Expenditure Approach

10 Key excerpts on "Expenditure Approach"

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  eBook - ePub

  The Trader's Guide to the Euro Area

  Economic Indicators, the ECB and the Euro Crisis

  • David J. Powell(Author)
  • 2013(Publication Date)
  • Bloomberg Press

    (Publisher)

  4

  The accounting identity used to calculate GDP under the Expenditure Approach states that GDP equals consumption plus investment plus net exports. Consumption is broken down into private consumption and government consumption and investment consists of gross fixed capital investment and the change in inventories. The sum of consumption and investment equals domestic demand. Net exports equals exports minus imports.

  Consumption (= Private Consumption + Government Consumption) + Investment (= Gross Fixed Capital Investment + Change in Inventories) = Domestic Demand + Net Exports (= Exports − Imports) = Gross Domestic Product

  Private consumption is spending on goods and services by non-governmental entities such as individuals and households. It is the largest category of GDP for most developed economies. For example, it was about 71% of GDP of the U.S.; 64% of that of the U.K. and 57% of that of Germany in 2011.

  Eurostat also includes a group called NPISH in its calculation of private consumption (Table 2.1 ). It is an acronym for non-profit institutions serving households. It includes charities, churches, political parties and trade unions.

  TABLE 2.1 Euro-Area GDP and Expenditure Components

  Source: Eurostat

  Government consumption represents the purchase of goods and services by general government. It made up about 20% of GDP of the U.S.; 20% of that of Germany; and 22% of that of the U.K. in 2011. Investment is the spending used to increase future consumption. The category breaks down into gross fixed capital formation and inventories.

  Gross fixed capital formation represents the acquisition of fixed assets minus the disposal of those items. In this case, “gross” refers to the exclusion of depreciation costs. Fixed assets are defined by Eurostat as “tangible or intangible assets produced as outputs from the processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year.”5

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  Textbook of Macroeconomics

  • (Author)
  • 2014(Publication Date)
  • White Word Publications

    (Publisher)

  Example: the expenditure method: GDP = private consumption + gross investment + government spending + (exports − imports) , or Note: Gross means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. Domestic means that GDP measures production that takes place within the country's borders. In the expenditure-method equation given above, the exports-minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports). Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are: • Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainst-ream economic models) to increases in long-term private consumption. • If separated from endogenous private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. Income approach This method measures GDP by adding incomes that firms pay households for the factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship. ____________________ WORLD TECHNOLOGIES ____________________ The US National Income and Expenditure Accounts divide incomes into five categ-ories: 1. Wages, salaries, and supplementary labour income 2. Corporate profits 3. Interest and miscellaneous investment income 4. Farmers’ income 5.

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  Economic Environment NQF4 SB

  TVET FIRST

  • D Bekker, M Richards, FHB Serfontein, A Smith(Authors)
  • 2013(Publication Date)
  • Macmillan

    (Publisher)

  The expenditure method involves calculating the amount that has been spent on goods and services produced inside the borders of South Africa. If we know how much was spent on goods and services produced then we also know how much has been produced by the people and we also know how much income was earned. According to our circular flow model total spending in the economy consists of the consumption spending by households (C), investment spending (I) and government spending (G). Spending by foreigners on our goods and services must also be included and we do that by adding exports (X). However, some of the spending by households, firms and government is on imported goods and services (Z). If we want to calculate our gross domestic product we must subtract our spending on imports from total spending. After all we did not produce these goods and services, they were produced by other countries. The total spending on domestically produced goods is therefore C + I + G + (X – Z) This then gives us the value of gross domestic product according to the expenditure method. 44 Topic 1 Activity 2.6 Use the following information to calculate the gross domestic product: Consumption spending = R60 million Investment spending = R18 million Government spending = R 22 million Exports = R 24 million Imports = R20 million Main spending constituents of gross domestic product in South Africa The following table contains the main components of total spending in South Africa for 2004 and 2006.

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  21st Century Economics: A Reference Handbook

  • Rhona C. Free(Author)
  • 2010(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  31 AGGREGATE EXPENDITURES MODEL AND EQUILIBRIUM OUTPUT MICHAEL R. MONTGOMERY University of Maine A ggregate expenditures (AE), the total spending in an economy on final goods and services over a designated time period, is the core demand-side concept in modern macroeconomics (a final good is a newly produced good bought by a user who will finally dispose of that good by using up its services). Following the lead of John Maynard Keynes in his General Theory of Employment, Interest and Money (1936/1965) and early Keynesians such as Alvin Hansen (1953) and Paul A. Samuelson (1939), AE is typically broken down by major type of purchaser into consumption expenditures, invest-ment expenditures, government expenditures, and the sum of exports less imports (known as net exports). The study of these categories in recent decades has been aided con-siderably by the development of the National Income and Product Accounts (NIRA) accounting system, which is used by governments in measuring and reporting the sizes of these categories. The sum of this spending is known as gross domestic product, or GDP. Specifically, • Consumption expenditures are expenditures on final goods (excluding housing) and services by consumers, produced during the accounting period and in the economy under study. • Investment expenditures are final goods and services purchased by businesses and buyers of homes, produced during the accounting period and in the economy under study. They include nonresidential structures of all types, plus all producers' durable equipment, plus residential structures, plus all inventories produced in the accounting period (some of these inventories may be planned, or desired, inventories; others may be unplanned, or undesired, inventories—unplanned inventories being acquired when sales are less than anticipated). Investment expenditures do not include financial transactions such as the purchase of stocks and bonds.

