Curiosity 2.1: What Is the Difference between GDP and GNP?

2.2
Estimating GDP
Suppose that everything produced during the year was bought during the year. Then by adding up all expenditure on final goods and services during the year we would have a measure of GDP, what was produced during the year. This is the rationale behind the expenditure approach to measuring GDP, and with three major adjustments, it is the method by which U.S. GDP is estimated.
First, what if some of what was produced was not bought during the year? Suppose a million dollars worth of furniture, manufactured during the year and so part of that year's GDP, was not purchased during the year. The national accounts statistician views this extra furniture as having been purchased by the manufacturers themselves for the purpose of augmenting their inventory. In this way, by imaginative accounting, items that were not bought become bought. This technique causes the adding-expenditures approach to measure what was actually produced, namely GDP. Similarly, of course, if during the year people bought more than was produced so that inventories fell, the national accounts statistician records this difference as a negative investment in inventories, lowering the adding-expenditures measure to measure accurately what was actually produced.
Second, what if some things bought during the year were used products, such as antiques, and so do not correspond to that year's production? Such items are not counted when adding all expenditures, but the fraction of such sales that reflects a purchase of the services provided by the antique dealer is counted.
Third, what if some of the spending during the year was on imported goods and services, or on goods with imported components? Adding up all spending would then overestimate what was actually produced in the United States. This problem is solved by subtracting all imports.
Table 2.1 reports GDP measured via the expenditure approach. Total expenditure on goods and services is broken into four general categories, corresponding to those formulated by Keynes: consumption expenditure (denoted C), investment expenditure (I), government expenditure (G), and foreign expenditure, exports (X). An extra category, imports (M), is subtracted from exports to produce net exports. This step removes the import component inherent in all categories so that we end up with total expenditure on domestically produced goods and services. It must be stressed that all spending here is on actual goods and services, so that investment is spending on such things as lathes, delivery trucks, facto-ties, and shopping centers, not spending on financial investments such as stocks and bonds, and government spending is on things like highways and IRS accountants, not on transfer payments such as welfare payments that do not correspond to output.
Table 2.1 is a simplified version of a national accounts expenditure table; more detail can be found in the monthly publication Survey of Current Business published by the Bureau of Economic Analysis (BEA a branch of the Commerce Department). Notice that spending on inventory appears as "change in inventories"; it could be negative if inventories fell because more output was bought during the year than was produced during the year.

 



Macroeconomic Essentials. Understanding Economics in the News 2000
Macroeconomic Essentials - 2nd Edition: Understanding Economics in the News
ISBN: 0262611503
EAN: 2147483647
Year: 2004
Pages: 152

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