Eco 200 – Principles of Macroeconomics Chapter 7: National Income Accounting.

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Eco 200 – Principles of Macroeconomics Chapter 7: National Income Accounting

Gross Domestic Product (GDP) The market value of final goods and services produced within a country’s borders in a given year Does not include: Intermediate goods Goods produced in the past Non-market production Black market Underground economy Household production

GDP using value-added approach Final value of output = sum of value-added by all firms in the economy

GDP and inventory GDP is a measure of output, not sales The annual change in inventory is included in GDP If production is greater than sales, inventories increase If production is less than sales, inventories decrease Inventory change may be planned or unplanned. Inventory change is included as a component of investment spending (I)

GDP as expenditure GDP = C + I + G + X C = consumption I = gross investment G = government spending X = net exports = exports - imports

GDP as income GDP can also be measured by the income generated during production GDP = wages + rent+ interest + profits – net factor income from abroad + capital consumption allowance (depreciation) + indirect business taxes

Other measures of aggregate output Gross National Product (GNP) = GDP + net factor income from abroad Net National Product (NNP) = GNP – capital consumption allowance NNP includes only net investment (= gross investment – depreciation) National Income (NI) = NNP – indirect business taxes (and some minor adjustments)

Other measures of aggregate output (continued) Personal Income (PI) = NI – income earned but not received + income received but not earned Undistributed corporate profits Transfer payments = income received without any good or service provided in return Examples: social security benefits, unemployment compensation, welfare programs, etc. Disposable personal income (DPI) DPI = PI – personal taxes DPI = C + S C = consumption, S = savings

Nominal and real GDP Nominal variable – expressed in current dollars Real variable – expressed in constant dollars (using a given base year) Price index = cost of basket of goods in the current year / cost of basket of goods in the base year

Types of price indexes GDP price index Consumer price index (CPI) Producer price index (PPI) (previously known as the wholesale price index)