CHAPTER 10:
National Output
Dr. Widad Soufi
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Need for a measure of society’s well-being
GDP: market value of all final goods and services produced within a
country in a given period of time
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Market value: market price
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All: everything legally produced and sold in markets
 Including rental value of owner-occupied housing
 Illegal goods and services are excluded
 Most home-produced items are excluded
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Final: intermediate goods and services are excluded to avoid double counting
 GDP = Σ added values at each production stage
 If intermediate good not used as input but stored to be later sold or used, then
intermediate good is final good, added to inventory, and included in GDP
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Produced: only value of current production is included
 If used item is sold, then value not included in GDP, but transaction costs included
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Country: everything produced within the boundaries of the country, regardless of
nationality
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Period of time: usually the year
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Circular Flow Diagram:
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Household sector
Business sector
International sector
Public sector
Total production = Total Income = Total Expenditure
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Total expenditure = C + I + G + NE
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C: excludes households’ purchases of new housing
I: includes households’ purchases of new housing
G: excludes transfer payments
NE = Exp – Imp
Total income = National income
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GNP = GDP + Net factor incomes from abroad
NNP = GNP – Depreciation
NI= NNP – Indirect business taxes + business
subsidies – Statistical discrepancy
PI = NI – Corporate profits – Corporate income
taxes
DPI = PI – Personal taxes
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Nominal GDP: Evaluation of GDP at current
market prices
Real GDP: Evaluation of GDP at constant base year
prices
Example (Mankiw, page 213)
Real GDP data:
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U.S.: see textbook
Morocco: see homework
Measure of economic well-being
Short term ups (expansions) and downs (recessions) in
the business cycle
Long term growth: on average
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Yes, but GDP does not measure:
The value of leisure
 Most of the activities that do not take place in a
market
 Environmental quality
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1.
2.
3.
4.
Explain why an economy’s income must equal its
expenditure.
A farmer sells wheat to a baker for $2. The baker
uses the wheat to make bread, which is sold for
$3. What is the total contribution of these
transactions to GDP?
Many years ago Peggy paid $500 to put together a
record collection. Today she sold her albums at a
garage sale for $100. How does this sale affect
current GDP?
Why do economists use real GDP rather than
nominal GDP to gauge economic well-being?
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Solve the following problems: 5, 9
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Mankiw, Gregory. Principles of
Macroeconomics. Third edition.