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  If exports exceed imports, as in most of the 1960s and 1970s in the U.S. economy, a trade surplus exists. If imports exceed exports, as in recent years, then a trade deficit exists. (Source: http://bea.gov/iTable/ index_nipa.cfm, Table 1.1.10) Consumption expenditure by households is the largest component of GDP, accounting for about two-thirds of the GDP in any year. This tells us that consumers’ spending decisions are a major driver of the economy. However, consumer spending is a gentle elephant: when viewed over time, it does not jump around too much, and has increased modestly from about 60% of GDP in the 1960s and 1970s. Investment expenditure refers to purchases of physical plant and equipment, primarily by businesses. If Starbucks builds a new store, or Amazon buys robots, they count these expenditures under business investment. Investment demand is far smaller than consumption demand, typically accounting for only about 15–18% of GDP, but it is very important for the economy because this is where jobs are created. However, it fluctuates more noticeably than consumption. Business investment is volatile. New technology or a new product can spur business investment, but then confidence can drop and business investment can pull back sharply. If you have noticed any of the infrastructure projects (new bridges, highways, airports) launched during the 2009 recession, or if you received a stimulus check during the pandemic-induced recession of 2020–2021, you have seen how important government spending can be for the economy. Government expenditure in the United States is close to 20% of GDP, and includes spending by all three levels of government: federal, state, and local. The only part of government spending counted in demand is government purchases of goods or services produced in the economy.

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  Spanish Economic Growth, 1850–2015

  • Leandro Prados de la Escosura(Author)
  • 2017(Publication Date)
  • Springer Open

    (Publisher)

  7 Measuring GDP, 1850 – 1958: Demand Side Measuring aggregate economic activity through the expenditure side represents adding up all fi nal products or sales to fi nal demand. Ideally, each expenditure component should be computed with actual data from households, fi rms and public administration. Unfortunately, lack of direct evidence renders such a task impossible and the so-called com-modity fl ows approach provides a second-best alternative. 1 This method uses output fi gures for agriculture and industry that are adjusted to include imports and to exclude exports in order to derive estimates of consumption and investment. An implication is that the GDP output and expenditure estimates are not independent from each other. I will succinctly describe the procedures and sources used to derive estimates for private and public consumption of goods and services, domestic investment and net exports of goods and services. In all cases, except for net exports of goods and services, the same method employed in the output approach to obtain GDP levels will be followed. That is, in order to compute annual nominal GDP, the level for each expenditure component in 1958 was backcasted with the yearly variations of Laspeyres quantity and Paasche price indices and the resulting series added up. For investment, private consumption and gross domestic © The Author(s) 2017 L. Prados de la Escosura, Spanish Economic Growth, 1850 – 2015 , Palgrave Studies in Economic History, DOI 10.1007/978-3-319-58042-5_7 111 expenditure quantity indices at 1913, 1929 and 1958 relative prices were constructed and, then, a single index for each demand component was obtained by splicing the three volume indices using a variable weighted geometric average. A volume index of real GDP results from adding up its component indices with weights from 1958 national accounts. A word of warning is necessary. GDP estimates from the expenditure and output sides are not coincidental.

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  UFS BUSINESS SCHOOL EDITION ECONOMIC INDICATORS

  • P Mohr, D Yu, S Adendorff(Authors)
  • 2020(Publication Date)
  • Van Schaik Publishers

    (Publisher)

  Table 2-2 . Expenditure on GDP is always valued at market prices.

  A substantial portion of the expenditure on South African GDP originates in the rest of the world. This spending on South African exports of goods and services has to be added to the other components of spending on GDP. However, C, I, G and X all include spending on goods and services not produced in South Africa. Such imports of goods and services therefore have to be subtracted to obtain the total expenditure on South African produced goods and services. Expenditure on GDP does not include imports , since imports are produced in the rest of the world . Expenditure on GDP includes spending on South African produced goods and services only.

  Expenditure on GDP is always equal to GDP at market prices. It indicates the total value of spending on goods and services produced in the country. However, it does not indicate the total value of spending within the borders of the country. As indicated above, part of the expenditure on South African GDP occurs in the rest of the world, while part of the spending by domestic households, firms and the government in the country is on goods and services produced in the rest of the world.

