Chapter Two National Income Accounting Gross Domestic Product and Gross National Product 1. Calculating GDP Final goods and value added current output market prices Gross Domestic Product and Gross National Product 1. Calculating GDP Final goods and value added current output market prices 2. GDP and GNP 2. GDP and GNP Real and Nominal GDP (see table 2-3) Real and Nominal GDP (see table 2-3)

Price Indexes 1. The GDP deflator ---is the ratio of nominal GDP in a given year to real GDP of that year 2. The Consumer Price Index (CPI)--- measures the cost of buying a fixed basket of goods and services representative of the purchases of urban consumers. 3. The Producer Price Index (PPI)----raw materials and semi-finished goods. Price Indexes 1. The GDP deflator ---is the ratio of nominal GDP in a given year to real GDP of that year 2. The Consumer Price Index (CPI)--- measures the cost of buying a fixed basket of goods and services representative of the purchases of urban consumers. 3. The Producer Price Index (PPI)----raw materials and semi-finished goods.

From GDP to Personal Disposable Income 1. GDP - Capital consumption allowance 2. NDP - Indirect taxes 3. NI - corporate profits -social insurance contributions + government and business transfers to persons + interest and dividends 4. PI - personal tax and non-tax payments 5. PDI ≡ consumption + saving From GDP to Personal Disposable Income 1. GDP - Capital consumption allowance 2. NDP - Indirect taxes 3. NI - corporate profits -social insurance contributions + government and business transfers to persons + interest and dividends 4. PI - personal tax and non-tax payments 5. PDI ≡ consumption + saving

Outlays and Components of GDP( Fig2-1) 1. Demand components (from the view of expenditures) A. Consumption B. Investment C. Government D. Net exports Total Demand for GDP(or Y) = C+I+G+NX Outlays and Components of GDP( Fig2-1) 1. Demand components (from the view of expenditures) A. Consumption B. Investment C. Government D. Net exports Total Demand for GDP(or Y) = C+I+G+NX

2. Payments to factors of production (from the view of income) A. Labor B. Capital C. Profit About 3/4 of factors payments are payments to labor. Most of the remainder goes to pay capital. In oil-extraction economies, natural resources are a dominant factor of production. PDI= GDP + net factor income from abroad - depreciation - retained earnings + transfers - taxes

The Circulation of the Macroeconomic System The Circulation of the Macroeconomic System 1. Simple Economy HouseholdFirm Factors Goods & Services Expenditure Payoffs

2. Simple Economy plus Government HouseholdFirm Factors Goods & Services Expenditure Payoffs Government Taxes G purchases TR Public Goods

2. Four Sectors of Economy HouseholdFirm Factors Goods & Services Expenditure Payoffs Government Taxes G purchases TR Public Goods Foreign Firm Foreign HH Import Export Money outflow Money inflow

Some Important Identities 1. A Simple Economy (no government and foreign trade ) Demand for: ( GDP) Y≡ C+I Income from : ( GDP) Y≡ C+S ∴ C+I ≡ Y≡ C+S and I ≡ Y - C≡ S that is I ≡ S Some Important Identities 1. A Simple Economy (no government and foreign trade ) Demand for: ( GDP) Y≡ C+I Income from : ( GDP) Y≡ C+S ∴ C+I ≡ Y≡ C+S and I ≡ Y - C≡ S that is I ≡ S

2. Reintroducing the government and foreign trade Demand : Y = C + I + G + NX Income : Y = YD + TA - TR ∵ C + S ≡ YD ∴ C + S ≡ YD ≡ Y + TR - TA ∴ S - I ≡ (G + TR - TA) + NX 3. Saving, Investment, Government Budget, and Trade