© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting Chapter 8

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve Three econometricians went out hunting, and came across a large deer.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a yard to the left.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve The second econometrician fired, but also missed, by a yard to the right.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve The second econometrician fired, but also missed, by a yard to the right. The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u State why national income accounting is important.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u State why national income accounting is important. u Define GDP, GNP, and NI.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u State why national income accounting is important. u Define GDP, GNP, and NI. u Calculate GDP in a simple example, avoiding double counting.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why GDP = C G + (X - M).

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why GDP = C G + (X - M). u Distinguish between real and nominal values.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why GDP = C G + (X - M). u Distinguish between real and nominal values. u State some limitations of national income accounting.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u In the 1930s it was impossible to talk intelligently about macroeconomics since the discussion lacked rigorous terminology.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u In the mid-1930s, Keynesians Simon Kuznets and Richard Stone began to develop this terminology.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u They developed national income accounting—a set of rules and definitions for measuring economic activity in the aggregate economy—that is, in the economy as a whole.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l Gross Domestic Product (GDP) is the total value of all final goods and services produced in an economy in a one-year period.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l Gross Domestic Product (GDP) is the total value of all final goods and services produced in an economy in a one-year period. u It is the single most-used economic measure.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l Gross National Product (GNP) is the aggregate final output of citizens and businesses of an economy in one year.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l GDP measures the economic activity that occurs within a country.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l GDP measures the economic activity that occurs within a country. l GNP measures the economic activity of the citizens and businesses of a country.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP l To move from GDP to GNP, net foreign factor income is added to GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP l Net foreign factor income is the income from foreign domestic factor sources minus foreign factor incomes earned domestically.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP l One must add the foreign income of one's citizens and subtract the income of residents who are not citizens.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u All goods and services produced by an economy must be weighted, that is, each good and service must be multiplied by its price.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u Once quantities of a particular good or service are multiplied by its price, we arrive at a value measure of the good or service.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u Finally, all the value measures are added to arrive at GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u GDP is a flow concept.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u The store of wealth is a stock concept.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u The stock equivalent to National Income Accounts is the Wealth Accounts—a balance sheet of an economy’s stocks of assets and liabilities.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u When one firm sells products to another firm for use in production of yet another good, the first firm’s products are not considered final output but intermediate products.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u When one firm sells products to another firm for use in production of yet another good, the first firm’s products are not considered final output but intermediate products. l Intermediate products are used as input in the production of some other product.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u Not accounting for intermediate products would result in double and triple counting.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u Not accounting for intermediate products would result in double and triple counting. l If we did not eliminate intermediate goods, a change in organization—say, a merger— would look like a change in output

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Ways of Eliminating Intermediate Goods u The first is to calculate only final output.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Ways of Eliminating Intermediate Goods u A second way is to follow the value added approach. l Value added is the increase in value that a firm contributes to a product or service.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Ways of Eliminating Intermediate Goods u A second way is to follow the value added approach. l Value added is the increase in value that a firm contributes to a product or service. l It is calculated by subtracting intermediate goods from the value of its sales.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Value Added Approach Eliminates Double Counting

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Value Added Approach Eliminates Double Counting

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Value Added Approach Eliminates Double Counting

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling your car to a neighbor does not add to GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling your car to a used car dealer who sells your car to someone else for a higher price, does add to GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling your car to a used car dealer who sells your car to someone else for a higher price, does add to GDP. l The value added is the dealer's services.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling a stock or bond does not add to GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling a stock or bond does not add to GDP. l The stock broker's commission for the sales does add to GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Social security payments, welfare payments, veterans' benefits, and other government transfer payments are not included in GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u The work of unpaid housespouses does not appear in GDP calculations.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Circular Flow u The national income accounting identity is the accounting equality of output and income.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Goods The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods P e r s o n alcons ump tio n ( 4 ) W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) Financial markets W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods I n v e s t m e n t ( 3 ) P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) Financial markets W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods I n v e s t m e n t ( 3 ) P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) ( 2 )G o v e r n m e n t S p e n d i n g T a x e s ( 2 ) Government Financial markets W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods I n v e s t m e n t ( 3 ) P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) I m p o r t s ( 5 ) E x p o r t s ( 5 ) ( 2 )G o v e r n m e n t S p e n d i n g T a x e s ( 2 ) Government Financial markets Other countries W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l The income approach is shown on the top half of the circular flow.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l National income is the total income earned by citizens and businesses in a country in one year.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l Firms make payments to households for supplying their services as factors of production.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Employee compensation is payments for labor such as salaries and wages.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Rents are payments for use of land and buildings.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Interest includes payments for loans by households to firms.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Profits are payments to the owners of firms.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l The expenditure approach is shown on the bottom half of the circular flow.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Specifically, GDP is equal to the sum of the four categories of expenditures.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Specifically, GDP is equal to the sum of the four categories of expenditures. GDP = C + I + G + (X - M)

