13e
Chapter 05:
National Income Accounting
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
• 05-01. Know what GDP measures – and
what it doesn’t.
• 05-02. Know the difference between real
and nominal GDP.
• 05-03. Know why aggregate income equals
aggregate output.
• 05-04. Know the major submeasures of
output and income.
5-2
Measures of Output
• Each good and service produced and
brought to market has a price, which serves
as a measure of its value.
• Gross domestic product (GDP): the total
dollar value of all final output produced
within a nation’s borders in a given time
period, usually one year.
5-3
Why “Final Output”?
• GDP measurements exclude intermediate
goods.
– Intermediate goods: goods or services purchased
for use as an input in the production of final goods
or in services.
– Value added: the increase in the market value of a
product that takes place at each stage of
production.
• The value added by each intermediate good is
captured in the market price of the final good
produced.
5-4
International Comparisons
• GDP is geographically focused: output
produced within a nation’s borders.
– This makes it easier to make international
comparisons of economic activity.
• For more vivid comparisons, we construct
GDP per capita: average GDP, or the total
GDP divided by total population.
5-5
GDP per Capita
• GDP divided by population.
– Average output per person.
– Used as a measure of a country’s standard of
living.
– Does not indicate the disparity of output
distributed to high-income earners and lowincome earners in that country.
– Low GDP per capita reflects a lot of deprivation
in that country.
5-6
Measurement Problems
• Nonmarket activities: GDP measures exclude
most goods and services produced but not sold
in the market.
• Production not included:
– Unpaid production done at home or by volunteer
workers.
– Unreported production done “off the books” or in
the underground economy.
• The official GDP measurement significantly
understates actual production in the country.
5-7
Real GDP and Nominal GDP
• A significant use of GDP is to measure how
production changes from year to year.
• Price changes from year to year make it
difficult to compare one year’s GDP with the
next year’s GDP.
– Both output levels and prices can change.
– We want to see only the change in output levels.
– Because of this, we must remove the effects of
price changes from the GDP measurements.
5-8
Real GDP and Nominal GDP
• Nominal GDP: the value of final output
produced in a given period, measured in the
prices of that period (current prices).
– The effects of price changes are included.
• Real GDP: the value of final output produced in
a given period, adjusted for changing prices.
– The effects of price changes are removed.
• The current year market values are
recalculated in base year dollars.
5-9
Computing Real GDP
• Base year: the year used for comparative
analysis; the basis for indexing price
changes.
– We arbitrarily set a price index in the base year
to equal 100.
• The GDP for any other year is recalculated
into base year dollars, using the price index
for that year.
5-10
Computing Real GDP
• The general formula for computing real GDP is
Nominal GDP in year t
Real GDP in year t =
Price index
• The price index represents a price level
percentage change from the base of 100.
100 + Percentage change
Price index =
100
5-11
Exercise 1
• Convert nominal GDP to real GDP:
Nominal GDP in year t
Real GDP in year t =
Price index
• Where (for 1991)
– Nominal GDP = $5,677.5 billion
– Price index = 117.8/100 or 1.178
• Real GDP (1991) = $5,677.5/1.178
= $4,819.9 billion
5-12
Exercise 2
• Convert nominal GDP to real GDP:
Nominal GDP in year t
Real GDP in year t =
Price index
• Where (for year t)
– Nominal GDP = $15 trillion
– Price index = 150/100 or 1.5
• Real GDP in year t =$15/1.5 =$10 trillion
5-13
Net Domestic Product
• Net domestic product (NDP): GDP less
depreciation.
NDP = GDP - Depreciation
• When we produce, we wear out some of our
capital, which must be replaced.
– Depreciation measures the value of capital we use up.
• NDP is the amount of output we could consume
without reducing our stock of capital.
5-14
Net Domestic Product
• The distinction between GDP and NDP is
mirrored in the difference between gross
investment and net investment:
– Gross investment: total investment
expenditure in a given time period.
– Net investment: gross investment less
depreciation.
• When net investment is positive, the economy grows.
• When net investment is negative, the economy
declines.
5-15
The Uses of Output
• The users of output indicate what mix of output
has been selected (answering WHAT to
produce):
– Consumption (C): goods and services used by
households (about two-thirds of GDP).
– Investment (I): plant, machinery, and equipment
produced (about 15% of GDP).
– Government spending (G): resources purchased
by the public sector (about one-fifth of GDP).
– Net exports (X - M): the value of exports (X) minus
the value of imports (M).
5-16
Net Exports
• Imports (M): goods and services made in
foreign lands but purchased in the United
States.
• Exports (X): goods and services produced in
the United States but purchased in foreign
lands.
• We add exports to our GDP, but subtract
imports from our GDP.
• The difference between exports and imports is
called net exports (X – M).
5-17
GDP Components
• The value of GDP can be computed by
adding up these expenditures:
GDP = C + I + G + ( X – M )
where:
C = consumption expenditure
I = investment expenditure
G = government expenditure
X = exports
M = imports
5-18
Measures of Income
• There are two ways to measure GDP:
– Measure expenditures (demand side).
– Measure income (supply side).
• The total value of market incomes must
equal the total value of final output, or GDP.
• By tracking income in the economy, we see
FOR WHOM the output is produced.
5-19
The Equivalence of Expenditure and Income
5-20
Measures of Income
• Output = Income.
• The spending that establishes the value of
output also determines the value of
incomes.
• We can track the distribution of funds from
GDP to disposable income.
5-21
From GDP to Disposable Income
• GDP – Depreciation = Net domestic product
(NDP)
• NDP + Net foreign factor income = National
income (NI)
• National income (NI) is the total income
earned by U.S. factors of production.
5-22
From GDP to Disposable Income
• There are several adjustments that have to be made to
national income in order to get to personal income.
• Subtract
–
–
–
–
Indirect business taxes.
Corporate profits.
Interest and miscellaneous payments.
Social Security taxes.
• Add
– Transfer payments.
– Capital income.
• This yields personal income (PI).
5-23
From GDP to Disposable Income
• Personal income (PI) is pretax income
received by households.
• Disposable income (DI) is what remains of
personal income after taxes are paid.
– PI – Personal taxes (T) = DI.
• We can do two things with our DI: spend it
or save it.
– DI = Consumption (C) + Saving (S).
• Saving: that part of DI not spent on C.
5-24
Income Summary
• Households receive personal income (PI) as
payment for the resources they own and
provide.
• How do households dispose of their Income?
– They spend: consumption (C).
– They save: saving (S).
– They pay taxes: taxes (T).
Personal income (PI) = C + S + T
5-25
The Flow of Income
• GDP, on the income side, ends up distributed in
this way:
– To households, in the form of disposable income.
• Returned to GDP as consumer spending.
– To businesses, in the form of retained earnings and
depreciation allowances.
• Returned to GDP as business investment spending.
– To government, in the form of taxes.
• Returned to GDP as government spending.
5-26