1. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting Chapter 8

2. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve Three econometricians went out hunting, and came across a large deer.

3. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a yard to the left.

4. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve The second econometrician fired, but also missed, by a yard to the right.

5. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve The second econometrician fired, but also missed, by a yard to the right. The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"

6. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u State why national income accounting is important.

7. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u State why national income accounting is important. u Define GDP, GNP, and NI.

8. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u State why national income accounting is important. u Define GDP, GNP, and NI. u Calculate GDP in a simple example, avoiding double counting.

9. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why GDP = C + 1 + G + (X - M).

10. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why GDP = C + 1 + G + (X - M). u Distinguish between real and nominal values.

11. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why GDP = C + 1 + G + (X - M). u Distinguish between real and nominal values. u State some limitations of national income accounting.

12. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u In the 1930s it was impossible to talk intelligently about macroeconomics since the discussion lacked rigorous terminology.

13. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u In the mid-1930s, Keynesians Simon Kuznets and Richard Stone began to develop this terminology.

14. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u They developed national income accounting—a set of rules and definitions for measuring economic activity in the aggregate economy—that is, in the economy as a whole.

15. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services

16. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l Gross Domestic Product (GDP) is the total value of all final goods and services produced in an economy in a one-year period.

17. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l Gross Domestic Product (GDP) is the total value of all final goods and services produced in an economy in a one-year period. u It is the single most-used economic measure.

18. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l Gross National Product (GNP) is the aggregate final output of citizens and businesses of an economy in one year.

19. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l GDP measures the economic activity that occurs within a country.

20. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Measuring Total Economic Output of Goods and Services l GDP measures the economic activity that occurs within a country. l GNP measures the economic activity of the citizens and businesses of a country.

21. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP

22. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP l To move from GDP to GNP, net foreign factor income is added to GDP.

23. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP l Net foreign factor income is the income from foreign domestic factor sources minus foreign factor incomes earned domestically.

24. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting u Moving from GDP to GNP l One must add the foreign income of one's citizens and subtract the income of residents who are not citizens.

25. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u All goods and services produced by an economy must be weighted, that is, each good and service must be multiplied by its price.

26. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u Once quantities of a particular good or service are multiplied by its price, we arrive at a value measure of the good or service.

27. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u Finally, all the value measures are added to arrive at GDP.

28. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u GDP is a flow concept.

29. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u The store of wealth is a stock concept.

30. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP u The stock equivalent to National Income Accounts is the Wealth Accounts—a balance sheet of an economy’s stocks of assets and liabilities.

31. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u When one firm sells products to another firm for use in production of yet another good, the first firm’s products are not considered final output but intermediate products.

32. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u When one firm sells products to another firm for use in production of yet another good, the first firm’s products are not considered final output but intermediate products. l Intermediate products are used as input in the production of some other product.

33. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u Not accounting for intermediate products would result in double and triple counting.

34. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Measures Final Output u Not accounting for intermediate products would result in double and triple counting. l If we did not eliminate intermediate goods, a change in organization—say, a merger— would look like a change in output

35. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Ways of Eliminating Intermediate Goods u The first is to calculate only final output.

36. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Ways of Eliminating Intermediate Goods u A second way is to follow the value added approach. l Value added is the increase in value that a firm contributes to a product or service.

37. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Ways of Eliminating Intermediate Goods u A second way is to follow the value added approach. l Value added is the increase in value that a firm contributes to a product or service. l It is calculated by subtracting intermediate goods from the value of its sales.

38. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Value Added Approach Eliminates Double Counting

39. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Value Added Approach Eliminates Double Counting

40. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Value Added Approach Eliminates Double Counting

41. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling your car to a neighbor does not add to GDP.

42. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling your car to a used car dealer who sells your car to someone else for a higher price, does add to GDP.

43. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling your car to a used car dealer who sells your car to someone else for a higher price, does add to GDP. l The value added is the dealer's services.

44. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling a stock or bond does not add to GDP.

45. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Selling a stock or bond does not add to GDP. l The stock broker's commission for the sales does add to GDP.

46. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u Social security payments, welfare payments, veterans' benefits, and other government transfer payments are not included in GDP.

47. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Calculating GDP: Some Examples u The work of unpaid housespouses does not appear in GDP calculations.

48. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Circular Flow u The national income accounting identity is the accounting equality of output and income.

49. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production The Circular Flow

50. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Goods The Circular Flow

51. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods The Circular Flow

52. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

53. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods P e r s o n alcons ump tio n ( 4 ) W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

54. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) Financial markets W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

55. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods I n v e s t m e n t ( 3 ) P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) Financial markets W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

56. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods I n v e s t m e n t ( 3 ) P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) ( 2 )G o v e r n m e n t S p e n d i n g T a x e s ( 2 ) Government Financial markets W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

57. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Household Firms (production Factor services Goods I n v e s t m e n t ( 3 ) P e r s o n alcons ump tio n ( 4 ) S a v i n g s ( 3 ) I m p o r t s ( 5 ) E x p o r t s ( 5 ) ( 2 )G o v e r n m e n t S p e n d i n g T a x e s ( 2 ) Government Financial markets Other countries W a g e s, r e n t s, i n t e r e s t, p r o f i t s ( 1 ) The Circular Flow

58. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach

59. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l The income approach is shown on the top half of the circular flow.

60. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l National income is the total income earned by citizens and businesses in a country in one year.

61. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l Firms make payments to households for supplying their services as factors of production.

62. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits.

63. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Employee compensation is payments for labor such as salaries and wages.

64. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Rents are payments for use of land and buildings.

65. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Interest includes payments for loans by households to firms.

66. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Income Approach l These factors are broken up into employee compensation, rent, interest, and profits. u Profits are payments to the owners of firms.

67. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach

68. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l The expenditure approach is shown on the bottom half of the circular flow.

69. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Specifically, GDP is equal to the sum of the four categories of expenditures.

70. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Specifically, GDP is equal to the sum of the four categories of expenditures. GDP = C + I + G + (X - M)

71. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Consumption

72. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Consumption u When individuals receive income, they can spend it on domestic goods, save it it, pay taxes, or buy foreign goods.

73. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Consumption u This is the largest and most important of the flows.

74. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Investment

75. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Investment u The portion of their income that individuals save leaves the income stream and goes into financial markets.

76. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Investment u Business spending on equipment, structures, and inventories is counted as investment.

77. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Government consumption and investment

78. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Government consumption and investment u When individuals pay taxes, those taxes are either spent by government on goods and services or are returned to individuals in the form of transfer payments.

79. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Government consumption and investment u The connection drawn between the government and the financial markets is there because if the government runs a deficit, it must borrow from financial markets to make up the difference.

80. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports

81. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports u Spending on foreign goods escapes the system and does not add to domestic production, thus spending on imports are subtracted from total expenditures.

82. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports u Exports to foreign nations are added to total expenditures.

83. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u The Expenditure Approach l Net exports u Exports to foreign nations are added to total expenditures. u These flows are usually combined into net exports.

84. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure

85. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure l Income and expenditures must be equal because of the rules of double-entry bookkeeping.

86. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure l Income and expenditures must be equal because of the rules of double-entry bookkeeping. l Profit is the balancing item.

87. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Two Approaches to Calculating GDP u Equality of Income and Expenditure l The national income accounting identity allows GDP to be calculated either by adding up all values of final output or by adding up the values of all earnings or income.

88. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries

89. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l GDP is important since we can compare one country with another and one year's production with another year's.

90. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l Per capita GDP is another measure often used to compare nations' GDP.

91. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l Per capita GDP is another measure often used to compare nations' GDP. u Per capita can be a poor measure of the various living standards in various nations.

92. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Comparing GDP Among Countries l Per capita GDP is another measure often used to compare nations' GDP. u To get around the problems of per capita GDP, economists use purchasing power parity, which adjusts for different relative prices among nations before making comparisons.

93. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Economic Welfare Over Time

94. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Economic Welfare Over Time l Comparing output over time is best done with real output which is nominal output adjusted for inflation.

95. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP

96. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Nominal GDP is GDP calculated at existing prices.

97. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation.

98. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation. u Real GDP is important to society because it measures what is really produced.

99. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation. u By dividing nominal GDP by the GDP deflator, we arrive at real GDP.

100. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Using GDP Figures u Real and Nominal GDP l Real GDP is nominal GDP adjusted for inflation. u By dividing nominal GDP by the GDP deflator, we arrive at real GDP.

101. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u GDP measures market activity, not welfare.

102. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u GDP measures market activity, not welfare. l GDP does not measure happiness, nor does it measure economic welfare.

103. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u GDP measures market activity, not welfare. l Welfare is a complicated idea, very difficult to measure.

104. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors

105. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure all market economic activity.

106. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure the following market activities:

107. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure the following market activities: u Illegal drug sales. u Under-the-counter sales of goods to avoid income and sales taxes. u Work performed and paid for in cash.

108. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l GDP figures do not measure the following market activities: u Unreported sales. u Prostitution, loan sharking, extortion, and other illegal activities.

109. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l Estimates of the size of the underground economy range from1.5 to 20 percent of GDP.

110. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l A second type of measurement error occurs in adjusting GDP for inflation.

111. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l A second type of measurement error occurs in adjusting GDP for inflation. u If the price and the quality of a product go up together, has the price really gone up?

112. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Measurement Errors l A second type of measurement error occurs in adjusting GDP for inflation. u Is it possible to measure the value of quality increases?

113. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories

114. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy.

115. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy. u Buying a steam iron would be consumption, and if it is used to iron team T-shirts sold by a home business, it would still be counted as consumption.

116. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy. u Investment includes private housing units, but they do not usually add to our stock of productive tools.

117. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l For example, the line between investment and consumption is often fuzzy. u Investment includes private housing units, but they do not usually add to our stock of productive tools. u The garages and spare bedrooms might if they are used in an income-producing capacity.

118. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l Some social scientists have developed alternatives to GDP such as the Gross Process Indicator (GPI).

119. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Some Limitations of National Income Accounting u Misinterpretation of Subcategories l Some social scientists have developed alternatives to GDP such as the Gross Process Indicator (GPI). u The GPI tries to measure pollution, education, health concerns, as well as GDP.

120. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Is Worth Using Despite Its Limitations u National income accounting should be used with sophistication.

121. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Is Worth Using Despite Its Limitations u It is a powerful economic tool that informs average citizens about the direction the economy is moving.

122. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill National Income Accounting End of Chapter 8