Economics
Combined Version
Edwin G. Dolan
Best Value Textbooks
4th edition
Chapter 19
Measuring Economic
Activity
Dolan, Economics Combined Version 4e, Ch. 19
GDP and Value Added
 GDP must include
only the value of final
goods and services if
it is to measure total
production without
double counting.
 The value of sales at
each stage of
production can be
divided into the value
added at that stage
and the value of
purchased inputs.
 The selling price of
the final product (a
$100 table, in this
case) equals the sum
of the values added at
all stages of
production.
Dolan, Economics Combined Version 4e, Ch. 19
Expenditure Approach to GDP
 Gross domestic product is estimated using the expenditure approach.
 This involves adding together the values of expenditures on newly produced
final goods and services made by all economic units: C+I+G+(Ex-IM)
 Net domestic product is derived from gross domestic product by excluding the
value of expenditures made to replace worn-out or obsolete capital equipment.
US, 2008
Dolan, Economics Combined Version 4e, Ch. 19
National and Domestic Income
 National and domestic income are measured using the income approach.
 National income is obtain by adding together the values of all forms of income earned
by a country’s residents.
 Domestic income is derived from national income by subtracting receipts of factor
income from the rest of the world and adding factor income paid to the rest of the world.
US, 2008
Dolan, Economics Combined Version 4e, Ch. 19
Balance of Payments
Accounts
 Current account transactions
consist of imports and exports
of goods and services,
together with international
flows of factor income and
transfer payments.
 Capital and financial account
transactions consist of
international borrowing and
lending, securities transactions,
direct investment, and official
reserve transactions.
 If all amounts were measured
completely and accurately, the
current account and financial
account balances would be
equal and opposite in sign.
 In practice, there is a
statistical discrepancy
indicating errors and
omissions in measurement.
US, 2008Dolan, Economics Combined Version 4e, Ch. 19
Nominal GDP for a Simple Economy
 In this simple economy in which only three goods are produced, nominal
domestic product grew from $1,000 in 2000 to $1,800 in 2010
 Because prices also went up, people did not really have 1.8 times as many
goods and services in 2010 as in 2000
Insert image of Table
6A1 from p. 163 of
macro 3/e
Dolan, Economics Combined Version 4e, Ch. 19
Nominal and Real GDP for a Simple
Economy
 Multiplying 2010 quantities by 2000 prices gives the value of 2010 GDP that
would have existed if prices had not changed.
 This is called real GDP for 2010.
 The ratio of nominal GDP to real GDP is the implicit price deflator
Insert image of Table
6A2 from p. 164 of
macro 3/e
Dolan, Economics Combined Version 4e, Ch. 19
Consumer Price Index for a Simple
Economy
 To calculate the consumer price index, divide the value of baseyear prices valued at current-year prices by the value of base-year
goods valued at base-year prices
 In this case, the CPI is 170
Insert image of Table
6A3 from p. 165 of
macro 3/e
Dolan, Economics Combined Version 4e, Ch. 19