BMAK Lectures II

Goethe University Frankfurt
Macroeconomics 1 (BMAK)
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.
II. Measuring Macroeconomic Activity
Readings:
- Burda and Wyplosz (2022), Chapter 2
- Jones (2020), Chapter 2
1
1. Production, Income and Expenditure

In Chapter I, we had seen that the analysis of the dynamics of levels of
income per person and of output growth rates, both across countries or
groups of countries, motivate a good bit of macroeconomic modelling.
The output growth numbers as reported in Chapter I are based on the so-
called National Income and Product Accounts (NIPA). As we will
learn in the first part of the current chapter, the NIPA provide the most
widely used framework for measuring the state of macroeconomic activity,
and comparing it across time periods and/or countries/regions.
Understanding the key elements of the NIPA is also important so as to
appreciate what precisely is meant by terms such as "income" or "output",
and what interpretations these terms may be given.
2
A first key measure of the state of the economy is gross domestic

product (GDP). GDP may be determined in three different ways:
(i) Product Approach
GDP
= value of all goods and services newly produced, minus the value of all
intermediate goods and services used in the production process
= sum of value added at each stage of the production process.
When measuring economic activity through the level of production, we
need to ensure that the value of the same product is not counted more
than once. For example, a manufacturer of a laptop may use a processor
produced by another manufacturer, and this processor should not be
counted as both a good produced on its own, and as a component of the
laptop. By excluding at each stage of production the cost of intermediate
goods and services, the value added approach ensures that there is no
"double counting".
3
GDP by Value Added Produced: Germany

(Billion Euro and Percent of GDP, 2021)
Agriculture, Forestry and Fishing 30.6 0.8%

Industry Excluding Construction 783.2 21.7%
Construction 179.8 5.0%
Trade, Transport, Accommodation and Food Services 516.8 14.3%
Information and Communication 163.8 4.5%
Financial and Insurance Services 123.2 3.4%
Real Estate Activities 342.0 9.5%
Business Services 376.4 10.5%
Public Services, Education and Health 628.4 17.4%
Other Services 114.4 3.2%
Net Taxes (Taxes Less Subsidies) on Products 343.2 9.5%
Gross Domestic Product 3601.8 100.0%
Source of Data: Destatis (2022)
4
(ii) Income Approach

GDP
= sum of all incomes earned in the production of all new goods and services
that constitute value added.
GDP by Incomes Received: Germany

Compensation of Employees 1918.0 53.3%

Property and Entrepreneurial Income 825.4 22.9%
Net Taxes (Taxes Less Subsidies) on Products and Imports 281.2 7.8%
Depreciation of Physical Capital 704.9 19.6%
Net Income Paid to Nonresidents -127.7 -3.5%

5
(iii) Expenditure Approach

GDP
=
sum of all expenditures by final users of newly produced goods and services:
Y  C  I  G  EX  IM . (1)
      
     
GDP consumption investment government exports
 imports
expenditure
   trade balance (TB)
gross national expenditure (GNE)
 total spending by   total spending by private firms   total spending by   exports imports = trade 
 private households   on newly produced goods and   public sector on   balance: value of newly 
 on newly produced   services (investment in plant   newly produced   produced goods and 
 services and   and equipment as well as in-   goods and services;   services exported minus 
 (durable as well as   ventory investment, with in-   this thus does not   
 imported 
 nondurable) goods,   ventory valued at cost); also   include transfer 
 except new housing   included is spending by private   
   payments 
 households on new housing; 
 all this spending adds to the 
 stock of physical capital 
 
6
GDP by Expenditure Components: Germany

Final Consumption Expenditure 1773.8 49.2%

Gross Fixed Capital Formation 838.9 23.3%
Machinery and Equipment 229.4
Construction 416.7
Other Products 137.7
Changes in Inventories 55.1
Government Final Consumption Expenditure 797.5 22.1%
Trade Balance 191.6 5.3%
Exports 1693.9
Imports 1502.4

