01NotesI-National Income Accounting

7/28/2019 01NotesI-National Income Accounting

1/5

ECONOMICS 202Notes I

MEASURING THE ECONOMY

I. NATIONAL INCOME ACCOUNTINGA. National income accounting provides a means to discover how the economy is operating and what, if

anything, needs to be done to improve conditions.

B. National income accounting provides government policy-makers a tool to formulate and evaluate economicpolicy.

1. In order to fight inflation, unemployment, or slow-growth problems, decision-makers need to learn theeffects of instituting a policyhow effective is the policy?

C. National income accounting helps businesses and consumers make intelligent economic decisions.1. Should you buy your house now or next year? This depends in part on the national economy.2. Should I borrow to buy a new frozen yogurt machine or should I pay cash? This depends in part on the

national economy.

3. Should I open more outlets of my espresso bar or should I sell out to Starbucks? This depends in parton the national economy.

II. MEASUREMENT OF OUTPUTA. Gross Domestic Product (GDP)is the total market value of all final goods and services produced in the

economy during one year.

1. GDP is a money measure of outputin the circular flow, it measures the outside ring the moneyexpenditures spent on goods and services.

2. GDP only measures final output of goods and services.a. Intermediate goods (unfinished goods) are excluded by subtracting the beginning year inventory

from the end of the year inventory.

b. This avoids double countingthe counting of the same good twice.3. Items excluded from GDP accounts:

a. Nonproductive transactionsi. Purely financial transactionssuch as public and private transfer payments and the purchase

or sale of securities (stocks) because these items to not represent current production.

ii.

Second-hand salesused goodsbecause production was counted when the good was firstproduced.

b. Non-market transactionsi. Homemakers servicesii Do-it-yourself labor ( but does include the cost of materials purchased)


2/5

ii Do-it-yourself labor ( but does include the cost of materials purchased)

3. Government Purchases (G) all levels of governmenta. Only purchases on newly produced goods and servicesb. Does not include transfer paymentsa large portion of government budgetsc. Government purchases may include some investment goods

4. Net Exports (Xn)a. Total exports less total imports

i. If exports less imports are positive, a trade surplus exists.ii. If exports less imports are negative, a trade deficit exists.

b. The United States is currently running a trade deficit of about 2% of GDP.C. Gross Domestic Product (GDP) computed by the expenditure approach, can be determined by adding

together the four individual elements, as follows:

GDP = C + Ig + G + Xn

D. Net Domestic Product (NDP)is the total value of all final goods and services produced in the economyduring one year, after accounting for depreciation.

1. Some part of Gross Private Domestic Investment is made for replacement of worn out equipment andis not really a part of new production, so this portion of investment spending is subtracted from the

total investment spending to obtain Net Private Domestic Investment (In).

a. Net investment (In) is found by subtracting depreciation from gross investment (Ig)b. In = Igdepreciation

2. There are two ways to compute NDP:NDP = C + In + G + Xn

or

NDP = GDPDepreciation

3. Net Domestic Product (NDP) is generally considered a better measure of economic conditions than isGross Domestic Product (GDP); however, GDP is used more.

III.ADJUSTMENT TO GDP FOR INFLATION AND FOR POPULATION CHANGESA. If you wish to make meaningful comparisons between different years of the performance of the national

economy, you must make adjustments in the basic data, so the comparisons are relatively valid.

B. Adjustment must be made for price changes and for population changes.1. Real GDPis GDP adjusted for inflation.


3/5

d) Currently, the base year for computing inflation-adjusted GDP is 1992.ii. Chain-Weighted Price Adjustments

a) In order to reduce the distortion of using a fixed year as the base year, GDP statistics arecurrently based on a moving average of price levels in consecutive years as an inflation

adjustment.

b) When using chain-weighted price adjustments, real GDP still refers to inflation adjustedGDP but is not expressed in any given base year.

C. Per Capita GDP1. Per Capita GDPis the GDP per person.2. Since population changes, per capita GDP (GDP per person) is a better measure of how the economy is

doing than total GDP.

