| UNIT THREE |
CHAPTER 7
National Income Accounting
I. GDP—A
Measure of Output
A.
Gross Domestic Product (GDP) is the market value of final goods and
services produced within a country during a specific time period, usually a
year.
B.
What Counts toward GDP?
1.
Only
final goods and services count.
a.
Sales at intermediate
stages of production are not counted because their value is embodied within the
final‑user good. Their inclusion would result in double counting.
2.
Financial transactions and income transfers are excluded because they do
not involve production.
3.
Only production within the geographic borders of the country is counted.
4.
Only goods produced during the current period are counted.
C.
Dollars—The Common Denominator for GDP
1.
Each good produced increases output by the amount the purchaser pays for
the good.
2.
GDP is equal the sum of the total spending on all goods and services
produced during the year.
II.
Two Ways of Measuring GDP
A.
Dollar flow of
Dollar flow of
expenditures
=
GDP =
income (and indirect cost)
on final goods
of
final goods
B.
Deriving GDP by the Expenditure Approach
1.
Sum of the expenditures on final user goods and services purchased by
households, investors, governments, and foreigners.
2.
When derived by the expenditure approach, there are four components of
GDP:
a.
personal consumption purchases
b.
gross private investment (including inventories)
c.
government purchases (both consumption and investment)
d.
net exports (exports - imports)
C. Deriving GDP by the
Resource Cost-income Approach
1.
Sum of the costs incurred and income (including profits) generated
producing goods and services during the period.
2.
When derived by the resource cost/income approach, the direct cost income
components of GDP are:
a.
Employee Compensation
b.
Self-employment income
c.
Rents
d.
Interest
e.
Corporate profit
f.
Sum of a through e equals
national income
3.
Not all cost components of GDP result in an income payment to a resource
supplier. In order to get to GDP, we need to account also for three other
factors:
a. Indirect business taxes:
Taxes that increase the business firm’s costs of production and therefore
the prices charged to consumers.
b.
Depreciation: The cost of the wear and tear on the machines and
other capital assets used to produce goods and services during the period.
c.
Net Income of Foreigners: The income that foreigners earn
producing goods within the borders of a country minus the income Americans earn
abroad.
4.
When derived by resource cost/income approach, GDP is equal national
income (employee compensation, self-employment income, rents, interest,
corporate profit) plus indirect business taxes,
depreciation, and the net income of foreigners.
D.
Relative Size of GDP Components
III. Real and Nominal GDP
A. The term "real"
means adjusted for inflation.
B.
Price indexes are use to adjust income and output data for the effects of
inflation.
C. A price index
measures the cost of purchasing a market basket (or “bundle”) of goods at a
point in time relative to the cost of purchasing the identical market basket
during an earlier reference (or base) period.
IV. Two Key Price Indexes:
Consumer Price Index and GDP Deflator
A. The consumer price index (CPI)
measures the impact of price changes on the cost of the typical bundle of goods
and services purchased by households.
B. The GDP
deflator is a broader price index than the CPI. It is designed to measure
the change in the average price of the market basket of goods included in GDP.
V.
Using the GDP Deflator to Derive Real GDP
A. Real GDP2=Nominal
GDP2 x (GDP deflator1/GDP deflator2)
B.
Data on both money GDP and price changes are essential for meaningful
output comparisons between two time periods.
VI.
Shortcomings of GDP as a Measuring Rod
A. It does not count
nonmarket production.
B. It does not
count underground economy.
C. It makes no
adjustment for leisure
D. It probably
understates output increases because of the problem of estimating improvements
in the quality of products.
E. It does
not adjust for harmful side effects.
VII. The Great
Contribution of GDP
A. In spite of its
shortcomings, real GDP is a reasonably accurate measure of short‑term
fluctuations in output.
VIII.
Related Income Measures
A.
Gross National Product (GNP): Output produced by the
"nationals"—the citizens of the country, regardless of whether
that output is produced domestically or abroad.
B.
National Income: Total income earned by the nationals (citizens)
during a period. It is the sum of
employee compensation, self-employment income, rents, interest, and corporate
profits.
C.
Personal Income: Total income received by domestic households and
non-corporate businesses. It is
available for consumption, saving, and payment of personal taxes.
D.
Disposable Income: Income available to individuals after
personal taxes. It can either be spent on consumption or saved.
X.
The Link Between Output and Income
