Lipsey Ch. 22
p1
NATIONAL OUTPUT AND VALUE ADDED
1. Gross Domestic Product

Definition: GDP is the market value of all final goods and services produced by the
factors of production located in the country during a period of one year.

Key words?
The Problem of Double Counting

Intermediate good: _________ of some firms that are _________ for other firms

Final good: goods that are not, in the period of consideration, used as ________ by
other firms. They are for final use by ______________.

Double counting: error that arises in estimating the nation’s output by
__________________________________________________________________

Example:
Two firms: Button Firm (Firm A) and Shirt Firm (Firm B)
Firm A:
Produces $100 of buttons in 2000, of which $20 are sold to Firm B,
which uses them as input; the other $80 are sold to consumers.
Firm B:
Produces $200 of shirts, of which $20 were the value of the buttons.
Nation’s output:
If calculated by the value of all goods produced by all firms, is equal
to ______________. But the $______ of buttons are counted twice.

Value added: Each firm’s value added is the value of its output minus the value of
its inputs. This avoids the double-counting problem in national income accounting.

In the above example:
Firm A’s value added = $_____________;
Firm B’s value added = $_______________;
Nation’s output: $_____________________.

This method gives the same value as counting only the value of final goods
produced in the nation. In the above example, value of final goods = $___________
+ $____________ = $______________.
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p2
NATIONAL INCOME ACCOUNTING
1. Circular flow of income
Expenditure to purchase the final output
==> Expenditure approach
counts the market value of all the production in the economy during one year.
Income generated during the production process
==> Income approach
counts the value of all the claims generated by that production.
Both lead to the same value - GDP.
A result of book-keeping convention.
2. The Expenditure Approach
The
expenditure
approach
calculates
the
_____________
needed
to
purchase
the
_______________ in one year.
Total expenditure of final output is the sum of _________________ broad categories:
2.1. Consumption (C)
Includes expenditure on all goods and services produced and sold to households during the year
(except residential housing).
Includes
2.2 Investment (I)
Includes expenditure on the production of final goods not for ______________ consumption, i.e.
investment goods.
Includes
1. Inventories:
of both _______________ and ________________________;
measured at ____________ value in national income accounting;
2. Capital goods:
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Capital stock -- is the economy’s total quantity of ______________________
Fixed investment -- creating new capital goods
3. Residential housing:
Very durable asset, counts as investment
Note that Gross investment = _______________ + ___________________
The entire gross investment is counted in national income.
2.3. Government expenditure (G)
Includes
ALL
government
expenditures
that
produce
_________________
and
use
__________________.
All government output is valued at _________, NOT ___________.
Curious consequence of this!
Transfer payments are _______________ because ____________________
E.g.
2.4. Net exports (X-M)
Foreign trade increasingly important in global economy.
In an open economy, not very many final goods are produced using only domestic inputs.
For example, Ford produces cars -- final product in the US ($22,000), but tires in Canada ($400),
wheels in Mexico ($200), etc.
The tires and wheels are counted as national income in _____________ countries; they did not
generate employment and income for _____________; they are ___________ and must be
subtracted from _____________ national income accounting.
On the other hand, Intel, an American firm, produces chips which are used in computers produced
and sold all over the world. Chips are ____________ and generate employment and income for
_____________ so they must be added to _______________ national income.
Net exports = ______________________.
5. GDP from the expenditure side
GDP = C + I + G + (X - M)
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3. The Income Approach
Calculates the total incomes generated in the process of production.
Because all value produced must be owned by someone, the value of production must equal the
value of income claims generated by that production, i.e. both approaches lead to the same GDP.
3.1. Factor payments
Wages
compensation to employees
Rent
payment for the services of land and other rented factors
Interest
interest earned on bank deposits, bonds, loans
Profits:
= _______________ + __________________
3.2. Non-factor payments - indirect taxes & subsidies
National income valued at market prices include ___________________, i.e. taxes on the
production and sale of goods and services.
Telephone is sold at $10, which includes market value of intermediate goods ($7), income to
factors of production ($2), and excise tax ($1). The $1 represents the government’s claim on the
$10 value and must be included in the GDP.
On the other hand, government subsidies must be ______________ from GDP.
___________________ + ___________ - ______________ = net domestic product at market
prices.
3.3. Depreciation
Although depreciation is not income earned by any factor of production, it is a claim on
__________________
Net domestic product at market prices + depreciation = ______________________
4. GDP and Gross National Product (GNP)

GDP = income produced in the country

GNP = income received by domestic residents of the country.

Example:
1. Japanese car company produces cars in US - counted in US _____ but not US ____;
2. American residents own Ford plant in Norway - this plant’s profits are counted in US
_________ but not US __________.

To convert GDP to GNP at market prices, we need to
1. Add factor income received from foreigners (income of Madonna from Italian audience)
2. Subtract factor income paid to foreigners (income of Paravotti paid by US audience)
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
p5
GDP is a better measure of domestic economic activity (e.g. how easy it is to get a job); while
GNP is a better measure of economic well-being of domestic residents (e.g. how rich the
country’s residents are).
5. Other Concepts
Net National Product (NNP) = _________ - ____________;
Disposable income: the amount of money households have for spending and saving, i.e.
Disposable income = ___________________
6. GDP deflator
Nominal vs. Real GDP.
Implicit GDP deflator =
The GDP deflator is the most comprehensive available index of the price level.
Inflation rate (Year 1 to Year 2) = ----------------------------------------------------------------------- x 100%
Example:
Choose base year = 1980.
1990 GDP deflator = 120;
1991 GDP deflator = 130.
Then inflation from 1990 to 1991 = ___________________
NATIONAL INCOME as a measure of ECONOMIC WELFARE
Money values vs. real values
Nominal vs. Real GDP.
Total output vs. per capita output
Total output:
Per capita output:.
But what about ____________________???
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Lipsey Ch. 22
Omissions from measured national income

_______________________

_______________________

_______________________
Uncounted factors affecting human welfare: indicators of QUALITY of life

_______________________

_______________________

_______________________

_______________________
Problems specific to international comparisons of per capita income

_______________________

_______________________
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