3. To obtain per capita GDP, simply divide the appropriate GDP figure by the population.a. Be sure to watch out for dividing billions (or trillions) by GDP by millions of persons!b. The result is a figure expressed in dollars per person.

4. You may compute both real and nominal GDP per capita.5. It is easier to compare per capita figures than total, because we can relate to per capita figures because

they are in numbers we can comprehend, rather than large abstract numbers in the trillions.

IV. MEASURES OF INCOMEA. The above analysis discusses looking at who is spending money on what is produced; we can also examine

who receives the income from the spent money.

B. The results of the two approaches must be equal (at least in theory).C. In class, we will focus primarily on the expenditure approach, but you will need to know the definitions ofthe terms used in the income approach.

D. Definitions1. National Income (NI )is the total income earned by current factors of production.

a. NI is computed by subtracting indirect business taxes from NDP.2. Personal I ncome (PI )is the income received by households before payment of personal taxes.

a. PI is computed by subtracting corporate taxes, retained earnings, and social security taxes from NIand adding transfer payments and net interest received.

3. Disposable Income (DI )is the after-tax income of households.a. DI is computed by subtracting personal taxes from PI.

4. Saving (S)is that portion of Disposable Income not spent on current consumption.a. S is computed by subtracting consumption spending from DI.

V. THE QUALITY OF LIFE


4/5

1

Gross Domestic Product and Related Measures

Billions of Billions of

Current Dollars Chained (2000) dollars

2004 2005:Q1 2005:Q2\r\ 2004 2005:Q1 2005:Q2\r\

Gross domestic product....... $11,734.3 $12,198.8 $12,373.1 $10,755.7 $10,999.3 $11,088.6

Personal consumption expenditures. 8214.3 8535.8 8667.7 7588.6 7764.9 7823.2Durable goods................... 987.8 1017.3 1035.0 1089.9 1122.3 1143.3

Nondurable goods................ 2368.3 2476.6 2532.8 2200.4 2265.6 2285.1

Services........................ 4858.2 5041.8 5099.9 4310.9 4392.0 4412.7

Gross private domestic investment. $1,928.1 $2,058.5 $2,054.2 $1,809.8 $1,902.9 $1,886.8

Fixed investment................ 1872.6 1998.7 2053.7 1755.1 1842.2 1882.1

Nonresidential................ 1198.8 1280.1 1312.9 1186.7 1252.2 1277.8

Structures.................. 298.4 315.9 325.7 248.4 251.0 252.7

Equipment and software...... 900.4 964.3 987.3 947.6 1014.2 1039.6

Residential................... 673.8 718.5 740.8 561.8 584.1 597.9

Change in private inventories... 55.4 59.9 0.5 52.0 58.2 2.6

Net exports of goods and services. -$624.0 -$697.5 -$687.0 -$601.3 -$645.4 -$611.2

Exports......................... 1173.8 1253.2 1304.2 1117.9 1165.3 1201.9

Imports......................... 1797.8 1950.6 1991.2 1719.2 1810.7 1813.1

Government consumption expenditure

and gross investment............. $2,215.9 $2,302.0 $2,338.2 $1,952.3 $1,971.9 $1,985.0

Federal......................... 827.6 860.2 868.2 723.7 731.8 734.7

State and local................. 1388.3 1441.7 1470.1 1228.4 1239.8 1250.1

Residual.......................... ..... ..... ..... -$26.8 -$48.0 -$60.2

Gross domestic product.......... $11,734.3 $12,198.8 $12,373.1 $10,755.7 $10,999.3 $11,088.6

Plus: Income receipts from

the rest of the world.......... 415.4 462.3 487.3 383.7 420.4 439.6

Less: Income payments to

the rest of the world.......... 361.7 422.9 454.3 333.5 383.3 408.6

Equals: Gross national product.. 11788.0 12238.2 12406.1 10805.7 11036.3 11119.4

Net domestic product............ $10,299.0 $10,750.4 $10,917.4 $9,365.5 $9,608.3 $9,689.1


5/5

2

Documents

01NotesI-National Income Accounting