Chapter 7- National Income
Accounting
Distribution of GDP
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Keeping Tabs on the Economy
• Recall: You must be able to measure and
track the economy in order to
understand what is going on and react
appropriately.
• In the U.S. the Bureau of Economic
Analysis compiles this data.
2
National Income Accounts
• The Bureau of Economic Analysis (BEA)
compiles data in what we call the
national income and product accounts.
• National Accounts: Keep track of the
flow of money between different sectors
of the economy.
3
National Income Accounting- a set of rules and
definitions for measuring economic activity in the
aggregate economy (economy as a whole)
4
• GDP (Gross Domestic Product)- the total
market value of all final goods/services
produced in an economy in a one-year period
• Measures values, not quantities
• GDP measures only final goods- a good/service
purchased by a final user
• Intermediate good- a good/service that is an input to
another good/service
• GDP only includes current production
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• GNP (Gross National Product)- Aggregate final
output of citizens and businesses of an
economy in a one-year period.
• Citizens working over seas not counting in GDP
• Economic output produced by citizens
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GDP: Measuring Total Production and
Income
Business cycle Alternating periods of economic
expansion and economic recession.
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GDP: Measuring Total Production and
Income
Expansion The period of a business cycle during
which total production and total employment
are increasing.
Recession The period of a business cycle during
which total production and total employment
are decreasing.
Economic growth The ability of an economy to
produce increasing quantities of goods and
services.
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Production, Income, and the Circular Flow Diagram
The Circular Flow and the
Measurement of GDP
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Gross Domestic Product Measures
Total Production
Production, Income, and the Circular Flow Diagram
Transfer payments: Payments by
the government to individuals for
which the government does not
receive a new good or service in
return.
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Four Components of GDP
•
•
•
•
Consumption (C)
Government Spending
Investment
International Spending
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Households (C)
• Consumer Spending: Household spending on
goods and services, not including spending on
new houses.
• Most households receive the majority of their
income from wages, but some receive
investment income in the form of profits,
interest, and rents.
• Consumer spending on services is greater than
the sum of spending on durable and nondurable
goods.
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Households cont’d
• Government Transfers: Cash payments
by the government to individuals.
• Disposable Income: Money available to
spend on consumption and savings.
DI = Income + Government Transfers - Taxes
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Households cont’d
• Private Savings: What consumers have left of
disposable income after consuming.
S-private = Disposable Income - Spending
• The total flow of money out of households must
equal the total flow of money in.
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Government (G)
• Government purchases: Spending by federal, state, and local
governments on goods and services.
• Governments, just like other institutions, purchases goods and
services.
• Government Borrowing: If the government can’t afford it’s
programs, it must turn to financial markets to borrow.
• Purchases made by state and local governments are greater
than purchases made by the federal government.
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Making
the
•Spending on Homeland Security
Connection
Government spending on homeland security more than
doubled between 2001 and 2006.
Business Investment (I)
• Investment: Spending by firms on new
factories, office buildings, machinery, and
additions to inventories, and spending by
households on new houses.
• Business fixed investment is the largest
component of investment
Don’t Let This Happen to YOU!
Remember What Economists Mean by Investment
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International Sector (NX)
• Exports: Goods and services sold to residents of
other countries.
• Imports: Goods and services purchased from
other countries.
• Net Exports: The difference between the value
of exports and the value of imports.
– NX = Exports - Imports
• Imports are greater than exports, so net exports
are negative.
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GDP
• GDP=Y=C+I+G+NX
• GDP is used as a measure of the size of an
economy and can be used to both track the
economy and to compare with others.
• U.S. GDP 2007: $13,768.8 billion
U.S. GDP 2009: $14,256 billion
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Gross Domestic Product Measures
Total Production
Components of GDP in 2008
2 Ways to Measure GDP
1. Measuring GDP by the Value-Added Method
Value added : The market value a
firm adds to a product.
Calculating Value
Added
FIRM
VALUE OF PRODUCT
VALUE ADDED
Cotton Farmer
Value of raw cotton = $
Value added by cotton farmer
=1
Textile Mill
Value of raw cotton woven
into cotton fabric = $3
Value added by cotton textile
mill = ($3 – $1)
=2
Value of cotton fabric made
into a shirt = $15
Value added by shirt
manufacturer = ($15 –$3)
= 12
Value of shirt for sale on
L.L. Bean’s Web site = $35
Value added by L.L. Bean
= ($35 – $15)
= 20
Shirt Company
L.L. Bean
Total Value Added
= $35
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Does GDP Measure What We Want It
to Measure?
GDP doesn’t count all forms of production.
Household Production
Household production refers to goods and
services people produce for themselves.
The Underground Economy
Underground economy Buying and selling of
goods and services that is concealed from
the government to avoid taxes or regulations
or because the goods and services are illegal.
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The Underground Economy is
Growing!
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Does GDP Measure What We Want It
to Measure?
Shortcomings of GDP as a Measure of Well-Being
The Value of Leisure Is Not Included in GDP
GDP Is Not Adjusted for Pollution or Other Negative
Effects of Production
GDP Is Not Adjusted for Changes in Crime and
Other Social Problems
GDP Measures the Size of the Pie but Not How
the Pie Is Divided Up
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Making
the
Connection
•Did World War II Bring Prosperity?
Real GDP versus Nominal GDP
Calculating Real GDP
Real GDP The value of final goods
and services evaluated at base-year
prices.
Nominal GDP The value of final
goods and services evaluated
at current-year prices.
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Real GDP versus Nominal GDP
The GDP Deflator
Price level A measure of the average prices
of goods and services in the economy.
GDP deflator A measure of the price level,
calculated by dividing nominal GDP by real
GDP and multiplying by 100.
Nominal GDP
GDP deflator 
 100
Real GDP
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Example 1
Nominal GDP
Real GDP
1999 Level
$9,274.3
$8,859.0
2000 Level
$9,824.6
$9191.4
Deflator
% Change
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Example 2
Year
Nominal GDP
GDP Deflator
1998
$8,782
103.2
1999
$9,274
104.7
2000
$9,825
106.9
2001
$10,082
109.4
1.
2.
3.
4.
Find Real GDP in 1998
Find Real GDP in 1999
Find Real GDP in 2000
Find Real GDP in 2001
Note: (We could calculate the percentage change between each year to find how
much production of goods/services change.)
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Real GDP versus Nominal GDP
Nominal GDP and
Real GDP, 1990–2008
Other Measures of Total Production
and Total Income
Net National Product (NNP)
National Income
Personal Income
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