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Chapter 1.4 - GDP Components
Chapter 1.4 - GDP Components
MACROECONOMIC
FOUNDATIONS
❖ Introduction
❖ Consumption
❖ Investment
❖ Public Expenditure
❖ International trade
Introduction – GDP Components
➢ Consumption
➢ Investment
Source: CORE-ECON
Consumption (I)
• Consumption is the backbone of the economy and the largest
part of GDP.
• But only income? No! it is disposable income – Income after taxes (T)
and transfers (TR) from the governments (subsidies, scholarships…)
𝐶 = 𝑓 𝑌𝐷
• Also, individuals not only consume but save (S) part of their
incomes.
𝑌𝐷 = 𝐶 + 𝑆
➢ Changes in inventories
❑ Residential Investment.
Investment (III)
• Indeed, investment is the most volatile component of the GDP, why is it?
Source: CORE-ECON
Investment (IV)
• Investment is drastically driven by the current situation of the national
economy but, even more, by expectations on future economic growth
Negative Positive
Expectations Expectations
Source: CORE-ECON
Investment (V)
• Nowadays, worldwide
investment is below its trend
before the 2008 Financial
Crisis.
• This way, we
can compare
across
countries.
Public Expenditure (III)
• Governments are highly dependent on what they get as fiscal
revenues through Taxes (T).
• To pay these bonds, the government will take use of its future fiscal
revenues (coming from taxes).
Further topics on the
Government (II)
• The stock of these public bonds plus their interests is known as
Public Debt. This a stock variable (it is calculated in a given
moment).
• But if we take into account the interest rates paid for the bonds it
sells, we will be talking about the total fiscal balance, which can
show a deficit or a surplus too. Indeed, a country might have a
surplus or a deficit in the primary balance while having positive
interest rates.
International Trade
• The difference between Exports (part of the national production
going abroad) and Imports (part of international production
coming to the national economy) is known as Trade Balance
(TB) - Saldo comercial.
𝐺𝐷𝑃 = 𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀
𝑌 𝐷 = 𝑌 − 𝑇 + 𝑇𝑅
𝑌𝐷 = 𝐶 + 𝑆
• From the last two, we get:
𝐶 + 𝑆 = 𝑌 − 𝑇 + 𝑇𝑅
• Let’s assume TR=0 (transfer usually are very small on aggregate)
𝑌 =𝐶+𝑆+𝑇
Everything together (II)
• Taking back the GDP expression:
𝐶+𝑆+𝑇 ≡𝑌 ≡𝐶+𝐼+𝐺+𝑋 −𝑀
(𝑆 − 𝐼) ≡ (𝐺 − 𝑇) + (𝑋 − 𝑀)
This is called balance of payments equilibrium.
• S > I → S – I > 0; it says that all the savings in an economy are enough to
finance the Investment but also that the excess could finance the Public
Sector. The private sector has financing capacity.