National Income and Product Accounts (NIPA) Accounting system for the U.S. to measure aggregate economic activity United Nations System of National Accounts International standard system of national accounts unstats.un.org

Gross Domestic Product (GDP) Market value of final goods and services newly produced within a nation during a fixed period of time –Market value –Newly produced final goods and services –Fixed period of time GDP per capita is an economy’s GDP divided by its population

U.S. GDP Chained 2005 Dollars per-capita real GDP real GDP

The Income-Expenditure Identity Y = C+I+G+NX –Y = GDP (Income) –C = consumption –I = investment –G = government purchases –NX = net exports What is produced is spent somewhere

The Income-Expenditure Identity Expenditures in 1996 Billions of dollars Percent of GDP Personal Consumption Expenditures (C) Gross private domestic investment (I) Government purchases of goods and services (G) Net exports (NX) Exports Imports Total (equals GDP) (Y)

GDP is same as National Income GDP = National Income + Indirect taxes +Depreciation - Net Factor Payments (NFP) The income approach says that what is produced is income to someone

National Income Income in 1996 Billions of dollars Percent of GDP Compensation of employees Proprietors' income Rental income of persons Corporate profits Net interest Total (equals National Income)

National Saving S = Y+NFP-(C+G) Savings rate is savings as a percent of GDP

Current Account CA = NX+NFP = S-I

Budget Deficit S g = (T-TR-INT)-G T = Tax Receipts TR = Transfers to private sector INT = interest on national debt G = Government purchases S g =Budget (surplus if positive, deficit if negative)

U.S. Budget Deficit

Some Fundamental Prices

The General Price Level Y = nominal GDP Y = P * y P = GDP deflator or simply market price y = real GDP or quantity of goods produced

The General Price Level Price growth = inflation: Real GDP growth:

Consumer Price Inflation research.stlouisfed.org/fred2

Nominal Interest Rate The (short-term) interest rate is the risk-free rate of return that can be earned in the market. R = Dollar interest rate Invest $1 today at the rate R Receive $(1+R) in one period (day, week, month, year, etc.).

The (ex post) real interest rate, r, is the rate of return in units of goods. r = R -  (Ex post) real interest rate is nominal interest rate minus (realized) inflation. Ex Post Real Interest Rate

The inflation rate is typically not known Expected (ex ante) real interest rate = nominal interest rate - expected inflation r e = R -  e The expected real interest rate is the nominal interest rate less expected inflation – the Fisher equation Ex Ante Real Interest Rate: The Fisher Equation

Inflation and Nominal Interest Rate in the United States R Inflation Nominal Interest Rate Interest Rate Inflation

Glossary of Terms GDPGross Domestic Product (also Y) NFPNet Factor Payments GNPGross National Product = GDP + NFP CNational Consumption INational Investment GGovernment Expenditure XExports MImports NXNet exports = X - M SNational Saving = S pvt + S govt TTotal taxes TRTransfer payments INTInterest payments  Inflation P t General price level at time t RNominal interest rate rReal interest rate (ex post)