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AP Macroeconomics
Part II. Measuring Domestic Output and National Income: GDP, Growth, and
Instability
Objective: Student will be able to understand basic categories to assess the
Economy’s performance.
Topic 1 “The National Economic Accounts”
Objective: SWBAT
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Understand how GDP is defined and measured.
Explain why economists focus on GDP, inflation, and unemployment when assessing the
health of an entire economy.
Comprehend the relationship among GDP, net domestic product, national income, and
disposable income.
Recognize the different between nominal GDP and real GDP
Understand why savings and investment are key factors in promoting rising living standards.
Main Concepts
1. Gross Domestic Product (GDP)
i. A Monetary Measure
ii. Avoiding Multiple Counting
iii. Two Ways of Looking for GDP: Spending and Income.
2. The Expenditure Approach
3. The Income Approach
4. Other Nation Accounts
i. Net Domestic Product
ii. National Income
iii. Gross National Product (GNP)
iv. Personal Income
v. Disposable Income
5. Nominal GDP vs. Real GDP
Class Work
 Copy vocabulary. See chapter 14, page 203, AP Practice Book. Be sure you understand
every term.
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Work on Qs 3,8, and 12, page 128-129, from the BLUE BOOK
Answer essential questions
Essential Questions:
1.
Explain the difference between Nominal GDP and Real GDP. What is GDP per
capita?
2.
Suppose that production and prices rise from one year to the next, but the
population stays constant. Will each of the three statistics above rise, fall, or remain
unchanged?
3.
In what type of situation is GDP per capita more appropriate than nominal or
real GDP?
4.
Is GDP an under-or overestimate? Explain.
Class notes
 Macroeconomics studies long-run economic growth
and short-run economic fluctuations in output and
unemployment.
 To assess the health and development of an
economy, macroeconomists focus their attention on
three key economic statistics: real Gross Domestic
Product (GDP), Unemployment and Inflation.
o The GDP or gross domestic product measures
the value of final goods and services produced
within (inside) the borders of a given country
during a given period of time, typically a year.
o Unemployment is the state a person is in if he or
she cannot get a job despite being willing to
work and actively seeking work. The
unemployment rate measures the percentage of
all workers who are not able to find paid
employment despite being willing and able to
work at currently available wages. High rates of
unemployment are undesirable (adverse)
because they indicate that the nation is not
using a large fraction of its most important
resource (people’s talents and skills).
o Inflation is an increase in the overall level of
prices. Inflation rate measures the extent
(degree) to which the overall level of prices is
rising in the economy.
 Macroeconomics strategies (policies) attempt (try)
to maximize growth while minimizing
unemployment and inflation.
 National Economic Accounts (NEA) or the Bureau of
Economic Analysis (BEA) measures the economy’s
overall performance by using a group of statistics.
 The Bureau of Economic Analysis (BEA), as an agency
of the Commerce Department, compiles the
National Income and Product Accounts for the U.S.
economy.
 The BEA enables economist and policymakers to:
 Assess the health of the economy by
comparing levels of production at regular
intervals.
 Track the long-run course of the economy
to see whether it has grown, been constant,
or decline.
 Formulate policies that will safeguard and
improve the economy’s health.
 The primary measure of the economy’s performance
is its annual total output of goods and services
(AGGREGATE OUTPUT). It is important the different
between nominal (at current prices) GDP and real
GDP (corrects for price changes).
 The GDP is a monetary measure.
 The BEA provides estimates of GDP for each quarter
about 30 days after the quarter ends. This
estimation is subject to revision.
 To avoid multiple counting,
 The GDP includes only the market value of
final goods and ignores intermediate goods
altogether (Intermediate goods are goods
and services that are purchased for resale
or for future processing) .
 The GDP excludes Nonproduction
transaction such as purely financial
transactions or secondhand sales. Both
contribute nothing to current production
and for that reason are excluded from GDP.
o Purely financial transactions are
public transfer payments, private
transfer payments, and stock
market transactions.
o Secondhand Sales
 Two ways of looking for GDP: Spending
(expenditures or output) approach and
Income approach.
 The Spending (expenditures or output)
approach (on the expenditure side): GDP as
the sum of all the spending on final goods
and services that has taken place
throughout the year. The type of spending
are listed below:
o Consumption Expenditures by
households (C)
o Investment Expenditures by
business (Ig) / all final purchases of
machinery, equipment, and tools
by business enterprises; all
construction; changes in
inventories
o Government Purchases of goods
and services (G)/ expenditures for
goods and services that
government consumes in providing
public services and expenditures
for capital such as schools and
highways which have long lifetime.
o Expenditures by foreigners (Xn) /
net exports. It includes all
international trade transaction
Exports – Imports
 Putting all together
C + Ig + G + X - M = GDP
 The Income approach (on the income side):
GDP as the sum of the income derived or
created from producing it. The components
of income are listed below:
o Wages / Compensation of
Employees
o Rents / income received by the
households and business that
supply property resources
o Interest / Money paid by private
business to the suppliers of loans
used to purchase capital.
o Profits / Proprietor’s income
o Statistical adjustments
 Other Nation Accounts
 Net Domestic Product (NDP)
NDP = GDP – consumption of fixed capital
(depreciation)
The NDP is the GDP adjusted for
depreciation.
As a measure of total output, GDP does not
make allowances for replacing the capital
goods used up in each year’s production.
The NDP tell us how much new output is
available for consumption and additions to
the capital.
 National income (NI) is all income earned
through the use of American-owned
resources, whether located at home or
abroad (in a foreign country)
NI = NDP – statistical discrepancy + net
foreign factor income
 Disposable Income (DI) is all income
received by households minus personal
taxes
DI = Consumption + Saving
 Personal Income (PI) is all income received
by households, whether earned or not.
 Gross National Product (GNP)
 Nominal GDP vs. Real GDP
Essential Questions
1. Explain the difference between Nominal GDP
and Real GDP. What is GDP per capita?
2. Suppose that production and prices rise from
one year to the next, but the population stays
constant. Will each of the three statistics above
rise, fall, or remain unchanged?
3. In what type of situation is GDP per capita more
appropriate than nominal or real GDP?
4. Is GDP an under-or overestimate? Explain.