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ECO285 National Income Accounting II Dr. Dennis Foster – Spring 2014 Required additional reading: • Should we believe the GDP? • Mises wiki on GDP and problems • Higgs and Real GDPP • Rothbard’s Private Product Remaining • Counting what counts: GDP redefined • Beyond GDP – Enlarged GDP &FAQs • Skousen – Gross Domestic Expenditures Interpreting the GDP • From the circular flow, we get: Income = Y = C + S + T Income = Expenditures Y = C + I + G + (Ex-Im) • Substitute, cancel C and rearrange to get: S + T + Im = I + G + Ex Leakages = Injections Interpreting the GDP • Further rearrange to get: I = S + (T-G) + (Im-Ex) • Investment comes from three sources: – Private sector savings. – Government “savings.” – Foreign sector savings. • Where economic growth is primarily determined by investment . . . 2011: $2.34 t ≈ $2.83 t - $1.0 t + $570 b GDP as the sum of “values added” • Finding C, I, G and net X is difficult. • Values are estimated based on statistical analysis. • GDP is calculated by adding up all values added. VA = (sales revenue) – (cost of inputs) • This data is obtainable from tax info. GDP: Nominal vs. Real • Nominal = “current dollar” value • Real = “constant dollar” value 2014 2013 Q P bread 100 95 $3.00 $2.50 shoes 10 9 $23.00 $22.50 movies 17 15 $8.00 hammocks 2 $45 constant current dollar dollar Q*P $285.00 $237.50 $250.00 $230.00 $225.00 $202.50 $136.00 $120.00 $90.00 $741.00 $688.50 $662.50 GDP 11.8% 3.9% Next – GDP Issues • What are we really measuring? • What are we trying to measure? • How good a job to we do at this? • What gets left out? • Are there better measures? • Why do we even want to measure economic activity? ECO285 National Income Accounting II Dr. Dennis Foster – Spring 2014