  The three central domestic expenditure items (C, I and G) do not distinguish between goods and services produced locally and those produced in the rest of the world (such as French wine, Italian shoes, American smart phones and German machinery). These three items constitute gross domestic expenditure (GDE) . Economists are particularly interested in GDE, which indicates the total value of spending originating within the borders of the country. It includes imports of goods and services, but excludes exports of goods and services, since spending on exports originates in the rest of the world.

  The relationship between GDP (or expenditure on GDP) and GDE is very important and needs to be emphasised. In symbols we have

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  Economics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  9-3 Government Spending Government spending on goods and services is the second largest component of aggregate expenditures in the United States. In later chapters, we examine the behavior of government in detail. Here we focus on how the government sector fits into the aggregate expenditures– income relationship. We assume that government spending is set by government authorities at whatever level they choose, independent of current income. In other words, we assume that government spending, like investment, is autonomous. Figure 8 depicts government expenditures as a function of real GDP. The function, labeled G , is a horizontal line. If government officials increase government expenditures, the function shifts upward, parallel to the original curve, by an amount equal to the increase in expenditures (for example, from G to G 1 ). If government expenditures are reduced, the func-tion shifts downward by an amount equal to the drop in expenditures (for example, from G to G 2 ). 9-4 Net Exports The last component of aggregate expenditures is net exports, or spending by the interna-tional sector. Net exports equal a country’s exports of goods and services (what it sells to the rest of the world) minus its imports of goods and services (what it buys from the rest of the world). When net exports are positive, there is a surplus in the merchandise and services accounts. When net exports are negative, there is a deficit. The United States has had a net FIGURE 8 Government Expenditures as a Function of Real GDP Government Expenditures ( G ) Real GDP G 1 G G 2 Government Expenditures Have Increased Government Expenditures Have Decreased Government spending is assumed to be autonomous and set by government policy. The government spending function is the horizontal line labeled G . Autonomous increases in government spending move the function upward (for example, from G to G 1 ); decreases move the function downward (for example, from G to G 2 ).

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  How U.S. Output is Measured. National Income Diagrammed

  • Arthur O. Dahlberg(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  But because of organizational a r r a n g e -ments, both the m a n a g e r s of business and the officials of government have consider-able discretion over how much they will spend of the money entrusted to them, when 16 they will spend it, and for what they will spend it. Because the volume of goods and s e r v i c e s that returns to business and gov-ernment is synchronized with their expendi-tures, it is as e a s y and convenient f r o m a statistical point of view to r e g a r d business and government as c o n s u m e r s as it is to r e -gard them as spenders. G r o s s National Expenditures is the sum of all expenditures by the three major spend-ing groups. (Actually, there is a fourth group whose spending contributes to the total, the R e s t of the World group. But, as ex-plained previously, because its contribution is small, we have omitted it-) Logically, the total value of all the goods and services purchased by these groups can be viewed as the total value of all the goods and s e r v i c e s produced for these groups. When viewed in this second way—that is, when expenditures are viewed as the value (or exchange) equiv-alent of production—the total expenditures a r e called G r o s s National Product. The common practice of using the t e r m f Gross National P r o d u c t quite i n t e r c h a n g e -a b l y with G r o s s N a t i o n a l E x p e n d i t u r e s h a s ; led to c o n s i d e r a b l e c o n f u s i o n . F o r the two I terms a r e only n u m e r i c a l v a l u e e q u i v a l e n t s . I. They a r e not c o n c e p t u a l e q u i v a l e n t s . S e -mantically the t e r m e x p e n d i t u r e s s u g g e s t s money o u t l a y s , w h e r e a s p r o d u c t s u g g e s t s the volume of goods and s e r v i c e s p r o d u c e d .

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  World Development Indicators 2012

  • World Bank(Author)
  • 2012(Publication Date)
  • World Bank

    (Publisher)

  Neither technique captures improvements in productivity or changes in the quality of government services. Deflators for household consumption are usually cal- culated on the basis of the consumer price index. Many countries estimate household consumption as a residual that includes statistical discrepancies associated with the estimation of other expenditure items, including changes in inventories; thus these estimates lack detailed breakdowns of household consumption expenditures. • Household final consumption expenditure is the market value of all goods and services, including durable products (such as cars and computers), purchased by households. It excludes purchases of dwellings but includes imputed rent for owner- occupied dwellings. It also includes government fees for permits and licenses. Expenditures of nonprofit institutions serving households are included, even when reported separately. Household consumption expenditure may include any statistical discrepancy in the use of resources relative to the supply of resources. • Household final consumption expen- diture per capita is household final consumption expenditure divided by midyear population. • Gen- eral government final consumption expenditure is all government current expenditures for goods and services (including compensation of employees). It also includes most expenditures on national defense and security but excludes military expenditures with potentially wider public use that are part of govern- ment capital formation. • Gross capital formation is outlays on additions to fixed assets of the economy, net changes in inventories, and net acquisitions of valuables. Fixed assets include land improve- ments (fences, ditches, drains); plant, machinery, and equipment purchases; and construction (roads, railways, schools, buildings, and so on).

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