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Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
7
C HAPTE R
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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7-1
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Measuring Domestic Output,
National Income, and
the Price Level
Copyright McGraw-Hill/Irwin, 2002
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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The Importance of
Macroeconomic Measurement
National Income Accounting:
•Health of the Economy
•Comparisons Over Time
•Formulation of Public Policy
What Are These Accounting
Measures?
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7-2
Copyright McGraw-Hill/Irwin, 2002
GROSS DOMESTIC PRODUCT
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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The total market value of all
final goods and services
produced in a given year
•A Monetary Measure
•Avoid Multiple Counting
•Final Goods
•Intermediate Goods
•Value Added
Copyright McGraw-Hill/Irwin, 2002
GROSS DOMESTIC PRODUCT
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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7-4
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• Excludes Nonproduction
Transactions
•Financial Transactions
•Public Transfer Payments
•Private Transfer Payments
•Stock Market Transactions
•Secondhand Sales
• Two Approaches
•Expenditures Approach
•Income Approach
more…
Copyright McGraw-Hill/Irwin, 2002
EXPENDITURES APPROACH
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Personal Consumption Expenditure ( C )
•Durable Consumer Goods
•Nondurable Consumer Goods
•Consumer Expenditures for Services
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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7-5
Copyright McGraw-Hill/Irwin, 2002
EXPENDITURES APPROACH
Importance of
Macroeconomic
Measurement
Personal Consumption Expenditure ( C )
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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7-6
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Gross Private Domestic Investment ( Ig )
•Machinery, Equipment, and Tools
•All Construction
•Changes in Inventories
•Noninvestment Transactions
•Gross vs. Net Investment
•Net Private Domestic Investment
Copyright McGraw-Hill/Irwin, 2002
EXPENDITURES APPROACH
Importance of
Macroeconomic
Measurement
Personal Consumption Expenditure ( C )
Gross Domestic
Product
Expenditures
Approach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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7-7
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Government Purchases ( G )
•Expenditures for Goods & Services
•Expenditures for Social Capital
•Does NOT include Government
Transfer Payments
Copyright McGraw-Hill/Irwin, 2002
EXPENDITURES APPROACH
Importance of
Macroeconomic
Measurement
Personal Consumption Expenditure ( C )
Gross Domestic
Product
Expenditures
Approach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Government Purchases ( G )
Key Terms
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Net Exports ( Xn)
Net Exports (Xn) = Exports (X) – Imports (M)
Copyright McGraw-Hill/Irwin, 2002
EXPENDITURES APPROACH
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Putting it all together:
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
GDP = C + Ig + G + Xn
Shortcomings of
GDP
Key Terms
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Next: The Income Approach
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7-9
Copyright McGraw-Hill/Irwin, 2002
THE INCOME APPROACH
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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•
•
•
•
•
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
• Corporate Income Taxes
• Dividends
• Undistributed Corporate
Profits
Copyright McGraw-Hill/Irwin, 2002
THE INCOME APPROACH
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
• From National Income to GDP
• Indirect Business Taxes
• Consumption of Fixed Capital
(Depreciation)
• Net Foreign Factor Income
Shortcomings of
GDP
Key Terms
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Copyright McGraw-Hill/Irwin, 2002
OTHER NATIONAL ACCOUNTS
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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U.S. GDP, NDP, NI, PI, & DI, 2000
Gross Domestic Product (GDP)
Consumption of fixed capital
Net Domestic Product (NDP)
Net foreign factor income earned
in the U.S.
Indirect business taxes
National Income (NI)
Social security contributions
Corporate income taxes
Undistributed corporate profits
Transfer payments
Personal Income (PI)
Personal Taxes
Disposable Income (DI)
Copyright McGraw-Hill/Irwin, 2002
$9966
-1257
$8709
- 9
-682
$8018
-706
-286
-274
+1530
$8282
1292
$6990
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
NOMINAL GDP vs. REAL GDP
• Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when Prices fall
• Nominal GDP
• Calculating Real GDP
(4)
Nominal GDP vs.
Real GDP
(2)
(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
-
-
-
Shortcomings of
GDP
Key Terms
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Unadjusted,
Copyright McGraw-Hill/Irwin, 2002
NOMINAL GDP vs. REAL GDP
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
• Adjustment Process
• GDP Price Index
Price Index
in a given
year
=
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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Price of market basket
in specific year
Real GDP
Price of same market
basket in base year
=
Nominal GDP
Price Index
(in hundredths)
An Alternative Method
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Price Index
(in hundredths)
Copyright McGraw-Hill/Irwin, 2002
=
Nominal GDP
Real GDP
x 100
NOMINAL GDP vs. REAL GDP
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
•Consumer Price Index
CPI =
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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Copyright McGraw-Hill/Irwin, 2002
Price of 1993-1995 market
basket in any given year
Price of the same market
basket in 1982-1984
x 100
SHORTCOMINGS OF GDP
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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• Nonmarket Transactions
• Leisure
• Improved Product Quality
• The Underground Economy
• GDP and the Environment
• Composition and Distribution
of Output
• Per Capita Output
• Noneconomic Sources of WellBeing
Copyright McGraw-Hill/Irwin, 2002
GLOBAL PERSPECTIVE
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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The Underground Economy as a Percent of GDP
0
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United
Kingdom
Japan
United States
Switzerland
Copyright McGraw-Hill/Irwin, 2002
5
10
15
20
25
30
Source: The Journal of Economic Literature, 2000
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Chapter
Conclusions
Key Terms
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End
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Copyright McGraw-Hill/Irwin, 2002
national income accounting
gross domestic product
intermediate goods
final goods
multiple counting
value added
expenditures approach
income approach
personal consumption
expenditures (C)
gross private domestic
investment (Ig)
net private domestic
investment
Copyright McGraw-Hill/Irwin, 2002
government purchases (G)
net exports (Xn)
national income
indirect business taxes
consumption of fixed capital
net domestic product (NDP)
personal income (PI)
disposable income (DI)
nominal GDP
price index
real GDP
consumer price index (CPI)
per capita output
BACK
END
Importance of
Macroeconomic
Measurement
Gross Domestic
Product
Expenditures
Approach
Income Approach
Other National
Accounts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
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End
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Next...
Introduction to
Economic Growth
And Instability
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Chapter 8
Copyright McGraw-Hill/Irwin, 2002