17d: GDP calculations, don't understand the components

CFA Level I Economics
#1

Correct me if I’m wrong, but GDP is supposed to measure active a nation’s economy is i.e. how much goods/services are produced.

The book says GDP = C + I + G + Net exports

If C is what a household spent, I is what they invested into new business, and G is what the government spent (presumably it took it away from your C in the form of taxes), how does GDP account for the money that a household earned, but put into a savings account?

I ask because, without adjusting for savings contributions, arent you going to get two different answers between calculating GDP via the income method vs the expenditure method?

#2

I believe savings is assumed equal to investment, the two are not distinguished from each other. Its been a while since L1 though.

#3

I believe savings is assumed equal to investment, the two are not distinguished from each other. Its been a while since L1 though.

#4

I’m also not convinced on the details of it but the explanation is that saving is a ‘transfer’ of money, not ‘spending’ it.

For example, if A ‘saves’ £1000, by lending it to B, then B spends that £1000 on buying supplies; that £1000 is only spent once, and should only be counted once in GDP.

Saving can be:

  • A buying equity in B

  • A buying bonds from B

  • or even A putting money in the bank, and the bank making a separate loan to B

Either way, saving money is considered a transfer of money

If you’re short of time, just learn the formula and move on.

But if you you have some time, I really liked these videos: http://macrotutor.weebly.com/ It’s in more detail than the CFA syllabus. I can’t remember if it specifically answers your savings question, but it certainly helped me with the IS-LM curve etc.

If you have even more time and interest, these videos give a good broad explanation of macro https://www.khanacademy.org/economics-finance-domain/macroeconomics I was tired of hearing the same undecodable explanations everywhere I looked, but this guys explains things differently, but in good detail.

For example he explains how lending to the bank can multiply the money in terms of it’s affect on GDP (due to the reserve banking system) 10x better than the CFA syllabus does.

#5

Savings and investment are the same thing here. The money from savings is what is used to finance the investments.