Download Substitute, cancel C and rearrange to get

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