Eco 200 – Principles of
Macroeconomics
Chapter 7: National Income
Accounting
Gross Domestic Product (GDP)


The market value of final goods and services
produced within a country’s borders in a
given year
Does not include:



Intermediate goods
Goods produced in the past
Non-market production



Black market
Underground economy
Household production
GDP using value-added
approach

Final value of output = sum of value-added
by all firms in the economy
GDP and inventory


GDP is a measure of output, not sales
The annual change in inventory is included in
GDP




If production is greater than sales, inventories
increase
If production is less than sales, inventories
decrease
Inventory change may be planned or unplanned.
Inventory change is included as a component of
investment spending (I)
GDP as expenditure

GDP = C + I + G + X




C = consumption
I = gross investment
G = government spending
X = net exports = exports - imports
GDP as income


GDP can also be measured by the
income generated during production
GDP = wages + rent+ interest + profits
– net factor income from abroad
+ capital consumption allowance
(depreciation)
+ indirect business taxes
Other measures of aggregate
output


Gross National Product (GNP) = GDP + net
factor income from abroad
Net National Product (NNP) = GNP – capital
consumption allowance


NNP includes only net investment (= gross
investment – depreciation)
National Income (NI) = NNP – indirect
business taxes (and some minor adjustments)
Other measures of aggregate
output (continued)

Personal Income (PI) = NI – income earned
but not received + income received but not
earned


Undistributed corporate profits
Transfer payments = income received without any
good or service provided in return




Examples: social security benefits, unemployment
compensation, welfare programs, etc.
Disposable personal income (DPI)
DPI = PI – personal taxes
DPI = C + S

C = consumption, S = savings
Nominal and real GDP



Nominal variable – expressed in current
dollars
Real variable – expressed in constant
dollars (using a given base year)
Price index = cost of basket of goods in
the current year / cost of basket of
goods in the base year
Types of price indexes



GDP price index
Consumer price index (CPI)
Producer price index (PPI) (previously
known as the wholesale price index)