Circular Flow of Income and Expenditure, Macroeconomics Video Lecture | Macro Economics - B Com

right so we've been looking at GDP and
we've defined it and we've seen the
importance of it now we're going to look
at two different ways of measuring GDP
the expenditures approach and the income
approach remember that we are looking at
a circular flow of funds right so when
we want to look at the value of goods
and services produced in the country in
other words the value of GDP we can
either measure that value in terms of
the money that was spent on the GDP or
in terms of the income that was earned
by providing the factors of production
that went into producing the goods and
services the value of whatever's on this
side must be the same as the values of
what it is on that side in other words
the expenditure must be equal to the
income so came back to where we were our
expenditure approach right the
expenditure practices that we measure
GDP in terms of all the different types
of spending which was household spending
consumption investment government
spending exports and imports so look at
those in a bit more detail consumption
is spending by households investment is
essentially spending my firm's
what are they spending on there by
machines and equipment that construct
factories and they build up their
inventories then of course we have
government spending and remember that
transfers are not included in this
figure because transfers are simply a
transfer of value from one place to
another there's no production that
happens when government provides a
social grant that social grant is not in
lieu of some production that is going to
happen or has happened it's simply a
transfer of value for
one point from one party to another
there's no production that happens there
Ford cannot be part of GDP because GDP
requires production right then what
about foreigners foreigners buy our
goods therefore we must include the
value of exports in other words the
value of goods that we send out of the
country although we've sent them out of
the country they were produced within
the country right therefore the value of
exports must be part of our GDP then
we've got imports in other words
households investment government they
can all be spending money either on
goods made within the country or by
buying goods made outside of the country
if they bought goods from outside of the
country that is an import if it was
bought from outside of the country
however that is not our GDP that is
someone else's GDP those goods were
produced somewhere else therefore any
spending that was on goods from outside
of the country in other words imports
must be subtracted from the spending
that these guys did so GDP expenditures
approach C plus I plus G Plus X minus M
what about the income approach the
income approaches are Carol what income
is earned from providing the factors of
production occur to GDP well we have
households earning wages some households
might also earn rent and interest then
we've got firms earning profits those
firms could also an interest in rinse
and then we've got taxes right so
government earns taxes we have to add
the taxes back to the profits and the
wages because obviously any wage that
you're going to get taxed in in profit
that you that firms own gets taxed but
within firm profits are also transfers
of funds from governments to firms which
we call subsidies in other words firm
may pay taxes to the government and the
government may then give money back to
the firm we call that a subsidy if there
is the case right then we would be
counting subsidies twice if we did not
subtract the value of subsidies from the
profits earned by the firms because
remember a subsidy is simply a transfer
value
there's no production that takes place
to the value of a subsidy we've also got
depreciation which we need to add back
into that we can come back to that
explanation a little bit later when we
talk more about investment but for now
know that we need to add depreciation
back to the income that was earned by
households and profit
and firms and government and then if we
are going to be technically correct we
need to subtract net foreign factor
income from any wages that were earned
in other words if a South African person
earned money for doing work outside of
South Africa and that formed part of
their wages while that work that they
did outside of South Africa doesn't form
part of South African GDP because it
wasn't produced within South Africa if
that is the case we need to subtract
that amount from the income that was
earned but you don't have to worry too
much about this when this one's a sort
of a just to be technically correct so
let's just put it together and see for
an expenditures approach to measuring
GDP or an income approach either way
we're going to end up at the same value
of GDP in the expenditures approach we
have C plus I plus G Plus what is called
X in which is X minus M right so X
little n means net exports in other
words X minus M or in terms of the
income approach we have wages plus
profits to firms plus depreciation
adding in taxes then adding in taxes
again then subtracting subsidies and we
get to this
okay let's see the day