Lecture Three
Measuring National
Output and National
Income
GDP
GDP is the market value of all final
goods and services produced within
a given period of time by factors of
production located within a country.
Expenditure Approach
The expenditure approach is a
method of computing GDP that
measures the amount spent on all
final goods during a given time
period.
Expenditure Approach
GDP = C + I + G + (EX - IM)
Consumption - C
Durable goods: goods that last
a relatively long time
Nondurable goods: goods
which are perishable
Services: goods which do not
involve the production of
physical things
Investment - I
Nonresidential: expenditures by firms
on machines, factories, tools, etc.
Residential: expenditures by
households on new houses and
apartment buildings
Business inventories: goods that
firms produce now with the intent to
sell later
Government Purchases - G
Expenditures by federal, state
and local governments on final
goods
Does not include transfer
payments (social security,
unemployment benefits, etc.)
Net Exports - (EX-IM)
Exports: sales to foreigners of
U.S. produced goods
Imports: purchases by U.S.
citizens of foreign produced goods
Net Exports = Exports - Imports
Income Approach
A method of computing GDP that
measures the incomes - wages,
rents, interest, and profits received by all factors of
production in producing final
goods.
National Income
Compensation of employees: wages,
salaries, etc., paid to households
Proprietors’ income: income of
unincorporated businesses
Corporate profits: income of
corporations
Net interest: interest paid by businesses
Rental income: income received by
property owners
Depreciation
Depreciation is the decline in
value of capital assets as they
wear out or become obsolete.
Indirect Taxes and Subsidies
Indirect Taxes: sales taxes, custom
duties, license fees, etc.
Subsidies: payments made by the
government for which it receives
goods or services
Net Factor Payments to Rest
of World
Payments of factor income to
the rest of the world minus the
receipt of factor income from the
rest of the world
Gross National Product
Add to GDP any income earned
abroad by US firms or residents
Subtract any income earned in
the US by foreign firms or
residents.
Net National Product - NNP
NNP = GDP - depreciation
National Income - NI
NI = NNP - indirect taxes + subsidies
Personal Income - PI
PI = NI - (corporate profits - dividends)
- social insurance payments
Disposable Personal Income DPI
DPI = PI - personal income taxes
Nominal GDP
 Nominal GDP is GDP measured
in current dollars
 Current dollars: the current
prices that one pays for goods and
services
Real GDP
Real GDP is measured in constant
year prices
Real GDP is adjusted for inflation
Constant year: an arbitrary base
year from which prices are derived
Real GDP
GDP adjusted for inflation.
Base year will be year 1.
GDP Deflator
A measure of the prices of all goods
and services produced
= (Nominal GDP/Real GDP) * 100
Rate of Inflation
Rate of change in price level
Inflation (year 2) =
GDP deflator (year 2) - GDP deflator (year 1)
GDP deflator (year 1)
Limitations of the GDP Concept
 Social Welfare
Underground Economy
Per Capita GDP
Review Terms & Concepts
 Base year
 Durable goods
 Business inventories
 Expenditure approach
 Compensation of
 Final goods & services
employees
 Corporate profits
 Current dollars
 Depreciation
 Disposable personal
income
 Fixed-weight procedure
 Government consumption
& investment
 Gross Domestic Product
(GDP)
 Gross investment
Review Terms & Concepts (cont.)
 Gross National
 Net factor payments
Product (GNP)
 Gross private
investment
 Income approach
 Indirect taxes
 Intermediate goods
 National income
 Net exports
 Net interest
 Net investment
 Net National Product
(NNP)
 Nominal GDP
 Nondurable goods
 Nonresidential
investment
Review Terms & Concepts (cont.)
 Per capita GDP
 Rental income
 Personal consumption
 Residential investment
expenditures
 Personal income
 Personal saving
 Personal saving rate
 Proprietors’ income
 Services
 Subsidies
 Underground economy
 Value added
 Weight