NFIA)

Real and Nominal concept - Inflation

Four Important distinctions


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Three Other Measures of Income

1. Net National Product (NNP):

Total income of residents of a nation after subtracting

capital consumption allowances.

2. Personal Income: The income that households and non-corporate businesses receive.

3. Disposable Personal Income:

The income that households and non-corporate businesses have left after

taxes.


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Real versus Nominal GDP

1. GDP is the market value of the economyscurrent production, referred to as NominalGDP.

2. Real GDP measures any given years totaloutput in constant prices.

3. An accurate view of the economy requiresadjusting nominal to real GDP, using the GDPPrice Deflator.

G ( li i ) i fl


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GDP (Implicit) Price Deflator

1. The GDP Price Deflator is a price index thatuses a bundle of all final goods and services.

It tells us the rise in nominal GDP that isattributable to a rise in prices.

2. Converting Nominal GDP to Real GDP:

Real GDP200x=

(Nominal GDP200x

) (GDP deflator200x

)X100


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The Components of GDP

GDP (Y) is the sum of:Consumption (C)

Investment (I)

Government Purchases (G)

Net Exports (NX) or Exports minus Imports

Y = C + I + G + NX


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Consumption, Savings and

Investment

That part of the disposable income that is not

consumed immediately is called as savings.

Savings are the deferment of current

consumption in favor of future consumption.


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The main determinant of Cis disposable income (YD)The consumption function

C = C(YD)(+)(+) -- increases in disposable income (YD) leads to

increases in consumption (C)

Consumption (C)


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The Four Components of GDP1. Consumption(C): Is the spending by households on goods and

servicese.g. buying clothing, food, movie tickets

2. Investment (I): Is the purchases of capital equipment and structures,

e.g. factory, houses, etc.

3. Government Purchases (G):Includes spendingon goods and services by local, provincial and

federal governments (e.g. roads, police, etc.).

Does notinclude t ransfer payments, because it is

not made in exchange for currently produced

goods or services.

4. Net Exports (NX):Exports minus imports.


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C = a + bYD

b= propensity to consume

Change in C from a rupee change

in income

0 < b < 1

C = a when YD is zero

ConsumptionFunction


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S i d I i h N i l


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Saving and Investment in the National

Income Accounts

Recall: GDP is both total income in an economy and the total

expenditure on the economys output of goods and services:Y = C + I + G + NX

Assume a closed economy:Y = C + I + G

National Saving or Savingis equal to:Y - C - G = I = S

S i d I t t i th N ti l


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Saving and Investment in the National

Income Accounts

National Saving or Saving is equal to:Y - C - G = I= S or

S = (Y - T - C) + (T - G)where T = taxes net of transfers

Two components of national saving:Private Saving = (Y - T - C)

Public Saving = (T - G)

S i d I t t


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Saving and Investment

Private Savingis the amount of income that households have left after

paying their taxes and paying for their consumption.

Public Savingis the amount of tax revenue that the government has left

after paying for its spending.

For the economy as a whole, saving must be equal to investment.


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Export minus imports


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Oil economy

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GDP, Saving and Consumption