Q: How do we measure GDP in Reality? A: There are three equivalent approaches 1. Value-Added Approach adds up production across producers 2. Income account adds up claims against value added across types of claimant 3. Expenditure Account adds up uses of product by type of use

1. factors of production (capital and labor) help interpret the national accounts 2. preliminaries a. stocks vs. flows b. location of factors 3. factors in the income accounts 4. factors in the expenditure accounts 5. private vs. public sectors 6. factors and value-added are connected through the production function Factors of Production

1. principle: add private factors with public factors 2. practice: public investment rarely measured separately from public consumption 3. principle: add public sector value-added to private sector value-added 4. practice: public sector output not sold in the marketplace, so net value-added is assumed to be equal to public sector labor costs. It is impossible to measure aggregate public sector productivity 5. principle: add private factor incomes with public factor incomes 6. practice: public capital is not rented in a marketplace, so net public capital income is assumed to be zero 7. practice: public sector output cannot be classified as final versus intermediate  need to adjust the income accounts for “indirect taxes” Private vs. Public: Principles and Measurement

1. government spending = government purchases + transfers, only purchases included as public entry in the NIPA expenditure account 2. government purchases = purchases of items from private enterprises + purchases of items to be used by public institutions and enterprises, but only the later are included as pubic entry in the NIPA value-added account Government Spending Compared with Public Sector NIPA Entries