National Income Accounting
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Measures the economy’s overall
performance.
Assess the overall health of the economy
Growing? Declining? Constant?
The #’s determine policies
GDP (Aggregate output): the total market
value of all final goods and services
produced in a given year.
GDP
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GDP compares this year with previous
years output.
Intermediate goods/final goods
Value added: market value of a firms
output less the value of the inputs the firm
bought from others.
Non-production transactions:
Financial/second hand sales
Non-Production Transactions
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Public transfer payments: Social security
payments, welfare payments. (not counted)
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Private transfer payments—gifts
Stock market transactions—(not counted)
Second hand sales: used cars, etc. (not counted)
Two GDP approaches:
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Expenditures approach
Income approach
GDP -- Ch.7
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Expenditures Approach:
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Household expenditures +
Investment expenditures by businesses +
Government purchases +
Expenditures of foreigners = GDP
GDP
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Income approach:
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Wages +
Rents +
Interest +
Profits +
Statistical adjustments = GDP
Expenditures Approach
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Personal consumption (C)
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Durable goods and nondurable goods
Gross private domestic investment ( Ig)
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Machines, equipment, construction, change in
inventories
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Inventories can increase or decrease
Investment is not: Paper transactions—stocks,
bonds, existing houses, etc.
Gross investment/net investment
Gross investment: ALL private investment
goods which includes new “additional”
buildings plus new buildings that replace
old worn out buildings and machinery.
(replacement capital + added or new
capital).
Net investment: Gross investment –
depreciation ( Ig)
The Expenditures Approach, cont’d
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Government Expenditures: (G)
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Purchases of goods and services that the
government consumes while providing public
services.
Expenditures for “social capital”, schools,
highways, (things that last)
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Does not include transfer payments
The expenditures approach, cont’d
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Net Exports– (Xn)
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Net exports (Xn) = exports (X) – imports (M)
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2000: Net exports (Xn) = - 370 Billion $
GDP = C + Ig + G + Xn
Nominal vs. Real GDP

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Nominal GDP: Output in current prices
Real GDP: Output prices are adjusted for
inflation.
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Ex. 5% increase in output/no change prices OR
Prices increase by 5% but no change in output
Difference in Nominal GDP______?
NDP-Net Disposable Product=GDP minus
consumption of fixed capital (depreciation)
Shortcomings of GDP
Non-market transactions (homemakers)
 Leisure (Understates value of )
 Improved Product Quality (Quantity
v.Quality)
 The Underground Economy(Off the books)
 Environmental Damage—GDP overstates


Clean up costs are added to GDP
The Income Approach
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Dividends: corporate profits paid to
stockholders. (used in the income
approach)
Undistributed corporate profits: Retained
earnings. (used in the income approach).
National Income: all the income that flows
to American supplied resources, whether
here or abroad.
The Income approach
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1. Indirect business taxes: sales taxes,
excise taxes, business property taxes,
license fees, customs duties.
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Why do we add?
The 5% sales tax added by government must be
added back to the price (adjustment to price of the
product that was sold).
The Income approach
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2. Consumption of fixed capital: The life of
private capital equipment last much longer
than one year so not to understate in year 1
and to avoid overstating profit in later
years, the cost of the equipment must be
allocated over its lifetime. (Depreciation)!
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Consumption of fixed capital: $ set aside to
replace equipment that is used up in producing
this years GDP.
The Income approach
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3. Net Foreign Factor Income—Last step in
balancing the national income account;
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National income is the total income of Americans,
whether it was earned in the United States or
abroad.
GDP is a measure of domestic output—total
output produced within the United States.
Net foreign factor income: foreign owned
resources in the U.S. earnings less U.S. owned
resources earnings abroad.
NOMINAL GDP vs. REAL GDP
•Consumer Price Index
CPI =
Price of 1993-1995 market
basket in any given year
Price of the same market
basket in 1982-1984
x 100
NOMINAL GDP vs. REAL GDP
• Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when Prices fall
• Nominal GDP
• Calculating Real GDP
(4)
(2)
Unadjusted,
(1)
Price
(3)
or Nominal,
(5)
Units of
Pizza
Price Index
GDP,
Adjusted, or
Year
Output
Per Unit
Year 1 = 100
(1)x(2)
Real, GDP
1
5
$10
100
$ 50
$50
2
7
20
200
140
70
3
8
25
250
200
80
4
10
30
-
-
-
5
11
28
-
-
-
Economic Well Being
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Per Capita Output:
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300 million people in our country
GDP approx. 1 trillion $
1 trillion/300 million = $33,000 each
If population grows faster than GDP % then our
standard of living falls! NOT GOOD!
Ex. GDP grows 2.3% and Population grows
3.1%, results???
Per Capita GDP
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U.S. Real GDP: $10 Trillion
China Real GDP: $10 Trillion
U.S. Population: 300 Million people
China Population: 1.5 Billion people
U.S. per capita GDP: $30,000
China per capita GDP: $6,666
Who is better off? Higher standard of
living?
GLOBAL PERSPECTIVE
The Underground Economy as a Percent of GDP
0
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United
Kingdom
Japan
United States
Switzerland
5
10
15
20
25
30
Source: The Journal of Economic Literature, 2000