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Chapter 19
Measuring
Economic
Activity
Introduction to Economics (Combined
Version) 5th Edition
 Gross domestic product is
the value, at current
market prices, of all final
goods and services
produced annually in a
given country.
 Final goods and services
are those sold to parties
who will use them for
consumption, investment,
government purchases, or
exports.
 Not included in GDP:
 Intermediate goods used in
production of other goods
 Sales of used goods
 Most financial transactions
GDP
Medical care is a service included as part
of gross domestic product.
Introduction to Economics (Combined
Version) 5th Edition
GDP and Value Added
 GDP must include only
the value of final goods
and services if it is to
measure total production
without double counting.
 The value of sales at each
stage of production can
be divided into the value
added at that stage and
the value of purchased
inputs.
 The selling price of the
final product (a $100
table, in this case) equals
the sum of the values
added at all stages of
production.
Introduction to Economics (Combined
Version) 5th Edition
Expenditure Approach to GDP
 Gross domestic product is estimated using the expenditure approach.
 This involves adding together the values of expenditures on newly produced
final goods and services made by all economic units: C+I+G+(Ex-IM).
 Net domestic product is derived from gross domestic product by excluding the
value of expenditures made to replace worn-out or obsolete capital equipment.
US, 2012
Introduction to Economics (Combined
Version) 5th Edition
National and Domestic Income
 National and domestic income are measured using the income approach.
 National income is obtain by adding together the values of all forms of income earned
by a country’s residents.
 Domestic income is derived from national income by subtracting receipts of factor
income from the rest of the world and adding factor income paid to the rest of the
world.
US, 2012
Introduction to Economics (Combined
Version) 5th Edition
Balance of Payments Accounts (1)
 Current account transactions consist of imports and exports of
goods and services, together with international flows of factor
income and transfer payments.
 The US had a current account deficit of $674 billion in 2012.
Introduction to Economics (Combined
Version) 5th Edition
2012, Billions of Dollars
Balance of Payments Accounts (2)
 Capital and financial account transactions consist of international
borrowing and lending, securities transactions, direct investment, and
official reserve transactions.
 If all amounts were measured completely and accurately, the current
account and financial account balances would be equal and opposite in
sign.
 In practice, there is a statistical discrepancy indicating errors and
omissions in measurement.
Introduction to Economics (Combined
Version) 5th Edition
2012, Billions of Dollars
Consumer Price Index for a Simple Economy
 To calculate the consumer price index, divide the value of baseyear prices valued at current-year prices by the value of base-year
goods valued at base-year prices.
 In this case, the CPI is 170.
Introduction to Economics (Combined
Version) 5th Edition
How Good Are the GDP Accounts?
 U.S. national accounts
are among the best in
the world, but they still
suffer from major
limitations:
 Accuracy vs. timeliness
 Biases in price indexes
and changes in quality
of goods
 Omission of the
underground economy
 Omission of
nonmaterial sources of
welfare
The quality of computers has increased rapidly
even as their price has fallen.
Introduction to Economics (Combined
Version) 5th Edition