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Components of GDP Assignment Help

• By considering all arrows to and from the goods market we see that Y + Im = C + I + G + X The left hand side is the value of all finished goods flowing into the goods market and the right hand side decomposes all goods into four categories. Note that this is simply an accounting identity and it must always hold.

• Moving Im to the right hand side we have Y = C + I + G + X - Im. X - Im is called net exports, NX and NX = - S_R. Note that net exports is equal to the amount that the rest of the world borrows from our country. Thus, we can write Y = C + I + G + NX where C, I, G, NX are called the components of GDP.

• We have another accounting identity from the financial markets: S_H + S_G + S_R = I. Using S_H = Y_Disp- C= Y -NT- C, S_G = NT- G and S^', =Im -Xwe get Y -NT- C+ NT- G + Im –¬ X = I, which is equivalent to the accounting identity from the goods market. Thus, if the accounting identity from the financial markets holds, the identity from the goods market must hold and vice versa. But the most important relationship to remember is

Y = C + I + G + NX

Four different measures of GDP

Using the circular flow model we see that there are four equivalent ways of measuring GDP:

• Using the definition: the market value of all finished goods (expenditure method)

• As the sum of all value added from all firms (value added method)

• As the sum of consumption (private and government), investment and net exports (components method)

• As the sum of all returns from the factor markets: wages, return on capital and so on (income method)

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