Chapter 5 - Summary for
Spring, 2015
National Income Accounting
Now we study the branch of macroeconomics
that examines aggregate performance of all
markets in the market system.
To measure the performance of the macro
economy, economists rely on statistical
measurements in three areas:
Gross Domestic Product (GDP)
Rate of Inflation (discussed later)
Unemployment (discussed later)
•
macroeconomics
The study of the nation’s economy as a
whole; focuses on the issues of inflation,
unemployment, and economic growth.
Gross Domestic Product (GDP)
• Gross domestic product (GDP) is the total
dollar value of final output produced within a
nation’s borders in a given time period.
Gross Domestic Product (GDP)
• Each good and service produced and brought
to market has a price.

That price serves as a measure of value
for calculating total output.

Total output is measured in monetary
terms.
Highlights
• Most comprehensive measure of output is
GDP
• GDP = value added at each state of
production – Total value of g & s produced
in a given year domestically
• Nominal and Real GDP are calculated
• Nominal= current prices
• Real = GDP expressed in terms of constant
prices (sans inflation)
• People basically care about buying power.
GDP Per Capita
Total GDP divided by Total Population
This is the way to compare international output among different
countries/economies.
Divide the pie- how many pieces for each?
In 2001 America’s total GDP of $10 trillion was shared by 280
million citizens. Average per capita GDP was around $36,000.
2004 it was $37,600 – population 2004 was 292 million+
2008 = $46,000
2009 = $45,787
2012 = $51,749
2013 = $53,042
1998 TO 2011 Per Capita U.S.
Two Ways to Measure GDP
Expenditure Approach
Income Approach
Output = Income
VALUE OF OUTPUT
VALUE OF INCOME
Consumer spending
Wages
Investment spending
Government spending
Product
market
Factor
market
Profits
Interest
Rent
Net exports
Sales taxes
Depreciation
Highlights Continued
Each year capital is worn out – called depreciation..
By subtracting depreciation from GDP we derive net domestic
product (NDP)
Difference between NDP and GDP is equal to the difference
between gross investment expenditures and net investment—
Expenditure Approach to Income Approach to
GDP Measurement
GDP Measurement
Consumption
+
Investment
+
Government
+
Net Exports
Total value of output
Wages and salaries +
Corporate profits +
Proprietors’ income +
Farm Income +
Rents +
Interest +
Sales taxes +
Depreciation =
Total value of income
Value of total expenditure must equal value of total income
OUTPUT = INCOME
• All the spending that establishes the value of
output also determines the value of incomes.
• Generally speaking, the market value of
incomes must equal the market value of
output.
• Every dollar spent on output becomes a
dollar of income for someone.
Computing GDP
• The value of GDP can be computed by adding
up expenditures of market participants:(add up
the market value of all domestic expenditures made
on final goods and services in a single year.)
GDP = C + I + G + (X – IM)
Where:
C = Consumption expenditure
I = investment expenditure
G = government expenditure
X = exports
IM = imports
Total Expenditure on final G & S is broken down
in four categories:
1. Consumption expenditures• Comprises the largest share (70%) of total
expenditure.
• Includes nondurable goods (food, clothing)
and durable goods (appliances, autos)
• Includes consumption service expenditures
such as barbers, doctors, lawyers,
mechanics.
2. Investment Expenditures
Includes expenditures on fixed investment goods
and inventory investment.
Fixed investments goods are those that are useful
over a long period of time- includes purchases of
new equipment, factories, other nonresidential
housing as well as new residential housing. Also
includes cost of replacing existing investment
goods that have become worn out or obsolete.
The market value of all investment goods that must
be replaced in a single year is referred to as
depreciation for that year.
Investment Continued
Inventory Goods are final goods waiting to be
sold that firms have on hand at the end of the
year.
The year-to-year change in the market value of
firms’ inventory goods is considered an
investment expenditure because these
inventory goods will eventually yield a flow of
consumption or production services.
3. Government Expenditures
Includes hiring of civil servants and military
personnel, construction of roads and public
buildings. Supplies for the war, contracts for many
products/services… Boeing…etc.
Social Security, welfare, and other transfer
payments are not included.(because government
expenditures on transfer payments do not involve
the purchase of any new goods or services and
are therefore excluded from the calculation.
4. Net Exports
Exports are g & s produced domestically but sold to
foreigners.
Imports are g & s produced by foreigners, but sold
domestically.
