Syndicate
GDP Equation
Up until now we have only focused on presenting the GDP. However it is also necessary to understand the different secrets involved in the GDP, specifically, its constitutive parts and how these behave. The discussion in this part is really interesting by itself, but it also facilitates comprehension and manipulation of the Keynesian model standard for macroeconomics.
The Keynesian model was developed in 1936 by the economist John Maynard Keynes, of The University of Cambridge, in his site, The General Theory of Employment, Interest and Money. The text that Mr. Keynes wrote had such a colossal influence, that it turned macroeconomics into an independent field of studies for economists.
Mr. Keynes site was the answer to the Great Depression of the 30’s. Since Keynes believed that government policies designed to combat that economic fall should concentrate on getting people to increase their expenses in goods and services, he started his model by using an equation that measures the GDP adding the expenses.
As we know we are able to measure the GDP by adding all the made expenses in the buying of goods and services or adding all the income that are derived from the production of goods and services. Both numbers need to be equal; this way the change to the method of counting the expenses to measure the GDP is completely valid.
The expense equation to measure the GDP adds the four traditional categories of expenditure, which are: (C) Consumption, (I) Investment, (G) Government, (NE) Net Exports, in order to equal the value of dollars, or the type of money used in a given country, of all the goods and services internally produced in a period, or GDP. In algebraic terms, the equation would look like this:
Y = C + I + G + NE
We will be getting into much more detail about this topic, however here is a little quick presentation about the four variables of expenses that the GDP is composed of:
- (C) represents the expenses of consumption that are done by households in goods and services, be it that they produce internally or overseas.
- (I) represents the expenses of investment that are done by the companies in goods of new capital, including factories, buildings and equipment. (I) also includes the changes in the inventories, because the goods that are produced during a period and are not sold have to go in the inventories of the companies and are counted as investment in inventories.
- (G) represents the buying of goods and services of the government.
- (NE) represents the net exports that are defined as all the exports of a country (EXP) except all the imports (IMP), or NE = EXP – IMP. EXP is the amount of dollars of our product that the foreigners buy. IMP is the amount of dollars of the product from the rest of the world that we buy.
These four expenditures provide us with the GDP because, as a group, they have been used to buy up to the last good produced in our country at a given moment.