Expenditure Method Video Lecture | Macroeconomics- Learning and Analysis

in any given year people in the economy
produce goods and services they produce
television sets books pencil sharpeners
DVD players attorney services haircuts
and much more have you ever wondered
what the total dollar value of all those
goods and services is in your Island
well it's a massive exercise so we have
never thought of it and I don't see any
meaning of finding out the total value
of goods and services in the economy
first of all there is a very simple and
holistic way to calculate the value of
goods and services in the economy and it
is a very meaningful number it gives an
idea of the overall progress of the
economy let us see more in detail about
this number in my island
last year it was dollar one point three
eight four trillion in other words last
year people living and working in our
island have produced dollar one point
three eight four trillion worth of goods
and services that dollar amount dollar
one point three eight four trillion is
what we call as the gross domestic
product simply put gross domestic
product GDP is the total market value of
all final goods and services produced
annually within a country's borders can
you please explain by taking a simple
example for sure consider a simple
economy in which one good is produced
and sold Rahul find an apple seed and
plant it in some ears and apple tree
appears rahul paise ROM dollar five in
wages to pick and box the apples next
Rahul sells the apples to Vijay for
$8.00 Vijay turns the apples into apple
juice and sells the apple juice to
Monica for ten dollars
mónica consumes the juice what is the
GDP in this simple economy is it five
dollars is it $13 is it $10 $18 or some
other dollar amount we use three
approaches in our island to compute GDP
the expenditure approach the income
approach and the value-added approach
let me describe you each approach in
terms of a simple economy let's first
see expenditure approach to compute GDP
using the expenditure approach we add
the amount of money spent by buyers on
final goods and services the Verde's
final goods and services are important
in computing GDP because not all goods
are final goods some goods are
intermediate goods please define clearly
both final good and intermediate good i
am little confused see a final good or
service is a good in the hands of the
ultimate consumer think of buyers at
each stage of value creation the first
buyer in our simple economy was Vijay
he bought apples from Rahul the second
buyer was Monica who bought the apple
juice from Vijay Monica is the final
buyer in this economy
she is the final user the ultimate
consumer and she is consuming the final
product which is apple juice in other
words she herself doesn't add any
further value to it and doesn't sell to
another person the good that she buys is
the final good so then what are the
apples aren't they a final good to know
in this imaginary economy the apples is
an intermediate good because the
not consumed directly by consumers like
Monica an intermediate good is an input
in the production of a final good in
other words the apples were used to
produce apple juice the final good so
what does GDP equal if we use the
expenditure approach to compute it any
guesses simple it is the dollar amount
spent by buyers for final goods and
services in our simple economy there is
only one buyer Monica who spends ten
dollars on one final good apple juice
Thurs GDP in our tiny economy is ten
dollars I'm still not very clear why
expenditures on final goods only are
counted when computing GDP this is
because we would be double counting if
we counted expenditures on both final
Goods and intermediate goods double
counting refers to counting a good more
than once when computing GDP how if we
count both Monica's purchase of the
apple juice ten dollars and VJs purchase
of the Apple's $1 we count the purchase
of the apples twice once when the apples
are purchased by Vijay and once when the
apples are converted into apple juice so
while a product is going up the value
chain by adding value to it if we add up
the product at each stage of the value
chain we are double or possibly triple
counting it and in that case the
economic activity or GDP is not
correctly measured in order to achieve
the right measurement we therefore use
only the value of the final product hmm
very interesting now I got it let's now
touch upon the two other approaches to
calculate the GDP in your economy