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Chapter 8: Q. 8.3 - Learning Objectives (page 164)

Explain the expenditure and income approaches to tabulating GDP.

Short Answer

Expert verified

The money spent on products and services is the starting point for the expenditure approach. The income approach, on the other hand, begins with the revenue generated by the production of goods and services (wages, rents, interest, and profits).

Step by step solution

01

Content Introduction

The expenditure method seeks to compute GDP by summing all final goods and services purchased in a given country. The income approach considers the country's final income.

02

Content Explanation

The income approach compares a country's overall output to the total factor income obtained by its population or citizens. The following are the most common types of factor income:

Employee remuneration (costs of ancillary benefits such as unemployment, health, and retirement);

Interest earned after interest paid is deducted;

Net of landlord expenses, rental income (mostly for the use of real estate);

Royalties are fees paid for the use of intellectual property and natural resources that can be extracted.

The expenditure method is essentially a technique of output accounting. It focuses on determining a country's overall output by determining the total amount of money spent. The basic formula for calculating domestic output takes all of the different areas where money is spent within a region and then adds them together to get the overall production.

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Most popular questions from this chapter

Which of the following activities of a computer manufacturer during the current year are included in this year's measure of GDP?

a. The manufacturer produces a chip in June, uses it as a component in a computer in August, and sells the computer to a customer in November.

b. A retail outlet of the firm sells a computer completely built during the current year.

c. A marketing arm of the company receives fee income during the current year when a buyer of one of its computers elects to use the computer manufacturer as her Internet service provider.

Why might a range of dashboard economic indicators be difficult to include in one single measure such as GDP ?

Which of the following are production activities that are included in GDP? Which are not?

a. Mr. King performs the service of painting his own house instead of paying someone else to do it.

b. Mr. King paints houses for a living.

c. Mrs. King earns income from parents by taking baby photos in her digital photography studio.

d. Mrs. King takes photos of planets and stars as part of her astronomy hobby.

e. E⋆Trade charges fees to process Internet orders for stock trades.

f. Mr. Ho spends \(10,000on shares of stock via an Internet trade order and pays a \)10brokerage fee.

g. Mrs. Ho receives a Social Security payment.

h. Ms. Hernandez makes a $300payment for an Internet-based course on stock trading.

i. Mr. Langham sells a used laptop computer to his neighbor.

Each year, Johan typically does all his own landscaping and yard work. He spends \(200per year on mulch for his flower beds, \)225per year on flowers and plants, \(50on fertilizer for his lawn, and \)245on gasoline and lawn mower maintenance. The lawn and garden store where he obtains his mulch and fertilizer charges other customers \(500for the service of spreading that much mulch in flower beds and\)50 for the service of distributing fertilizer over a yard the size of Johan's. Paying a professional yard care service to mow his lawn would require an expenditure of $1,200per year, but in that case Johan would not have to buy gasoline or maintain his own lawn mower.

Each year after a regular spring cleaning, Maria spruces up her home a little by retexturing and repainting the walls of one room in her house. In a given year, she spends \(25on magazines to get ideas about wall textures and paint shades, \)45on newly produced texturing materials and tools, \(35on new paintbrushes and other painting equipment, and \)175on newly produced paint. Normally, she preps the walls, a service that a professional walltexturing specialist would charge \(200to do, and applies two coats of paint, a service that a painter would charge \)350to do, on her own.

a. When she purchases her usual set of materials and does all the work on her home by herself in a given spring, how much does Maria's annual spring texturing and painting activity contribute to GDP?

b. Suppose that Maria hurt her back this year and is recovering from surgery. Her surgeon has instructed her not to do any texturing work, but he has given her the go-ahead to paint a room as long as she is cautious. Thus, she buys all the equipment required to both texture and paint a room. She hires someone else to do the texturing work but does the painting herself. How much would her spring painting activity add to GDP?

c. As a follow-up to part (b), suppose that as soon as Maria bends down to dip her brush into the paint, she realizes that painting will be too hard on her back after all. She decides to hire someone else to do all the work using the materials she has already purchased. In this case, how much will her spring painting activity contribute to GDP?
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