Note: Destatis includes public-sector spending on newly produced goods and services
that add to the stock of physical capital in "gross fixed capital formation"; the latter
thus encompasses a larger number of components than "investment".
7
GDP Recording of a Single Market Transaction
As we have seen in the data, when calculating GDP using the product,
income or expenditure approach, we always obtain the same total value
for GDP. This reflects that for the aggregate economy, production
equals income equals expenditure.
At the same time, all three approaches yield different insights into the
macroeconomy:
 The product approach informs us about the sectoral decomposition of
GDP.
 The income approach yields insight into the distribution of GDP
between status groups such as employees and entrepreneurs.
 The expenditure approach provides a decomposition of GDP into the
components of gross national expenditure and the trade balance.
8
Let us further illustrate these facts and learn about some key rules of
NIPA accounting through considering examples of GDP calculations:
Calculating the Effects of a Single Market Transaction on GDP
On January 20, 2022, a domestic household purchases from a grocery

store two liters of milk, at 1.5 Euro per liter. The grocery store
purchased the milk five days earlier at a wholesale price of 1 Euro per
liter.
How to calculate the effect of this January 20 transaction on the year
2022 GDP of the domestic economy under the product, income and
expenditure approaches?
9
The January 20 transaction contributes to the year 2022 GDP of the

domestic economy as follows:
‐ Product approach: sale of milk on January 20 creates value added

produced in the amount of:
3 Euro (value of milk as sold by the grocery store)
– 2 Euro (value of milk as purchased by the grocery store: intermediate
good)
= 1 Euro.
‐ Income approach: sale of milk on January 20 creates value added

earned in the amount of:
(3 Euro – 2 Euro) = 1 Euro
(income recipients may include staff and owners of the grocery store, as
well as the government, if there was a sales tax involved).
10
‐ Expenditure approach:
purchase of milk on January 20 is consumption expenditure in the
amount of 3 Euro;
at the same time the value of the grocery store's inventory through this
purchase is reduced by 2 Euro (negative inventory investment);
making use of Equation (1), Y = C + I + G + TB, and noting that we have
no government expenditure, no exports and no imports, overall
expenditure is given by:
3 Euro + (– 2 Euro) = 1 Euro.
11
Calculating GDP for a Sample Economy
Quiet Muffler GmbH has a factory in Landshut valued at a 2,000,000 Euro.

During the year 2022 Quiet Muffler builds ten mufflers. The market value of
each muffler is 800 Euro. Quiet Muffler's costs for the production of each
muffler are: labor, 300 Euro; interest on debt, 250 Euro; imported components
from Malaysia, 100 Euro; and taxes, 50 Euro.
Ecological Engine GmbH, which is located in Ingolstadt, has a factory valued at
4,000,000 Euro. During the year 2022 Ecological Engine builds eleven engines
each having a market value of 5,000 Euro. Ecological Engine's costs to produce
each engine are: labor, 2,000 Euro; imported components from Romania,
1,000 Euro; and taxes, 1,000 Euro.
Ecological Engine sells ten of these engines, but at the end of the year 2022
had not sold the eleventh engine it had produced, which is put into inventory.
Quiet Muffler sells all its ten mufflers and Ecological Engine sells all the ten
engines that it does sell to Future Vehicles AG, which is located in Stuttgart.
12
Using Quiet Muffler's mufflers and Ecological Engine's engines, Future Vehicles
during the year 2022 builds ten cars at a cost of 15,000 Euro each (5,800 Euro
worth of components; 6,200 Euro in labor costs; and 3,000 Euro in taxes per
car). Future Vehicles sells seven of the ten cars it had produced to German
households, for 22,000 Euro each; at the end of the year 2022, it had not sold
the remaining three cars it had produced, which are put into inventory.
How to calculate (under the product, income and expenditure approaches) the
year 2022 GDP of this sample German economy made up of Quiet Muffler,
Ecological Engine, and Future Vehicles?
13
• GDP Based on the Product Approach:

We need to determine the value added adduced by each firm in 2022, and
then sum the values added across all firms in the sample economy (the
following amounts are in Euro):
Quiet Ecological Future Total

