Chapter 5 National Income Accounting

Economy  Structure of economic life and activity in an area  Macroeconomics – study of the whole economy, theories, predictions, events and policies

Macroeconomics and the Human Body Cells perform functions linked to the operation of the body  Cells die off and are replaced  Blood circulates thru the body providing nutrients Economic units perform different functions to operate the whole economy  Units die off and are replaced  Money circulates thru the economy providing incentives Expectations  If you expect to feel better then you will  Economic expectations and action fuel results In both economics and medicine there are differences of opinion Medical people have labs and controlled experiments. Economists only have the one patient: U.S. Knowledge in both improves over time as each views the performance and results of their patients

National Income Accounting  Measuring the Economy’s performance

Gross Domestic Product  GDP - market value of all final goods produced in a year in a country (not financial transactions)  Double Counting  Final goods  Intermediate Goods

Approaches  Expenditures = Income = GDP  Expenditures :GDP = C+I+G+X - M Consumption (C) Investment (I)  Net Investment In = I – Ir or I = In + Ir  Replacement Ir = Depreciation Government Purchases (not transfer payments) (G) Net Exports = Exports – Imports (X - M)

Income  Wages and salaries  Rent  Interest  Profits

Other Measures Net Domestic Product (NDP) = GDP – Depreciation National Income (NI) = NDP – Indirect Business Taxes + Net Foreign Income (Americans income abroad – Their income made here) Personal Income (PI) = NI – Social security taxes – Corporate taxes – undistributed corporate profits + transfer payments Disposable Income (DI) = PI – Personal Taxes = C + S

Real GDP  Real GDP – Nominal GDP adjusted for inflation  Real Per Capita GDP = Real GDP/Population

Why Income = Expenditures GDP = C+I+G+X - M = DI + T C+I+G+X- M = C+S+T I+G+X = S+T+M I = S so G+X = T+M G = T so X = M

Shortcomiings  Doesn’t include home production  Doesn’t measure quality or leisure  Doesn’t reflect purpose  Doesn’t include the underground economy Illegal activities Tax avoidance  Environmental damage  Doesn’t include second hand sales, transfer payments and financial transactions

New Measures  Net Economic Welfare  Genuine Progress Indicator  Gross National Income (GNI)

Macroeconomic Model: Aggregate Demand and Supply Aggregate Output – Real GDP (adjusted for inflation) Aggregate Demand – Negative relationship between aggregate output demanded and the price level Aggregate Supply – relationship between amount of Real GDP supplied and the price level Equilibrium: Intersection of AD and AS