Spending by the government on all nal goods and services. e. g. ages for government employees, the upkeep of military bases, the maintenance of Air Force One, the maintenance of roads and bridges This category includes government investments such as the maintenance/construction of roads. Does NOT include transfers of wealth such as Social Security, Medicare, and unemployment bene ts as they are already accounted for in Consumption. 14/ 31 Net exports: The di erence between total exports (to all other countries) and total imports (from all countries) to the U.
S.. If this number is negative, the U. S. is importing more value than it is exporting, in what is called a trade de cit. If this number is positive, the U. S. is experiencing a trade surplus. Note that these values are in terms of the subject country’s currency (U. S. dollars). We only consider net exports because 1) we do not want to double ount goods in the GDPs of other countries and 2) GDP is supposed to measure production in the U. S.
Splitting GDP – Factor Income Approach We can equivalently express this value in terms of how much agents in the U. S. receive for their goods or work. You can think of rms collecting revenue from the spending described in the national spending approach, and distributing it in the following way: Wages: Firms pay employees for their work Rent: Firms pay landowners and property owners rent Interest: Firms pay interest to the owners of the capital they are using Pro t: Any revenue that is left after the above payments are considered prot
The sum of these yields GDP, as calculated using the factor income approach: Y = Wages + Rent + Interest + Prot 16/31 Equivalence of National Spending and Factor Income Approaches The sum of all the spending in the U. S. doesn’t quite equal the sum of all payments to factors of production, so we need to make a few adjustments: Sales taxes aren’t re ected in the factor income approach, so we need to add that The national spending approach considers production that occurs before the depreciation of capital (i. e. machines wearing down), so this must be considered when using the factor income approach. 17/31
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