Muffler Engine Vehicle
Value of Goods and 10 ∙ 800 10 ∙ 5,000 7 ∙ 22,000 261,000
Services Newly + 1 ∙ 4,000 + 3 ∙ 15,000
Produced
Less Intermediate  10 ∙ 100  11 ∙ 1,000  10 ∙ 5,800  70,000

Goods and Services
Total = Valued Added 7,000 43,000 141,000 191,000

/ GDP Based on
Product Approach
14
• GDP Based on the Income Approach:

We need to add up all (value-added) incomes earned in the sample
economy in 2022. Note that one type of income earned are the firms'
profits. We calculate these in the first step, as profit = revenue − cost :
Profit Quiet Muffler

Revenue 10 ∙ 800 = 8,000
Cost
Labor 10 ∙ 300 = 3,000
Parts (imported) 10 ∙ 100 = 1,000
Interest payments 10 ∙ 250 = 2,500
Tax payments 10 ∙ 50 = 500
Profit = 1,000
15
Profit Ecological Engine

Revenue 10 ∙ 5,000 + 1 ∙ 4,000 = 54,000
Cost
Labor 11 ∙ 2,000 = 22,000
Parts (imported) 11 ∙ 1,000 = 11,000
Tax payments 11 ∙ 1,000 = 11,000
Profit = 10,000
Profit Future Vehicles

Revenue 7 ∙ 22,000 + 3 ∙ 15,000 = 199,000
Cost
Labor 10 ∙ 6,200 = 62,000
Parts (domestic) 10 ∙ 5,800 = 58,000
Tax payments 10 ∙ 3,000 = 30,000
Profit = 49,000
16
Other types of value-added income earned in the sample economy in 2022

include labor income (of the employees), interest income (of the banks) and tax
revenue (of the government). Adding up all valued-added incomes earned in the
sample economy in 2022:
Quiet Ecological Future Total

Muffler Engine Vehicles
Profits 1,000 10,000 49,000 60,000
Labor Income 3,000 22,000 62,000 87,000
Interest Income 2,500 0 0 2,500
Tax Revenue 500 11,000 30,000 41,500
Total = GDP Based 191,000

on Income Approach
17
• GDP Based on the Expenditure Approach:

For the expenditure approach, we can make use of Equation (1),
Y  C  I  G  TB :
Total
Consumption 154,000 154,000
Investment 4,000 + 45,000 49,000
Government Expenditure 0 0
Trade Balance  1,000  11,000  12,000
Total = GDP Based on 191,000

Expenditure Approach
18
GDP vs. GNP/GNI
In addition to GDP, measures of the state of the economy often analyzed

include gross national product (GNP) and gross national disposable
product (GNDP).
GNP is related to GDP as follows:
GDP
+ primary income received by residents from nonresidents = balance on
primary income
− primary income paid by residents to nonresidents
(BPI)
= GNP
Notes:
• Primary income received from nonresidents represents the return received
by residents for providing to nonresidents temporary use of labor, financial
resources or nonproduced nonfinancial assets (the latter include, for
example, licenses and leases).
• Examples include compensation of employees, interest income, dividends
and rents, all as received by residents from nonresidents.
19
GDP vs. GNP/GNI
Thus, GDP captures all incomes received by the producers of new goods and
services operating within the borders of the domestic country (irrespective of
where their permanent residence is), whereas GNP captures all incomes
received by the producers of new goods and services who are permanent
residents of the domestic country (irrespective of where they received these
incomes).
On terminology: GNP is often referred to as GNI (gross national income).

