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Chapter 2 Macro

Product approach
the amount of output produced; important concept is value added = value of output minus value of inputs purchased from other producers
Income approach
the incomes generated by production
Expenditure approach
the amount of spending by purchasers
the fundamental identify of national income accounting
total production = total income = total expenditure
output produced
by domestically owned factors of production
GDP definition
output produced within a nation
GNP – NFP; NFP = net factor payments from abroad
= payments to domestically owned factors located abroad minus payments to foreign factors located domestically
the income-expenditure identity
Y = C + I + G + NX
Y = C + I + G + NX
Four main categories of spending: consumption (C), investment (I), government purchases of goods and services (G), and net exports (NX)
spending by domestic households on final goods and services (including those produced abroad)
• About 2/3 of U.S. GDP • Three categories
– Consumer durables (examples: cars, TV sets, furniture, major appliances)
– Nondurable goods (examples: food, clothing, fuel)
– Services (examples: education, health care, financial services, transportation)
spending for new capital goods (fixed investment) plus inventory investment
• About 1/6 of U.S. GDP
• Business (or nonresidential) fixed investment: spending by businesses on structures and equipment and software
• Residential fixed investment: spending on the construction of houses and apartment buildings
• Inventory investment: increases in firms’ inventory holdings
Government purchases of goods and services
spending by the
government on goods or services
• About 1/5 of U.S. GDP
• Most by state and local governments, not federal government
• Not all government expenditures are purchases of goods and services
– Some are payments that are not made in exchange for current goods and services
– One type is transfers, including Social Security payments, welfare, and unemployment benefits
– Another type is interest payments on the government debt
• Some government spending is for capital goods that add to the nation’s capital stock, such as highways, airports, bridges, and water and sewer systems
Net exports
exports minus imports
• Exports: goods produced in the country that are
purchased by foreigners
• Imports: goods produced abroad that are purchased by residents in the country
• Imports are subtracted from GDP, as they represent goods produced abroad, and were included in consumption, investment, and government purchases

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