To measure this level of produced output we can measure arrow 4 which are the expenditures spent on this output. If something is produced and sold the amount sold should equal the amount produced. The only problem with this is what happens if something is produced one year but not sold in the next year?
If we just added up the market values of goods and services that were sold these items would be included in the wrong year. To handle this problem we include items produced one year and sold the next as changes in business inventories which ARE included the year that they are produced.
We can also measure arrow 1 which is the income earned by households when they sell their resources arrow 2 to businesses. The value of output produced GDP is equal to the value of ALL the income earned by everyone who had anything to do with producing the output. So to measure GDP the value of the products produced we can sum up all the income earned in producing that level of GDP.
Remember that we defined investment as the "accumulation of capital" and we defined capital as "manufactured resources" so investment occurs when businesses buy capital. If a carpenter buys a hammer it is an investment. Note: if an economist buys shares of stock in Microsoft, it is NOT an economic investment. Only newly created capital is counted as investment.
Each year as new goods and services are being produced, some of the existing capital equipment is wearing out and buildings are deteriorating. This is called "depreciation" or "consumption of fixed capital". Whereas gross investment adds to a country's stock of capital, depreciation reduces a country's stock of capital. If net investment is positive then the country ends up with more capital at the end of the year than it stated with. Since we know that economic growth is caused by getting "more resources", if net investment is positive then the economy is growing, "expanding economy".
It would be "increasing our potential" which is caused by getting more resources, better resources, and better technology. If net investment is negative this means that depreciation is greater than gross investment, or more capital wears out than is produced so we would have a "declining economy".
If gross investment all new capital that is produced EQUALS depreciation capital that wears out then net investment will equal zero. Government purchases does NOT include transfer payments. Transfer payments, by definition, are payments for which nothing is expected in return. Government transfer payments include welfare and social security payments, transfers from the federal government to state government and from state to local governments.
Of course, when people on welfare spend their government check on food and rent then this does enter GDP as consumption C.
If a country has a trade deficit then the value of imports is greater than the value of a country's exports and net exports Xn is negative. Subtracting is a lot different than not adding. Imports are subtracted from GDP because they were incorrectly included in consumption expenditures C. Since imports are produced in another country they should not be added to our GDP, but they are added as art of of consumption so therefore they have to be removed.
Use the data below to calculate the GDP of this economy using the expenditures approach. All figures are in billions. Personal consumption expenditures. DOING it yourself is better than reading it. What we will do is divide the profits earned by entrepreneurs into two types: proprietor's income and corporate profits. Compensation of employees includes wages, salaries, fringe benefits, salary and supplements, and payments made on behalf of workers like social security and other health and pension plans.
Rents: payments for supplying property resources adjusted for depreciation it is net rent. Proprietors' income: income of incorporated businesses, sole proprietorships, partnerships, and cooperatives. Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the shareholders, and the remainder is left as undistributed corporate profits also referred to as retained earnings. Use the data below to calculate the GDP of this economy using the income approach.
On the exams I will give you "corporate profits". As you can see, National income does not equal GDP. There are some expenditures that are included in the expenditures approach that are not income therefore not included in the income approach. They are indirect business taxes 50 , depreciation 43 , and net foreign income factor 0 , But, again, you won't have to do this in this course.
DI is personal income minus personal taxes. The ensuing questions ask you to determine the major national income measures by both the expenditure and income methods. Answers derived by each approach should be the same. Personal consumption expenditures Net foreign factor income earned Transfer payments Rents Consumption of fixed capital depreciation Social security contributions Interest Dividends part of corporate profits Compensation of employees Indirect business taxes Undistributed corporate profits part of profits Personal taxes Corporate income taxes part of corporate profits Corporate profits Government purchases Net private domestic investment Personal saving GDP per capita is often used to measure a country's well being or standard of living.
The higher the GDP per capita for a country the better off the country is. But there are some problems with using GDP per capita to measure a country's standard of living. Legal economic activity may also be part of the "underground," usually in an effort to avoid taxation. GDP does not account for a possible future decline in output due to resource depletion. Noneconomic Sources of Well-Being like courtesy, crime reduction, etc. We must use per capita GDP to compare the living standards of different countries.
We've been using the AS - AD model to understand the macroeconomy. For example, in many urban areas, efforts may be made to re-purpose underutilized real estate that has fallen into disrepair. Instead of expanding the sprawl of the city, older buildings might be torn down and replaced by new construction intended to fill the same use as the predecessor building.
Such an example would qualify as depreciation and replacement. By contrast, if a new housing community is developed, the construction of residences would be contributory to NDP.
Though GDP is frequently cited when assessing the economic health of a country, NDP puts into perspective the pace at which capital assets degrade and must be replaced. This is important as failure to take action would result in a decrease in the country's GDP.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics. Key Takeaways Net domestic product NDP is an annual measure of the economic output of a nation that is adjusted to account for depreciation.
It is calculated by subtracting depreciation from the gross domestic product GDP. An increase in NDP would indicate growing economic health, while a decrease would indicate economic stagnation. An increase in NDP signifies a growing economy, while a decrease denotes economic stagnation.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Net National Product NNP Definition Net national product NNP is the total value of finished goods and services produced by a country's citizens overseas and domestically, minus depreciation. Corporate Profit Definition Corporate profit is the money left over after a corporation pays all of its expenses.
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