Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
7
C HAPTE R
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
Measuring Domestic Output,
and National Income
Next
Slide
End
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7-1
Copyright McGraw-Hill/Irwin, 2005
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
Next
Slide
Assessing the Economy’s
Performance
National Income Accounting:
•Health of the Economy
•Comparisons Over Time
•Formulation of Public Policy
What Are These Accounting
Measures?
End
Show
7-2
Copyright McGraw-Hill/Irwin, 2005
GROSS DOMESTIC PRODUCT
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7-3
Next
Slide
The total market value of all
final goods and services
produced in a given year
•A Monetary Measure
•Avoid Multiple Counting
•Intermediate Goods
•Final Goods
•Value Added
Copyright McGraw-Hill/Irwin, 2005
GROSS DOMESTIC PRODUCT
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7-4
Next
Slide
• Excludes Nonproduction
Transactions
•Financial Transactions
•Public Transfer Payments
•Private Transfer Payments
•Stock Market Transactions
•Secondhand Sales
• Two Approaches
•Expenditures Approach
•Income Approach
more…
Copyright McGraw-Hill/Irwin, 2005
GROSS DOMESTIC PRODUCT
Expenditures Approach
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7-5
Next
Slide
Consumption
by Households
Income Approach
Wages
+
Expenditures
+
Rents
+
Interest
+
Profits
+
Statistical
by Foreigners
Adjustments
+
Investment
G
by Businesses
=
=
D
+
Government
P
Purchases
Copyright McGraw-Hill/Irwin, 2005
EXPENDITURES APPROACH
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Personal Consumption Expenditure ( C )
•Durable Consumer Goods
•Nondurable Consumer Goods
•Consumer Expenditures for Services
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
Next
Slide
End
Show
7-6
Copyright McGraw-Hill/Irwin, 2005
EXPENDITURES APPROACH
Assessing the
Economy’s
Performance
Personal Consumption Expenditure ( C )
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7-7
Next
Slide
Gross Private Domestic Investment ( Ig )
•Machinery, Equipment, and Tools
•All Construction
•Changes in Inventories
•Noninvestment Transactions
•Gross vs. Net Investment
•Net Private Domestic Investment
Copyright McGraw-Hill/Irwin, 2005
EXPENDITURES APPROACH
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Gross Investment
- Depreciation
=Net Investment
Gross
Investment
Net
Investment
Shortcomings of
GDP
Depreciation
Key Terms
Stock of
Capital
Consumption
and
Government
Spending
Stock of
Capital
January 1
Year’s GDP
December 31
Previous
Slide
End
Show
7-8
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Increased
EXPENDITURES APPROACH
Assessing the
Economy’s
Performance
Personal Consumption Expenditure ( C )
Gross Domestic
Product
Expenditures
Approach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7-9
Next
Slide
Government Purchases ( G )
•Expenditures for Goods & Services
•Expenditures for Social Capital
•Does NOT include Government
Transfer Payments
Copyright McGraw-Hill/Irwin, 2005
EXPENDITURES APPROACH
Assessing the
Economy’s
Performance
Personal Consumption Expenditure ( C )
Gross Domestic
Product
Expenditures
Approach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Government Purchases ( G )
Key Terms
Previous
Slide
End
Show
7 - 10
Next
Slide
Net Exports ( Xn)
Net Exports (Xn) = Exports (X) – Imports (M)
Copyright McGraw-Hill/Irwin, 2005
EXPENDITURES APPROACH
Assessing the
Economy’s
Performance
Gross Domestic
Product
Putting it all together:
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
GDP = C + Ig + G + Xn
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7 - 11
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7 - 12
Next
Slide
Comparative GDPs in Trillions, 2001
0
United States
Japan
Germany
United
Kingdom
France
China
Italy
Canada
Mexico
Spain
Brazil
India
Korea, Rep.
Netherlands
Australia
Copyright McGraw-Hill/Irwin, 2005
1
2
3
4
5
6
7
8
9
10
Source: World Bank
THE INCOME APPROACH
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
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End
Show
7 - 13
Next
Slide
•
•
•
•
•
Compensation of Employees
Rents
Interest
Proprietors’ Incomes
Corporate Profits
• Corporate Income Taxes
• Dividends
• Undistributed Corporate
Profits
Copyright McGraw-Hill/Irwin, 2005
THE INCOME APPROACH
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
• From National Income to GDP
• Indirect Business Taxes
• Consumption of Fixed Capital
(Depreciation)
• Net Foreign Factor Income
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7 - 14
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
OTHER NATIONAL ACCOUNTS
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
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End
Show
7 - 15
Next
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U.S. GDP, NDP, NI, PI, & DI, 2002
Gross Domestic Product (GDP)
$10,446
Consumption of fixed capital
-1,393
Net Domestic Product (NDP)
$9,053
Net foreign factor income earned
in the U.S.
- 10
Indirect business taxes
-695
National Income (NI)
$8,348
Social security contributions
-748
Corporate income taxes
-213
Undistributed corporate profits
-141
Transfer payments
+1,683
Personal Income (PI)
$8,929
Personal Taxes
-1,113
Disposable Income (DI)
$7,816
Copyright McGraw-Hill/Irwin, 2005
NOMINAL GDP vs. REAL GDP
Assessing the
Economy’s
Performance
Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when prices fall
• Nominal GDP
• Calculating Real GDP
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
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End
Show
7 - 16
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(4)
(2)
(3)
(5)
Unadjusted,
(1)
Price Price Index or Nominal, Adjusted,
Units of Pizza
Year 1 =
Or Real,
GDP,
Year Output Per Unit
100
GDP
(1)x(2)
1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
Copyright McGraw-Hill/Irwin, 2005
100
200
250
-
$ 50
140
200
-
$ 50
70
80
-
NOMINAL GDP vs. REAL GDP
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
• Adjustment Process
• GDP Price Index
Price Index
in a given
year
=
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
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End
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7 - 17
Price of market basket
in specific year
Real GDP
Price of same market
basket in base year
=
Nominal GDP
Price Index
(in hundredths)
An Alternative Method
Next
Slide
Price Index
(in hundredths)
Copyright McGraw-Hill/Irwin, 2005
=
Nominal GDP
Real GDP
x 100
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7 - 18
Next
Slide
SHORTCOMINGS OF GDP
•Nonmarket Activities
•Leisure
•Improved Product Quality
•The Underground Economy
•GDP and the Environment
•Composition and
Distribution of Output
•Noneconomic Sources of
Well-Being
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
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End
Show
7 - 19
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The Underground Economy as a Percent of GDP
0
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United
Kingdom
Japan
United States
Switzerland
Copyright McGraw-Hill/Irwin, 2005
5
10
15
20
25
30
Source: The Journal of Economic Literature, 2000
national income accounting
gross domestic product
intermediate goods
final goods
multiple counting
value added
expenditures approach
income approach
personal consumption
expenditures (C)
gross private domestic
investment (Ig)
Copyright McGraw-Hill/Irwin, 2005
net private domestic
investment
government purchases (G)
net exports (Xn)
national income
indirect business taxes
consumption of fixed capital
net domestic product (NDP)
personal income (PI)
disposable income (DI)
nominal GDP
real GDP
price index
BACK
END
Assessing the
Economy’s
Performance
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Previous
Slide
End
Show
7 - 21
Next...
Introduction to
Economic Growth
And Instability
Next
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Chapter 8
Copyright McGraw-Hill/Irwin, 2005