BPI is sometimes referred to as net factor income from abroad (NFIA ).
20
GDP vs. GNP/GNI
GDP vs. GNI: The Case of Ireland
Source: Feenstra and Taylor (2017), International Macroeconomics
21
GNP vs. GNDP/GNDI
GNP in turn is related to GNDP as follows:
GNP
+ secondary income received by residents from nonresidents = balance on
secondary
− secondary income paid by residents to nonresidents income (BSI )
= GNDP
Notes:
• Secondary income received from nonresidents represents income received by
residents without providing to nonresidents a corresponding economic value
in return.
• Examples include personal transfers, social contributions, insurance
premiums and insurance claims, all as received by residents from non-
residents.
On terminology: GNDP is often referred to as GNDI (gross national

disposable income). BSI is sometimes referred to as net unilateral
transfers (NUT).
22
GNP vs. GNDP/GNDI
Major Recipients of Net Unilateral Transfers
23
Current Account
Current Account
The so-called current account balance is given by the sum of

(i) the trade balance (exports minus imports of goods and services),
(ii) the net primary income (primary income received minus primary income
paid), and
(iii) the net secondary income (secondary income received minus secondary
income paid):
CA  TB  BPI  BSI . (2)
24
GDP vs. NDP
Distinction Between Gross and Net Measures
Subtracting technical and physical depreciation of the stock of physical capital,

we move from gross measures to the corresponding net measures. For
example:
GDP
− consumption of fixed capital (depreciation)
= NDP (net domestic product)
Net measures convey how much income is available if the value of the
productive capacities (that is, the stock of physical capital) is to be
maintained.
25
GDP, GNP, GNDP and NDP
Calculating a Firm's Contributions to GDP, GNP, GNDP and NDP
In the year 2022, Berlin-based InVogue develops a new app listing current
sales events in several German cities; the app in the year 2022 is
downloaded globally 500,000 times at a purchase price of 3 Euro. InVogue's
IT equipment at the beginning of the year 2022 is valued at 120,000 Euro;
the annual rate of depreciation on InVogue's IT equipment is 25%. InVogue
pays the following annual wages to its programmers: 550,000 Euro to
programmers who are residents of Germany, and 150,000 Euro to
programmers who are residents of Poland. The programmers who are
residents of Germany in 2022 transfer 5,000 Euro of their earnings to an
orphanage in Cambodia. The programmers who are residents of Poland in
2022 transfer 20,000 Euro of their earnings to relatives in Poland. The profits
of InVogue are paid as dividends to its owners, who are residents of Qatar.
Calculate the year 2022 contributions of InVogue to the GDP, GNP, GNDP and
NDP of the German economy.
26
The year 2022 contributions of InVogue to the German economy are as

follows:
‐ GDP Contribution: Value added in the amount of 3 Euro (sales price of app)
∙ 500,000 (number of downloads) = 1,500,000 Euro.
‐ GNP Contribution: Note that the following primary income is paid to
nonresidents:
-- Wages of Polish programmers: 150,000 Euro;
-- Factor income on physical capital for Qatari owners: 30,000 Euro (depre-
ciation of IT equipment: 120,000 Euro (value of capital stock at the
beginning of the year 2022) ∙ 0.25 (rate of depreciation as a fraction));
-- Dividend payments to the Qatari owners: 770,000 Euro (InVogue profits:
1,500,000 Euro (revenue) – 700,000 Euro (total cost of labor: 550,000
Euro + 150,000 Euro) – 30,000 Euro (depreciation of IT equipment)).
The GNP contribution is thus equal to 1,500,000 Euro (GDP contribution) –
950,000 Euro (BPI contribution) = 550,000 Euro.
27
‐ GNDP Contribution: The transfer of the German programmers to the

Cambodian orphanage (5,000 Euro) constitutes secondary income paid
to nonresidents. The GNDP contribution is thus equal to 550,000 Euro
(GNP contribution) – 5,000 Euro (BSI contribution) = 545,000 Euro.
‐ NDP Contribution: As calculated above, the year 2022 depreciation
amounts to 30,000 Euro. The NDP contribution is thus equal to
1,500,000 Euro (GDP contribution) – 30,000 Euro (depreciation) =
1,470,000 Euro.
28
Potential Problems with GDP
Potential Problems with GDP (and Related NIPA Measures)
GDP as a measure of an economy's valued added, and even more so as a

measure of a society's standard of living, may suffer from several
drawbacks:
• Measurement issues:
‐ Some goods and services, for example home production, are not
transacted and are thus not captured in GDP.
‐ Some goods and services are not officially transacted, for example
informal or illegal activities, and are thus difficult to capture as
part of GDP.
29
Size of Shadow Economy

