1. Principles Of Macroeconomics
National Income Accounting
GDP
The Expenditure Approach
The Income Approach

2. An Economic Barometer What exactly is GDP?
How do we use it to tell us whether our economy is in a recession or how rapidly our economy is expanding?
How do we take the effects of inflation out of GDP to compare economic well-being over time?
And how do we compare economic well-being across countries?

3. Gross Domestic Product
Gross Domestic Product (GDP) Is…
….the market value of all final goods and services produced in a country in a given time period.
This definition has four parts:
Market value
Final goods and services
Produced within a country
In a given time period

4. Gross Domestic Product
Gross Domestic Product (GDP) Is…
….the market value of all final goods and services produced in a country in a given time period.
Market value
GDP is a market value—goods and services are valued at their market prices.
“You can’t compare apples to oranges.”
Market prices measure the amount people are willing to pay for different goods, they reflect the value of goods.
If apples are double the price of oranges, apples contributes twice as much to GDP.
Things that don’t have a market value are excluded, e.g., housework you do for yourself.

5. Gross Domestic Product
Gross Domestic Product (GDP) Is…
….the market value of all final goods and services produced in a country in a given time period.
Final goods and services
GDP is the value of the final goods and services produced.
A final good (or service) is an item bought by its final user during a specified time period.
A final good contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service.
GDP only includes final goods, as they already embody the value of intermediate goods used in their production.
Excluding intermediate goods and services avoids double counting.

6. Total Expenditure by firm
Calculating GDP
Aggregate Expenditure
American Ore Inc
American Steel
American Motors
Total factor income
Value of Sales
4,200 (ore)
9,000 (steel)
21,500 (Car)
Intermediate goods
4,200 (iron ore)
Wages
2,000
3,700
10,000
15,700
Interest Payment
1,000
600
2,600
Rent
200
300
500
Profit
2,200
Total Expenditure by firm
4,200
9,000
21,500
Value Added
4,800
12,500
Sum of Value Added - 21,500
Total Payment to Factors - 21,500

8. Gross Domestic Product
Gross Domestic Product (GDP) Is…
….the market value of all final goods and services produced in a country in a given time period.
Produced within a country
GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there.

9. Gross Domestic Product
GDP and the Circular Flow of Expenditure and Income
GDP measures the value of production, which also equals total expenditure on final goods and total income.
We can determine how much a consumer pays for it; that will tell us the value of the final product. Or we can add up all the income created in producing it.
What is spent on a product is received as income by those who helped produce it.

10. Gross Domestic Product
Firms hire factors of production from households. The blue flow, Y, shows total income paid by firms to households.

11. Gross Domestic Product
Households buy consumer goods and services. The red flow, C, shows consumption expenditures.

12. Gross Domestic Product
Households save, S, and pay taxes, T. Firms borrow some of what households save to finance their investment.

13. Gross Domestic Product
Firms buy capital goods from other firms. The red flow represents this investment expenditure by firms.

14. Gross Domestic Product
Governments buy goods and services, G, and borrow or repay debt if spending exceeds or is less than taxes.

15. Gross Domestic Product
The rest of the world buys goods and services from us, X, and sells us goods and services, M—net exports are X - M

16. Gross Domestic Product
And the rest of the world borrows from us or lends to us depending on whether net exports are positive or negative.

17. Gross Domestic Product
The blue and red flows are the circular flow of expenditure and income. The green flows are borrowing and lending.

18. Gross Domestic Product
The sum of the red flows equals the blue flow.

19. Gross Domestic Product
That is: Y = C + I + G + X - M

20. The Components of GDP Y = C + I + G + NX Consumption (C)
Recall: GDP is total spending.
Four components:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
These components add up to GDP (denoted Y):
Each of the four components of GDP is defined and discussed in detail on the following slides.
Y = C + I + G + NX

21. Consumption (C) For renters, consumption includes rent payments.
Total spending by households on good and services.
Note on housing costs:
For renters, consumption includes rent payments.
Mostly, the term “consumption” refers to what students probably already think of as total consumer spending. The note about the treatment of owner-occupied housing is a not-so-obvious exception, and some of the test bank questions are designed to see if students remember this exception.
(For more on this issue, see the notes accompanying the following slide.)

22. Investment (I)
is total spending on goods that will be used in the future to produce more goods.
includes spending on
capital equipment (e.g., machines, tools)
structures (factories, office buildings, houses)
inventories (goods produced but not yet sold)
Note: “Investment” does not mean the purchase of financial assets like stocks and bonds.

23. Government Purchases (G)
is all spending on the good and services purchased by government at the federal, state, and local levels.
G excludes transfer payments, such as Social Security or unemployment insurance benefits.
These payments represent transfers of income, not purchases of good and services.

24. Net Exports (NX) Y = C + I + G + NX NX = exports – imports
Exports represent foreign spending on the economy’s good and services.
Imports are the portions of C, I, and G that are spent on good and services produced abroad.
Adding up all the components of GDP gives:
Y = C + I + G + NX

25. Expenditure
Measures GDP by using data on consumption, investment, government expenditure and net exports .
Amount in 2005
Name
Symbol
Billions of dollars
Percentage of GDP
Consumption C
8,668
70.0
Investment I
2,054
16.6
Government G
2,338
18.9
Net Exports NX
-687
-5.5
GDP Y
12,373
100.0

26. GDP, Income, Expenditure
Expenditure Equals Income
Because firms pay out everything they receive as incomes to the factors of production, total expenditure equals total income.
That is:
Y = C + I + G + NX
The value of production equals income equals expenditure

27. Aggregate Income
Aggregate income earned from production of final goods, Y, equals the total paid out for the use of resources, wages, interest, rent, and profit.
Firms pay out all their receipts from the sale of final goods, so income equals expenditure
Y = C + I + G + (X – M).

28. Income Approach
Wages
Compensation of employees in the national accounts, is the payment for labor services.
It includes salaries plus fringe benefits paid by employers such as health care insurance, social security contributions, and pension contributions
Interest
Is the income households receive on loans
Rent
Includes payments for the use of land
Profit
Includes the profits of corporations (Corp Income tax, dividends and undistributed Corp. profit) and small businesses.

29. Income Approach Adjustments
Indirect Business Tax
firms treat this as cost of the production process and therefore add to the prices of the products they sell (sale and excise taxes, license fees, and duties) Production of widgets adds 1.00 of wages, rent interest, and profit income. But government adds .05 to the price of a product. The value of the output is 1.05 but only 1.00 if this value is paid to the household.
Net to Gross
Expenditure includes investment. Because some new capital is purchased to replace depreciated capital ( annual charge which estimates the amount of capital equipment used in each years production)
To get gross domestic product from the income approach, we must add depreciation to total income.
Net foreign Factor
National Income is the total income of American, whether earned in the United States or abroad

30. Gross Domestic Product
Gross investment is the total amount spent on purchases of new capital and on replacing depreciated capital.
Net investment is the change in the stock of capital and equals gross investment minus depreciation.

31. Gross Domestic Product
This figure illustrates the relationships among capital, gross investment, depreciation, and net investment.