Quick Quiz
1) What is one of the five measures of
income?
2) What is another?
3) What is one of the four sectors of the
economy?
4) What is another?
5) How is personal income (PI) determined?
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What is GDP?
How does GDP differ from GNP?
Today we will be examining the different
measures of a nation’s income
Measuring a Nation’s Income- GNP

The GDP does include
production of foreignowned good produced
in the US, but
EXCLUDE US
production outside the
US
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Hence, it is not a proper
measure of the total
income earned by
American citizens!
Gross National Product ( GNP)
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$ value of all final goods, services, and structures
produced in one year with labor and property
supplied by US
Largest measure of economy’s total income
Shift from GDP to GNP must:
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1. Add all payments that Americans receive from
outside the US
Subtract all payments made to foreign-owned resources
in the US
GNP, continued
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Ex:
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GDP= $7,872
+payments to Americans=242
-payments to foreigners=270
GNP+$7,844 (similar #s; this is usually true for the
US, but not all nations) WHY do you think so?
GNP, continued
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Weakness of GNP: says nothing about the
production taking place in the US, just
supplied by US Residents- Why is this a
weakness?
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Why is GDP used as the leading indicator of
economic health over the GNP?
GDP vs. GNP activity
Five Measures Biographies
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-What does the measure show?
-What is added or subtracted to find the
measure?
-To whom would this measure be most
valuable? Why?
Economic Sectors and Circular
Flows
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The economy is made up of various parts,
called sectors.
Sectors receive various components of the
national income, and the sectors use this
income to purchase the total output
Consumer Sector (C)

Basic unit- Household (all persons who occupy
a house, apartment or room)
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Broader than a FAMILY
Unrelated Individual- lives alone or with non
relatives
Why important to the US Bureau of Census?
Consumer sector receives $ after taxes, etc.
Investment Sector (I)
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Proprietorship, partnerships, and corporations.
Brings together the factors of production to
produce output
Income is retained earnings and savings
borrowed from the consumer sector
Government Sector (G)
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AKA Public Sector
Includes local, state, and federal levels of
government
Receives income from indirect business taxes,
corporate income taxes, Social Security,
personal income taxes from the consumer
sector
Foreign Sector (F)
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All consumers and producers outside the US
Does not have a specific source of income
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Represents the dollar value of goods sent abroad
and the dollar value of goods purchases abroad
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If the two are reasonably close, the foreign sector will
appear to be fairly small, when there are a large number
of goods and services being traded
Output-Expenditure Model
GDP= C+I+G+F
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Explains and analyzes the performance of the
economy.
Shows how separate sectors of the economy are
interrelated
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Why are the sectors critical links in economic
activity?
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How are each of the sectors used in
determining the performance of the nation’s
economy?

Write down three
questions and the
answers about
something you learned
today. You can write
them in any formattrue/false, mc, short
answer, etc
Homework

Write an essay
comparing GNP and
GDP as measures of
economic health and
performance. It should
be one typed page,
double-spaced, tnr, 1inch margins.
Price Index
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What are other ways to measure income
besides GDP and GNP?
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A major problems with GDP- subject to
distortions b/c of inflation
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Inflation can make output appear to grow w/out
actually doing so
Constructing a Price Index
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Price Index- a statistical series that can be used
to measure changes in prices over time
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Used to reduce inflation
Specific to product or range of items
It’s not that difficult to construct a Price Index…so
how do we do it?
Construction of Price Index
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1. Choose a Base Year for comparison
2. Select a MARKET BASKET of goodsmust remain fixed
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Market Basket= goods representative of the
purchases that will be made overtime
3. Prices of each time in market basket are
totaled
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Total=prices of the market basket base year and
valued at 100%
Major Price Indices
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1. Consumer Price Index (CPI)
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Reports on price changes on 90,000 items in 364
categories
Sampled- prices for goods and services taken from
85 geographical areas
Complied Monthly by BLS
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Separate indices for 28 selected areas around the
country
Major Price Indices, continued
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2. Producer Price Index (PPI)
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Measures price changes received by domestic
producers for their own output
Samples 3,000 commodities w/based year 1982
Reported Monthly through BLS
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Broken down into subcategories
Major Price Indices, continued
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3. Implicit GDP Price Deflator
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Average level of prices for all goods and services
in the economy
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Computed quarterly
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Good, long-run indicator of price changes consumers
face
Not useful for month-to-month changes in inflation
Base year 1992
Real vs. Current GDP
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Current (or nominal) GDP- not adjusted for
inflation
Real GDP- inflation distortions have been
removed

Write down three
questions and the
answers about
something you learned
today. You can write
them in any formattrue/false, mc, short
answer, etc
Homework

Study for Quiz tomorrow,
use the websites under Unit
IV on the Wiki to track price
changes over the last five
years for three items that
you buy regularly. Chart
how your income
(allowance/wages) has
changed over the five-year
period. Type a paragraph
reflecting on your results
and discuss how you have
been affected by inflation.