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Main content
Current time:0:00Total duration:4:49
AP.MACRO:
MEA‑1 (EU)
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MEA‑1.A (LO)
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MEA‑1.A.3 (EK)

Video transcript

you'll hear people talking about different ways of looking at GDP and in general they'll talk about the expenditure view of GDP expenditure view of GDP versus the income view of GDP and to realize why these get you to the same number for GDP but why you're kind of conceptually looking at two different things we're going to revisit a very very simple economy maybe slightly more complicated than that one Island economy so in this economy we have some households and that's why it's slightly more complicated I'm now saying households not just one house on an island so you have some households and you have some firms and you have some firms and for the sake of simplicity we're going to assume that households own all the factors of production on all factors of production and they essentially rent them out to firms to produce all the goods and services so all the firm's so this is another assumption produce all the goods and services produce all goods goods and services now this these are two very strong assumptions and it's really not true in the real world this just helps me draw the diagram obviously in the real world households do not own all of the factors of the production many if not most of the factors and product factors of production the the factories and the ships and whatever else are actually owned by firms in the real world but this is not that crazy of an assumption because those firms at the end of the day are owned by people they are owned by households so in theory that they could have been transferred to the households and then the households just rent the factors of production to the firm's and this is also a hugely simplifying assumption because we know that in the real world firms don't produce all the goods and services that households also produce goods and services some of which never get mentioned get measured the service of me taking the trash out at night or doing the lawn or making dinner or the service of parents taking care of their children none of that gets accounted for but for this just for simplicity we're going to make these two assumptions all the factors of production the and let's list them the labor the labor the land the capital and if we want to throw it in the entrepreneurship it's all owned by how soles and all the goods and services are produced by firms so just like we saw with that first example of the island the households do all of the expenditures and this ends up being all of the revenue all of the revenue for the firm's and then the firm's spend a lot you take that revenue and then spend it to rent many of these factors of production or some or all of these factors of production so they hire people which is essentially renting labour they might rent the land they might rent the capital so all of that ends up becoming income all of that ends up becoming income for the households and whatever else is left over so this is expenses this is expenses so if you take this revenue what's what it turns into is expenses and profit whatever is left over after expenses is profit but we're assuming all the firm's are also owned by all the households so the expenses plus the profit end up all going to the households and becoming income which then becomes expenditures expenditures for the household which then become revenue revenue for the firm's so when people say the expenditure versus the income view of GDP they're saying look I could measure GDP at any one of these points I could measure the expenditures in a time period by households in this very simple model which would be the same as the revenue of firms in this very similar model which is the same as the expenses plus the profit of the firm's in this simple model which is same as the income of the household and so the expenditure the expenditure view of GDP would be looking in this very simple model we'll see it gets complicated very fast especially when we start thinking about expenditures not just coming from households but this is a simplifying a hugely simplified model to show you that these are the same thing would say hey let's look at GDP at this point maybe at that point and if we want to look at the income model we could look at GDP at at that point what we'll see as we go into future videos and we start to break things between consumption and investment and government spending and net exports that it isn't quite this simple to diagram out but when we do think about that we are thinking when we're talking about consumption and investment in government we are thinking of it from the Bender's point of view there's another way of thinking about it where you could have looked at the aggregate income in that country's point of view making some adjustments for things like exports and imports and things like that but hopefully that at least clarifies why these come up with the same number from as you can see it in this very simple model and that they are two slightly different lenses on the same thing