(Estimated Size Relative to GDP, Fraction, 2015)
Source: Burda and Wyplosz (2022)
30
‐ Changes in the quality of goods and services are often ignored,

especially for services, and may be difficult to capture.
• Conceptual issues:
‐ Some components of GDP may be viewed as "regrettables" (not
enhancing the well-being of society).
‐ GDP does not take into account factors other than income that are
important for the well-being of society: for example,
• value of health,
• value of leisure time, and
• value of the environment.
31
Alternative measures of a society's standard of living exist, for example the

"Human Development Index" (HDI), calculated by the United Nations.
HDI takes into account information on health (such as life expectancy at

birth) and education (such as years of schooling), in addition to that on
GDP, in aiming to measure the "quality of life".
Despite the existence of such alternative measures, GDP continues to be

the main measure used in practice for comparing the standard of living
achieved across time periods and countries.
32
2. Saving and Wealth
As for individual households and firms, the economic well-being of an

economy beyond income also depends on its wealth. A firm, for
example, is routinely assessed both on the basis of its income
statement and its balance sheet (the latter listing assets and liabilities).
This is as measuring changes in wealth permits monitoring the
sustainability of economic development.
How to measure the national wealth of an economy, and how does

national saving contribute to the accumulation of national wealth?
33
Private Saving
Private Saving
Saving of the private sector:
S pvt  Y  BPI  BSI  T  GT  C , (3)



GNI
 GNDI

private GNDI
where
T = taxes levied by government on private sector;
GT = net transfers from government to private sector.
Government Saving
Saving of the government sector:
S govt  T  GT  G. (4)
 
net government income
34
National Saving
National Saving
Adding up private saving and government saving, we obtain
S  S pvt  S govt
 Y  BPI  BSI  T  GT  C   T  GT  G 
(5)
 Y  BPI  BSI  C  G.
Substituting the expenditure approach-based definition of GDP from Equation
(1), Y = C + I + G + TB, into Equation (5) and noting Equation (2), we
obtain:
S  I  TB  BPI  BSI . (6)

CA
National saving can thus be allocated to two uses:

(i) funding (through I) the domestic accumulation of physical capital;
(ii) funding the accumulation of (nonfinancial and financial) wealth abroad
(being a net lender to the rest of the world if CA > 0).
35
Saving, Investment and Current Account
Saving, Investment and Current Account
36
National Wealth
National Wealth
National wealth is the overall wealth of the residents of an economy. How to
measure it? Consider first the net asset position of an individual. His/her end of
period t net asset position is given by:
net asset position at end of period t

 net asset position at beginning of period t
 acquisitions of assets during period t
 disposals of assets during period t
 valuation changes of net assets during period t .
In general, end-of-period wealth is thus a function of
• beginning-of-period wealth,
• saving (net asset acquisitions minus net asset disposals), and
• valuation changes.
37
National Wealth
Tracing saving sufficiently far back into the past, the components of saving
(including their subsequent valuation changes) thus inform us about the
components of wealth.
From Equation (6), we know that national saving can be allocated either
towards investing in physical capital in the domestic economy or towards
accumulation of wealth abroad (that is, lending to the rest of the world).
Note that the domestic economy's stock of physical capital (K) is related to
investment in physical capital as follows:
K end of  K beginning of    K beginning of  It . (7)

period t period t  period t

rate of investment
depreciation during period t
of physical
capital during
period t
38
National Wealth
National wealth therefore is composed of:

