1. National Income Accounting
Macro Measurements Expenditure/Income Approach GDP

2. Now we study the branch of macroeconomics that examines aggregate performance of all markets in the market system.
To measure the performance of the macro economy, we will examine two approaches:
Expenditure approach
Income approach

3. Gross Domestic Product (GDP)
Gross domestic product (GDP) is the total dollar value of final output produced within a nation’s borders in a given time period.

4. Gross Domestic Product (GDP)
Each good and service produced and brought to market has a price.
That price serves as a measure of value for calculating total output.

5. The Measurement of Output

6. Highlights Most comprehensive measure of output is GDP
GDP = value added at each state of production – Total value of g & s produced in a given year domestically
Nominal and Real GDP are calculated
Nominal= current prices
Real = GDP expressed in terms of constant prices (sans inflation)

7. GDP Per Capita Total GDP divided by Total Population
This is the way to compare international output among different countries/economies.
Divide the pie- how many pieces for each?
In 2001 America’s total GDP of $10 trillion was shared by 280 million citizens. Average per capita GDP was around $36,000.
2004= $37,600 – population 2004 was 292 million+
2005 = $41,800
2008 = $46,000 population 2008 was 303 million+

8. 1Luxembourg $80,800
2. Qatar $75,900
3. Bermuda $69,900
4. Jersey $57,000
5. Norway $55,600
6. Kuwait $55,300
7. UnitedArabEmirates $55,200
8. Singapore $48,900
9. United States $47,500
10. Ireland $45,600

9. So… What does per capita really tell us?
It is a statistical comparison that indicates how well off people are in a country.
Real per capital increases when REAL GDP rises faster than population
It can indicate the differences in the ways people live. How many TVs they have. How many cell phones, Internet connections, cars, refrigerators, paved roads, schools, etc.
All it does is state that if per capita is higher, the average amount of goods/person is higher than the base comparison.

10. Expenditure Approach to GDP Measurement
Highlights Continued
Each year capital is worn out – called depreciation..
By subtracting depreciation from GDP we derive net domestic
product (NDP)
Difference between NDP and GDP is equal to the difference
between gross investment expenditures and net investment—
Expenditure Approach to GDP Measurement
Income Approach to GDP Measurement
Consumption +
Investment
Government
Net Exports
Total value of output
Wages and salaries +
Corporate profits +
Proprietors’ income +
Farm Income +
Rents +
Interest +
Sales taxes +
Depreciation =
Total value of income
Value of total expenditure must equal value of total income

11. OUTPUT = INCOME
All the spending that establishes the value of output also determines the value of incomes.
Generally speaking, the market value of incomes must equal the market value of output.
Every dollar spent on output becomes a dollar of income for someone.

12. Computing GDP
The value of GDP can be computed by adding up expenditures of market participants:(add up the market value of all domestic expenditures made on final goods and services in a single year.)
GDP = C + I + G + (X – IM)
Where:
C = Consumption expenditure X = exports
I = investment expenditure IM = imports
G = government expenditure

13. Total Expenditure on final G & S is broken down in four categories:
Consumption expenditures-
Comprises the largest share (2/3’s) of total expenditure.
Includes nondurable goods (food,clothing) and durable goods (appliances, autos)
Includes consumption service expenditures such as barbers, doctors, lawyers, mechanics.

14. Expenditures Continued
Investment Expenditures
Includes expenditures on fixed investment goods and inventory investment.
Fixed investments goods are those that are useful over a long period of time- includes purchases of new equipment, factories, other nonresidential housing as well as new residential housing. Also includes cost of replacing existing investment goods that have become worn out or obsolete.
The market value of all investment goods that must be replaced in a single year is referred to as depreciation for that year.

15. Investment Continued
Inventory Goods are final goods waiting to be sold that firms have on hand at the end of the year.
The year-to-year change in the market value of firms’ inventory goods is considered an investment expenditure because these inventory goods will eventually yield a flow of consumption or production services. Because depreciation is subtracted on the expenditures approach it is added to the income which makes it a wash. Graph will follow.

16. Total Expenditures Continued
Government Expenditures
Includes hiring of civil servants and military personnel, construction of roads and public buildings.Supplies for the war, contracts for many products/services… Boeing…etc.
Social Security, welfare, and other transfer payments are not included.(because government expenditures on transfer payments do not involve the purchase of any new goods or services and are therefore excluded from the calculation.

