GROSS DOMESTIC PRODUCT

The market value of all goods and services

produced within a country in a given period of
time.
It can be measured as all the EXPENDITURES
to buy the goods and services produced.
It can also be measured as all the INCOME
earned from producing the goods and services.
Since every dollar spent is someones income,
the two measures give the same result.

Gross Domestic Product

The circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world.

Gross Domestic Product

Firms hire factors of production from households. The blue flow,
Y, shows total income paid by firms to households.

Gross Domestic Product

Households buy consumer goods and services. The red flow,
C, shows consumption expenditures.

Gross Domestic Product

Households save, S, and pay taxes, T. Firms borrow some of
what households save to finance their investment.

Gross Domestic Product

Firms buy capital goods from other firms. The red flow I
represents this investment expenditure by firms.

Gross Domestic Product

Governments buy goods and services, G, and borrow or repay
debt if spending exceeds or is less than taxes

Gross Domestic Product

The rest of the world buys goods and services from us, X and
sells us goods and services, Mnet exports are X - M

Gross Domestic Product

And the rest of the world borrows from us or lends to us
depending on whether net exports are positive or negative.

Gross Domestic Product

The blue and red flows are the circular flow of income and
expenditure. The green flows are borrowing, lending, and taxes.

Gross Domestic Product

The sum of the red flows equals the blue flow.

Gross Domestic Product

That is: Y = C + I + G + X - M

Expenditures
Expenditures are purchases of goods and
services.
Expenditures are

Consumption (C)
Investment (I)
Government spending (on goods and services) (G)
Net Exports (X-M)
Exports (X)
Imports (M)

Expenditures equal Income

Expenditures= C + I + G + X M
All expenditures become someones
income so
Y (income) = C + I + G + X M

Government
Government spending:
Goods and services (G)
Roads, health care, education, helicopters, police officers
salaries, judges salaries.

Government revenue:

Taxes
(Income from Crown corporations)
(Tariffs)
Less Transfers to persons (part of net taxes)
GST rebates, unemployment insurance, pensions, subsidies
Interest on the debt (substantial)
NOTE: The govt is not buying services, so transfers are not
an expenditure.

Budgetary Deficits and Surpluses

Spending
Goods and services
(G) + Transfers to
persons (Tr)

Revenue
Taxes (Tx)

Net Taxes
Tx Tr = NT

Surplus
G + Tr < Tx
G < Tx Tr
G < NT

Deficit
G + Tr > Tx
G > Tx Tr
G > NT

Savings and Investment

Investment is financed by savings
Savings have three sources:
Savings by households
The part of income households do not spend on
consumption or net taxes.
(S = Y - C - NT)

Savings by governments
NT G = savings

Savings of foreigners
M X = foreign borrowing

STOCKS AND FLOWS

FLOWS
Income : the goods and
services produced each
year
Deficits: The excess of
spending over income each
year
Investment: Goods
produced to be used in
production each year
Surpluses: The excess of
revenue over expenditures
each year.

STOCKS
Wealth: All the goods a
person owns. Wealth is the
sum of past net saving.
Debt: the sum of all past
deficits less all past
surpluses
Capital: All the investment
goods owned. Capital is
the sum of past net
investment