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Consumption

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Consumption u When individuals receive income, they can spend it on domestic goods, save it it, pay taxes, or buy foreign goods.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Consumption u This is the largest and most important of the flows.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Investment

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Investment u The portion of their income that individuals save leaves the income stream and goes into financial markets.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Investment u Business spending on equipment, structures, and inventories is counted as investment.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Government consumption and investment

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Government consumption and investment u When individuals pay taxes, those taxes are either spent by government on goods and services or are returned to individuals in the form of transfer payments.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Government consumption and investment u The connection drawn between the government and the financial markets is there because if the government runs a deficit, it must borrow from financial markets to make up the difference.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports u Spending on foreign goods escapes the system and does not add to domestic production, thus spending on imports are subtracted from total expenditures.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports u Exports to foreign nations are added to total expenditures.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports u Exports to foreign nations are added to total expenditures. u These flows are usually combined into net exports.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure l Income and expenditures must be equal because of the rules of double-entry bookkeeping.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure l Income and expenditures must be equal because of the rules of double-entry bookkeeping. l Profit is the balancing item.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure l The national income accounting identity allows GDP to be calculated either by adding up all values of final output or by adding up the values of all earnings or income.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l GDP is important since we can compare one country with another and one year's production with another year's.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l Per capita GDP is another measure often used to compare nations' GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l Per capita GDP is another measure often used to compare nations' GDP. u Per capita can be a poor measure of the various living standards in various nations.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l Per capita GDP is another measure often used to compare nations' GDP. u To get around the problems of per capita GDP, economists use purchasing power parity, which adjusts for different relative prices among nations before making comparisons.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Economic Welfare Over Time

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Economic Welfare Over Time l Comparing output over time is best done with real output which is nominal output adjusted for inflation.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Nominal GDP is GDP calculated at existing prices.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation. u Real GDP is important to society because it measures what is really produced.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation. u By dividing nominal GDP by the GDP deflator, we arrive at real GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation. u By dividing nominal GDP by the GDP deflator, we arrive at real GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u GDP measures market activity, not welfare.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u GDP measures market activity, not welfare. l GDP does not measure happiness, nor does it measure economic welfare.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u GDP measures market activity, not welfare. l Welfare is a complicated idea, very difficult to measure.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure all market economic activity.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure the following market activities:

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure the following market activities: u Illegal drug sales. u Under-the-counter sales of goods to avoid income and sales taxes. u Work performed and paid for in cash.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure the following market activities: u Unreported sales. u Prostitution, loan sharking, extortion, and other illegal activities.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l Estimates of the size of the underground economy range from1.5 to 20 percent of GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l A second type of measurement error occurs in adjusting GDP for inflation.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l A second type of measurement error occurs in adjusting GDP for inflation. u If the price and the quality of a product go up together, has the price really gone up?

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l A second type of measurement error occurs in adjusting GDP for inflation. u Is it possible to measure the value of quality increases?

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy. u Buying a steam iron would be consumption, and if it is used to iron team T-shirts sold by a home business, it would still be counted as consumption.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy. u Investment includes private housing units, but they do not usually add to our stock of productive tools.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy. u Investment includes private housing units, but they do not usually add to our stock of productive tools. u The garages and spare bedrooms might if they are used in an income-producing capacity.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l Some social scientists have developed alternatives to GDP such as the Gross Process Indicator (GPI).

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l Some social scientists have developed alternatives to GDP such as the Gross Process Indicator (GPI). u The GPI tries to measure pollution, education, health concerns, as well as GDP.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Is Worth Using Despite Its Limitations u National income accounting should be used with sophistication.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Is Worth Using Despite Its Limitations u It is a powerful economic tool that informs average citizens about the direction the economy is moving.

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting End of Chapter 8