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Macroeconomics - ECO 2013
Fall 2005 – 1 Term
August 24 – December 16, 2005
Chapter 7: Measuring Domestic Output,
National Income, and Price Level
National Income Accounting measures
the economy’s OVERALL performance
Bureau of Economic Analysis
Assess health of the economy by
comparing levels of production
Track the long-run course of the
economy
Formulate policies
Gross Domestic Product (GDP)
Aggregate Output: primary measure of the
economy’s performance is its annual total
output of G & S
Gross Domestic Product (GDP) = Aggregate
Output
GDP = total market value of all FINAL G & S
produced in a given year
G & S produced by citizen-supplied or
foreign-supplied resourced employed WITHIN
a country
Gross Domestic Product (GDP)
GDP is a monetary measure
Avoids multiple counting: Includes
ONLY FINAL goods & excludes
intermediates


Intermediates: G & S purchased for resale
or further processing/manufacturing
Final: G & S purchased for final use by
consumer
GDP Excludes Nonproduction
Transactions
Nonproduction transactions must be excluded
from GDP b/c they have nothing to do w/ the
general of final goods
Two types:

Financial Transactions
 Public Transfer Payments
 Private Transfer Payments
 Stock Market Transactions

Secondhand Sales
Two ways to Calculate GDP
Expenditures Approach

Output Approach: Sum of all the money
spent in buying good
Income Approach

Earnings / Allocations Approach: Income
derived or created from producing good
Expenditures Approach
Add up all spending on final G & S that
has taken place throughout the year
GDP = C + Ig + G + Xn where
C = Personal Consumption
Ig = Private Domestic Investment
G = Government purchases of G & S
Xn = Net exports
Personal Consumption
Expenditures (C)
Durable Consumer Goods
Nondurable Consumer Goods
Consumer Expenditures for Services
Gross Private Domestic
Investment (Ig)
Final purchases of machinery,
equipment, & tools by business
enterprises
Construction
Changes in inventories
Net Investment = Gross Investment –
Depreciation (amount of capital used up
over the course of a year)
Government Purchases (G)
Government Consumption Expenditures
& Gross Investment
Two components:



Expenditures for G & S that government
consumes in providing public services
Expenditures for Social Capital (e.g.,
schools & highways)
Does not include Transfer payments
Net Exports (Xn)
Net Exports (Xn) = Exports (X) –
Imports (M)
When Imports (M) > Exports (X), Net
Exports (Xn) is NEGATIVE
 Trade Deficit!
Global Perspective of GDP
United States
Japan
Germany
France
United Kingdom
Italy
China
Brazil
Canada
Spain
India
Mexico
Korea
Netherlands
Australia
Income Approach
National Income + Adjustments
GDP = Wages + Rent + Interest + Profit + Adjustments where
Wages includes salary supplements

(insurance, benefits)
NET Rents received from property resources

(less depreciation)
Interest paid by private businesses to suppliers of capital
Proprietor’s Income

sole proprietorships, partnerships, & corporate profits
Corporate Profits



Corporate Income Taxes
Dividends
Undistributed Corporate Profits (aka Retained Earnings)
Nominal GDP v. Real GDP
Compare market values of GDP from year to
year, despite any changes due to inflation



Deflate GDP when prices rise
Inflate GDP when prices fall
From a REFERENCE year
Nominal GDP: GDP based on prices that
prevailed when output was produced (aka
unadjusted GDP)
Real GDP: GDP that has been deflated or
inflated to reflect changes in price level (aka
adjusted GDP)
GDP Price Index
Price Index: Measure of price of specified collection
of G & S (market basket) in a given year as
compared to price of an identical collection of G & S
in a reference year
Price Index in Given Year = (Price of Market Basket in
Specific Year / Price of Market Basket in Base Year) *
100
Real GDP = Nominal GDP / Price Index (in
hundredths)
Consumer Price Index (CPI)
Compiled by Bureau of Labor Statistic
(BLS)
Reports price of a market basket of
~300 G & S that are presumably
purchased by a “typical urban
consumer”
Shortcomings of GDP
Nonmarket Transactions (e.g., Homemakers)

Understates GDP
Leisure

Understates well-being
Improved Product Quality

GDP is Quantitative v. Qualitative measure
Underground Economy


Business that conceal income
Factors:
1. Extent & Complexity of Regulation
2. Type & Degree of Taxation
3. Effectiveness of Law Enforcement
Shortcomings of GDP
Environment


Social costs of negative by-products reduce
economic well-being
Overstates GDP
Composition & Distribution of Output
Per Capita Output

Divide GDP by population
Noneconomic Sources of Well-Being
Chapter 7 Study Questions
7: Net Exports
8 & 9: GDP, NDP, NI, PI
12: Real GDP
13: GDP