(i) the domestic economy's capital stock (K), and
(ii) the domestic economy's wealth abroad (net international investment
position (NIIP), equal to foreign nonfinancial and financial assets (FOA)
minus foreign nonfinancial and financial liabilities (FOL)):
national wealth  K  FOA  FOL . (8)


 
domestic wealth wealth abroad  NIIP 
Notes:
• Domestic financial assets held by domestic residents are not part of
national wealth.
(The value of domestic financial assets for their holders is offset by them
being a liability of the same amount for the domestic issuers of these
assets.)
39
National Wealth
• Equating the stock of physical capital at the end of period t with the
stock of physical capital at the beginning of period t + 1, the capital
accumulation equation, (7), may also be written as
K t 1  K t    K t  I t
 1     K t  I t . (9)
Equation (9) will feature in our models of the macroeconomy.
Let us further illustrate national wealth accounting by considering the

calculation of national saving and national wealth for two sample
economies:
40
Goethe University Frankfurt II. Measuring Macroeconomic Activity
Macroeconomics 1 (BMAK) 2. Saving and Wealth
Wintersemester 2022/23 Calculating National Saving and Wealth for Sample Economies
Calculating National Saving and National Wealth for Sample Economies

Green Engine GmbH is located in the economy East, and at the beginning of
the year 2022 had a capital stock worth 70,000 Euro. During 2022, Green
Engine builds 200 electric engines and its capital stock depreciates by 4,000
Euro. The market value of each engine is 300 Euro. Green Engine's costs for
the production of each engine are: cost of labor from workers who are
residents of East, 20 Euro; cost of labor from workers who are residents of the
economy West, 75 Euro; taxes, 10 Euro. Green Engine sells all 200 of the
engines produced in 2022 to Quiet Vehicles AG (which is located in West). Also
during 2022, the owners of Green Engine purchase 3,000 shares of the stock
of Quiet Vehicles AG, at a price of 10 Euro per share. Finally during 2022, the
owners of Green Engine earn 5,000 Euro in interest payments on a savings
account held with a bank in West (the balance on this account at the beginning
of the year 2022 had been 75,000 Euro, and the only transaction in this
account that occurs during 2022 is the crediting of the 5,000 Euro interest
payment).
41
Quiet Vehicles entered the year 2022 with a capital stock worth 250,000
Euro. During 2022, Quiet Vehicles builds 200 motorcycles and its capital stock
depreciates by 20,000 Euro. The costs for the production of each motorcycle
are: 300 Euro worth of components from Green Engine; 500 Euro cost of
labor from workers who are residents of West. Quiet Vehicles sells 5 of the
motorcycles produced for 2,000 Euro to private households in East; it sells
105 of the motorcycles produced to private households in West (also at 2,000
Euro per motorcycle). At the end of the year 2022, Quiet Vehicles puts all
remaining 90 motorcycles produced but not sold in 2022 into its inventory.
How to calculate the year 2022 national saving as well as the national wealth
at the end of the year 2022 of the economies East and West?
42
National Saving:
East West
Investment 0 90 ∙ 800
(addition to inventory)
Trade Balance 200 ∙ 300 − 200 ∙ 300
(exports of engines) (imports of engines)
− 5 ∙ 2,000 5 ∙ 2,000
(imports of motorcycles) (exports of motorcycles)
Balance on Primary − 200 ∙ 75 200 ∙ 75

Income (wages paid to workers from West) (wages of workers earned in East)
5,000 − 5,000
(interest income earned in West) (interest income paid to East)
Balance on Secondary 0 0
Income
Total = National Saving 40,000 32,000
43
National Wealth:
East West
Capital Stock 70,000 250,000

(initial capital stock) (initial capital stock)
− 4,000 − 20,000
(depreciation) (depreciation)
90 ∙ 800
(addition to inventory)
Foreign Nonfinancial 3,000 ∙ 10 0
and Financial Assets (stocks held in West)
75,000 + 5,000
(savings account held in West)
Foreign Nonfinancial 0 3,000 ∙ 10
and Financial Liabilities (stocks held by East)
75,000 + 5,000
(savings account held by East)
Total = National Wealth 176,000 192,000
44
Potential Problems with Wealth Measure
Potential Problems with this Measure of National Wealth
As a measure of an economy's comprehensive wealth, the wealth measure we

have considered appears to omit relevant factors, including
• "human capital" (the education and skills of the economy's people), and
• "natural capital" (including the economy's land, forests, minerals and
energy).
Alternative measures of an economy's wealth exist, for example the World

