Lecture II - Intermediate Macro: Today we learned how to compute GDP, three approaches: 1) value added approach; 2) expenditure approach; 3) income approach.
They follow from the three identities of national accounting: value of domestic production of final goods = value of expenditures on domestic final-use goods = income generated in domestic production of final goods.
It is not so important that they all deliver the same number but the way the get at GDP, the pie. The value added approach studies in which sectors (primary, secondary, tertiary, public) the pie is produced.
The expenditure approach studies who gets to eat the pie (private households, firms, the government, foreigners). The income approach studies which production factors are rewarded in production (workers, real estate owners, firm owners, the government).
There are many pitfalls and conventions in national accounting, especially with how the government is treated. For example, in the value added approach if the government has a lot of (perhaps even wasteful) costs, this will increase the GDP coming from the government.
We count housing as investment but cars as consumption. Expenditures on R&D, software, blue prints as investment, but human capital investment as consumption.
In the U.S., the system to compute GDP is called NIPA (the national income and product accounts) and is administered by the Bureau of Economic Analysis (BEA).
At the end, I showed a graph with both GDP (coming from the expenditure approach) and GDI (coming from the income approach) with slight statistical discrepancies, because no system of national accounting is perfect.
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