ECONOMICS, 5e
Roger Arnold
CHAPTER 6
Macroeconomic Measurements,
Part II: GDP and Real GDP
MACROECONOMIC
QUESTIONS

A Nation's Income
– The most central issue of macroeconomics is an
economy's total production of goods and
services
– A nation's income is the total of all the incomes
of the people that live there
MACROECONOMIC
QUESTIONS

Gross Domestic Product (GDP)
– The dollar value of total output of goods and
services is called nominal GDP
» Part of the increases in GDP reflect inflation
» Adjusting GDP for inflation gives real GDP
MACROECONOMIC
VARIABLES

Definitions
– Real gross domestic product is a measure of a
country's total output of final markets goods
and services during some year
– Nominal gross domestic product is the dollar
value of a country's output of final market
goods and services during some year
(billions of U.S. dollars)
U.S. Real & Nominal GDP,
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1965
1970
1975
1980
NGDP (billions of $)
CHAPTER 2
1985
1967-2001
1990
1995
2000
RGDP (billions of 1996 $)
The Data of Macroeconomics
slide 31
SOURCE: Bureau of Economic Analysis.
75
Exhibit 4
The Circular Flow:
Total Purchases
(Expenditures)
Equal Total
Income in a
Simple Economy
76
CIRCULAR FLOW AND
AGGREGATE DEMAND

Types of Spending
– Consumption, or consumer spending, is
spending by people on the final goods and
services for current use
CIRCULAR FLOW AND
AGGREGATE DEMAND

Types of Spending
– Investment refers to spending to create new
capital goods, such as machines, equipment,
inventories, human skills, and knowledge
CIRCULAR FLOW AND
AGGREGATE DEMAND

Types of Spending
– Government purchases refers to all spending by
the government except transfer payment (direct
payments of money to people)
CIRCULAR FLOW AND
AGGREGATE DEMAND

Types of Spending
– Exports are sales of goods and services to
people and firms in other countries
CIRCULAR FLOW AND
AGGREGATE DEMAND

Types of Spending
– Exports are sales of goods and services to
people and firms in other countries
– Imports are purchases of goods and services
from people and firms in other countries
CIRCULAR FLOW AND
AGGREGATE DEMAND

Types of Spending
– Net exports, or the balance of international
trade, equals exports minus imports
Exhibit 1 The Components of GDP
83
What is the difference between
GDP and GNP?
GNP is the value of all final goods and
services produced by citizens of a nation
regardless of their location.
 GDP is the value of all final goods and
services produced within the border of a
nation regardless of citizenship.
 GNP = GDP + net foreign factor income

84
Why do we make the distinction
about FINAL goods?
Final goods are in the hands of the ultimate
user.
 Intermediate goods are inputs into the
production of final goods.
 We only use final goods to avoid the
problem of “DOUBLE COUNTING”
 Alternatively, we can use the value added at
each stage of production

85
What GDP Omits
Certain Nonmarket Goods and Services
 Underground Activities
 Sales of Used Goods
 Financial Transactions
 Government Transfer Payments
 Leisure

86
GDP and Well Being
GDP is useful in measuring the productive
capacity of an economy.
 GDP is not necessarily a good measure of
happiness or well being.
 Measurements of well being often include
measures of education, access to health
care, infant mortality, and life expectancy.

87
Two Ways of Measuring GDP
Expenditure approach
 Income approach
 See pages 79-80 in your workbook.

The Expenditure Approach
Household sector: Consumption
 Business sector: Gross private domestic
investment
 Government sector: Government purchases
 Foreign sector: Net exports

The Income Approach gives us
NATIONAL INCOME
Compensation of employees
 Proprietor's Income
 Corporate profits
 Rental income
 Interest

From National Income to GDP:
Making Some Adjustments
- Income earned from the rest of the world
 + Income earned by the rest of the world
 + Indirect business taxes
 + Capital consumption allowance
(depreciation)
 + Statistical discrepancy

From National Income to GDP:
Making Some Adjustments
GDP = NI + indirect business taxes +
depreciation – net foreign factor income
 NI = GDP - indirect business taxes depreciation + net foreign factor income

Other National Income
Accounting Measurements




Net Domestic Product = GDP Depreciation
Personal Income = National Income
- undist. corp. profits - Social Security
taxes - corp. profits taxes + transfer
pmts. + net interest
Disposable Income = Personal
Income - Personal taxes
Disposable Income = Personal
Cons. + Personal Saving
Desirable Economic States or
Goals
Price stability
 Low unemployment
 High and sustained economic
growth

MACROECONOMIC MODELS

Business Cycles
– Business cycles are 2-year to 5-year
fluctuations around trends in real GDP and
other related variables
MACROECONOMIC MODELS

Business Cycles
– A recession is a large fall in the growth of real
GDP and related variables
» A depression is an especially large recession
What Is a Business Cycle?
Peak
 Contraction (Recession)
 Trough
 Recovery
 Expansion

Exhibit 7 The Phases of the Business Cycle
98