MacroeconomicsI_working_version (1)

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Chapter 6
The relationship described above says that what is spent on product is an income to those
who provided their resources (human or material) to create that product and get it to the
market. Such an equation is an identity - purchasing (spending money) and selling
(receiving income) are two side of the same transaction – one side of the equation always
equals the other one.
That identity could be expanded in details as is shown in figure 6.3. The left part of the
figure presents that the total output – GDP is purchased by households, firms, government,
and by foreign consumers. The left part shows the income side of GDP – all the income
obtained from the sale of GDP, which is allocated among the suppliers’ resources in forms
of wages, interests, rents and profits.
Households’ expenditures for
consumption
plus
Firms’ expenditures for gross
investments
plus
Government purchases of goods
and services
plus
Expenditures by foreign
consumers
= GDP =
Wages
plus
Interests
plus
Rents
plus
Profits
plus
Statistical adjustment
Figure 6.3 Two sides of GDP: the expenditures (spending) and income approach. We can measure GDP
by summing all the expenditures paid for total output. Or, alternatively, we can count GDP as the total
income derived form the production of that output.
6.2.1. Expenditures Approach
Let’s explain the expenditures approach in more details. To measure GDP in this way, we
must sum up all spending - personal expenditures on consumption (C), gross private
domestic investment (Ig), government purchases (G), and net exports (Xn) – spent on final
goods and services.
The GDP equation: GDP = C + Ig + G + Xn