Bank's "total wealth" that combines physical, human and natural capital as
well as net foreign assets, but data coverage is still relatively limited.
45
Wealth: Cross-Country Data
Total Wealth and Its Components
United
Germany Switzerland China India Brazil Burundi
States
1995 Total Wealth per Capita

(Constant 2018 U.S. Dollars) 682128 476436 1061415 33512 9422 94322 6669
2018 Total Wealth per Capita

(Constant 2018 U.S. Dollars) 872400 672408 1280372 174365 24102 117206 4594
Contributions to 2018 Total Wealth

per Capita (in Percent)
Produced Capital 30 38 29 23 25 26 11
Natural Capital 2 1 1 4 12 13 16
Human Capital 71 57 62 73 65 63 77
Net Foreign Assets -3 4 8 0 -2 -2 -4
Source of Data: World Bank DataBank (2022)
46

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BMAK Lectures II

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Goethe University Frankfurt

II. Measuring Macroeconomic Activity

II. Measuring Macroeconomic Activity

A first key measure of the state of the economy is gross domestic

GDP by Value Added Produced: Germany

Agriculture, Forestry and Fishing 30.6 0.8%

Net Taxes (Taxes Less Subsidies) on Products 343.2 9.5%

Gross Domestic Product 3601.8 100.0%

Source of Data: Destatis (2022)

(ii) Income Approach

GDP by Incomes Received: Germany

Compensation of Employees 1918.0 53.3%

Gross Domestic Product 3601.8 100.0%

(iii) Expenditure Approach

GDP by Expenditure Components: Germany

Final Consumption Expenditure 1773.8 49.2%

Gross Domestic Product 3601.8 100.0%

Calculating the Effects of a Single Market Transaction on GDP

On January 20, 2022, a domestic household purchases from a grocery

The January 20 transaction contributes to the year 2022 GDP of the

‐ Product approach: sale of milk on January 20 creates value added

‐ Income approach: sale of milk on January 20 creates value added

Calculating GDP for a Sample Economy

Quiet Muffler GmbH has a factory in Landshut valued at a 2,000,000 Euro.

• GDP Based on the Product Approach:

Quiet Ecological Future Total

Less Intermediate  10 ∙ 100  11 ∙ 1,000  10 ∙ 5,800  70,000

Total = Valued Added 7,000 43,000 141,000 191,000

• GDP Based on the Income Approach:

Profit Quiet Muffler

Profit Ecological Engine

Profit Future Vehicles

Other types of value-added income earned in the sample economy in 2022

Quiet Ecological Future Total

Profits 1,000 10,000 49,000 60,000

Labor Income 3,000 22,000 62,000 87,000

Interest Income 2,500 0 0 2,500

Tax Revenue 500 11,000 30,000 41,500

Total = GDP Based 191,000

• GDP Based on the Expenditure Approach:

Consumption 154,000 154,000

Investment 4,000 + 45,000 49,000

Trade Balance  1,000  11,000  12,000

Total = GDP Based on 191,000

In addition to GDP, measures of the state of the economy often analyzed

On terminology: GNP is often referred to as GNI (gross national income).

GDP vs. GNI: The Case of Ireland

Source: Feenstra and Taylor (2017), International Macroeconomics

GNP in turn is related to GNDP as follows:

On terminology: GNDP is often referred to as GNDI (gross national

Major Recipients of Net Unilateral Transfers

Source: Feenstra and Taylor (2017), International Macroeconomics

The so-called current account balance is given by the sum of

Distinction Between Gross and Net Measures

Subtracting technical and physical depreciation of the stock of physical capital,

Calculating a Firm's Contributions to GDP, GNP, GNDP and NDP

The year 2022 contributions of InVogue to the German economy are as

‐ GNDP Contribution: The transfer of the German programmers to the

Potential Problems with GDP (and Related NIPA Measures)

GDP as a measure of an economy's valued added, and even more so as a