Expenditures on exports are added to total
expenditures while expenditures on imports are
subtracted.
X-M = value of net exports to nation’s total
expenditures.
What’s Not Included in GDP
Sales of used
goods
Financial
transactions such
as trading of stocks
and bonds
What’s Not Included in GDP
Government transfer
payments such as
social security
Leisure time
Measures of Income
• GDP accounts have two sides.
– One side focuses on expenditure – the
demand side.
– The other side focuses on income – the supply
side.
Income Approach
Income Approach:
• Add up all the income earned by households and
firms in a single year.
• By adding together rent, wages, profit, interest
income, one should obtain the same value of GDP
as is obtained using the expenditure
approach…BUT…
• 2 types of expenditures that are included in
expenditure, but do not provide households or
firms any income (depreciation expenditures and
indirect business taxes)
Income Approach Continued
Depreciation expenditures (replacing existing, but
worn out investment goods, do increase the
incomes of those providing the replacement
goods, but they also decrease the profit
incomes of those purchasing the replacement
goods.) Result= aggregate income remains
unchanged.
Indirect business taxes consist of sales taxes and
other excise taxes that firms collect but not
regarded as part of firms’ incomes. (Hence,
included in expenditures approach but not
income)
Measures of Income
• The total value of market incomes
must equal the total value of final
output, or GDP.
Measuring GDP
• GDP is the scoreboard for economic performance
• GDP is the most widely used measure of economic
performance.
• GDP is measured quarterly.
• GDP = total value of goods and services produced in the
United States in a given year.
• Many transactions have to be excluded from GDP
– Counts only the g & s purchased by their final users
– Counts only the g & s produced during the specified period
– Excludes all financial transactions and income transfers.
(because financial transactions do not count for current
production- examples purchase and sale of stocks, bonds,
securities= merely transfer of ownership)
Transfer payments are unproductive money into economy (both
from GDP standpoint and growth standpoint.
When Goods are measured as output- units of each
good are weighted according to their PURCHASE PRICE
example: new car adds more than NIKE shorts
• The total spending on ALL g & s produced during the year is
then summed (in dollar terms) to obtain the annual GDP
• GDP differs from GNP
GDP – g & s produced within the borders of the US whether
produced by foreigners or Americans
GNP – measures the output of all Americans, whether the g & s
are produced here or abroad.
(The Nissan produced in Tennessee is included in U.S. GDP)
• If GDP grows too rapidly, it may cause increased
inflation.
• If GDP grows too slowly, or declines, there will
be an increase in the number of people
unemployed.
• ***What determines the level of GDP?
Ans…(level of spending)
• ***What determines the level of spending?
Ans…. (add up the level of C + I + G + (X-M)
Business Cycle
• Recurrent swings (up and down) in
• Real GDP.
Equilibrium GDP
• The level of GDP will depend on the total
spending for consumption, investment, and
government
• Anytime there is a change in the LEVEL
of spending the GDP will begin to move
toward the new level of spending.
When GDP is exactly equal to the level of total
spending, the economy is in equilibrium.
Achieving equilibrium is not necessarily the
goal. The goal is to have growth towards full
employment without excessive inflation
So…how do you calculate growth?
• Value of GDP by itself is not very
interesting.
• What is interesting is the year-to-year
percentage change in the value of GDP.
• How to calculate percentage change:
Need to know the value of the statistic at
two dates in time. Growth rate last year is
Yl and the value of the current year is Yc
Formula
Yc – Yl
Yl
x100
This formula is valid for calculating the percentage
change in any statistic, not just the percentage
change in GDP.
% change = _change___
original number
If we move from 150 to 200 what is the % change?
Answer
33 l/3 %
150 – 200 = 50
50 = 5 =
150 15
1
3
Calculate this:::::::
In 1999 – Real GDP was 9,299
In 2000 – Real GDP was 9,767
What was the % growth from 1999 to 2000
5%
9,767-9,299 = 468
468/9,299 = 5
Distinguishing Between Nominal and
Real Values
• Nominal Values
– Measurements in terms of the actual market
prices at which goods are sold; expressed in
current dollars, also called money values
• Real Values
– Measurements after adjustments have been made
for changes in the average of prices between
years; expressed in constant dollars
Example: Correcting GDP for Price
Index Changes
• Correcting GDP for price index changes
– Nominal (current) dollars GDP
– Real (constant) dollars GDP
Real GDP =
Nominal
GDP
Price index*
x 100
Would this change GDP?