Chapter Two
National Income Accounting
Gross Domestic Product and Gross National
Product
1. Calculating GDP
Final goods and value added
current output
market prices
2. GDP and GNP
 Real and Nominal GDP (see table 2-3)


Price Indexes
1. The GDP deflator ---is the ratio of
nominal GDP in a given year to real GDP of
that year
2. The Consumer Price Index (CPI)--measures the cost of buying a fixed basket of
goods and services representative of the
purchases of urban consumers.
3. The Producer Price Index (PPI)----raw
materials and semi-finished goods.

From GDP to Personal Disposable Income
1. GDP - Capital consumption allowance
2. NDP - Indirect taxes
3. NI - corporate profits -social insurance
contributions + government and business
transfers to persons + interest and dividends
4. PI - personal tax and non-tax payments
5. PDI ≡ consumption + saving

Outlays and Components of GDP( Fig2-1)
1. Demand components (from the view of
expenditures)
A. Consumption
B.
Investment
C.
Government
D.
Net exports
Total
Demand for GDP(or Y) = C+I+G+NX
2. Payments to factors of production (from the
view of income)
A. Labor B. Capital C. Profit
About 3/4 of factors payments are payments
to labor. Most of the remainder goes to pay
capital. In oil-extraction economies, natural
resources are a dominant factor of
production.
PDI= GDP + net factor income from
abroad - depreciation - retained earnings +
transfers - taxes
The Circulation of the Macroeconomic System
1. Simple Economy

Payoffs
Factors
Household
Firm
Goods & Services
Expenditure
2. Simple Economy plus Government
Public Goods
G purchases
TR
Taxes
Government
Taxes
Payoffs
Factors
Household
Firm
Goods & Services
Expenditure
2. Four Sectors of Economy
Public Goods
G purchases
TR
Taxes
Government
Taxes
Payoffs
Factors
Money
outflow
Household
Firm
Export
Goods & Services
Import
Foreign
Firm
Expenditure
Money
inflow
Foreign
HH

Some Important Identities
1. A Simple Economy (no government and
foreign trade )
Demand for: ( GDP) Y≡ C+I
Income from : ( GDP) Y≡ C+S
∴
C+I ≡ Y≡ C+S
and
I ≡ Y - C≡ S
that is I ≡ S
2. Reintroducing the government and foreign
trade
Demand : Y = C + I + G + NX
Income : Y = YD + TA - TR
∵ C + S ≡ YD
∴ C + S ≡ YD ≡ Y + TR - TA
∴ S - I ≡ (G + TR - TA) + NX
3. Saving , Investment , Government Budget ,
and Trade