17. Total Expenditures Continued
Net Exports
Exports are g & s produced domestically but sold to foreigners.
Imports are g & s produced by foreigners, but sold domestically.
Expenditures on exports are added to total expenditures while expenditures on imports are subtracted.
X-M = value of net exports to nation’s total expenditures.

18. What is NOT counted?
Numerous transactions occur that have nothing to do with final goods and services being produced:
Financial transactions
Transfer Payments
Secondhand Goods 18

19. Measures of Income GDP accounts have two sides.
One side focuses on expenditure – the demand side.
The other side focuses on income – the supply side.

20. Income Approach Income Approach:
Add up all the income earned by households and firms in a single year.
By adding together rent, wages, profit, interest income, one should obtain the same value of GDP as is obtained using the expenditure approach…BUT…
2 types of expenditures that are included in expenditure, but do not provide households or firms any income (depreciation expenditures and indirect business taxes)

21. Income Approach Continued
Depreciation expenditures (replacing existing, but worn out investment goods, do increase the incomes of those providing the replacement goods, but they also decrease the profit incomes of those purchasing the replacement goods.) Result= aggregate income remains unchanged.
Indirect business taxes consist of sales taxes and other excise taxes that firms collect but not regarded as part of firms’ incomes. (Hence, included in expenditures approach but not income)

22. Measures of Income
The total value of market incomes must equal the total value of final output, or GDP.

23. Value Added in Various Stages of Production

24. Income Approach Deriving GDP by the Income Approach
Gross Domestic Income (GDI)
Wages: salaries and labor income
Rent: farms, houses, stores
Interest: savings accounts
Profits: sole proprietorships, partnerships, corporations 24

25. Output = Income Factor market Product market VALUE OF INCOME
VALUE OF OUTPUT
Factor market
Product market
Consumer spending
Wages
Investment spending
Profits
Sales taxes
Depreciation
Government spending
Interest
Net exports
Rent

26. Figure 8-3 Gross Domestic Product and Gross Domestic Income, 2009 (in billions of 2009 dollars per year)
Sources: U.S. Department of Commerce and author’s estimates. 26

27. Gross Domestic Product and Gross Domestic Income, 2009 (in billions of 2009 dollars per year)
Sources: U.S. Department of Commerce and author’s estimates. 27

28. Measuring GDP - recap GDP is the scoreboard for economic performance
GDP is the most widely used measure of economic performance.
GDP is measured quarterly.
GDP = total value of goods and services produced in the United States in a given year.
Many transactions have to be excluded from GDP
Counts only the g & s purchased by their final users
Counts only the g & s produced during the specified period
Excludes all financial transactions and income transfers.
(because financial transactions do not count for current production- examples purchase and sale of stocks, bonds, securities= merely transfer of ownership)
Transfer payments are unproductive money into economy (both from GDP standpoint and growth standpoint.

29. When Goods are measured as output- units of each good are weighted according to their PURCHASE PRICE example: new car adds more than NIKE shorts
The total spending on ALL g & s produced during the year is then summed (in dollar terms) to obtain the annual GDP
GDP differs from GNP
GDP – g & s produced within the borders of the US whether produced by foreigners or Americans
GNP – measures the output of all Americans, whether the g & s are produced here or abroad.
(The Nissan produced in Tennessee is included in U.S. GDP)

30. Income Flow Chart Gross Domestic product (GDP) less depreciation
Searching for total income earned by factors of production.
The figure below = how much income flows into hands of
Consumers.
Gross Domestic product (GDP)
less depreciation
Net domestic product (NDP)
less direct business taxes
National income (NI)
less corporate taxes
less retained earnings
less Social Security taxes
Plus net interest
Plus transfer payments
Personal Income
less personal taxes
Disposable Income

31. If GDP grows too rapidly, it may cause increased inflation.
If GDP grows too slowly, or declines, there will be an increase in the number of people unemployed.
***What determines the level of GDP?
Ans…(level of spending)
***What determines the level of spending?
Ans…. (add up the level of C + I + G + (X-M)

32. Circular Flow of Spending and Income
Factor market PI
NDP
Net exports
Government spending
Saving
Depreciation
Retained earnings
Personal taxes
Transfer payments
Net interest
Corporate taxes
Social Security taxes
Indirect business taxes
GDP NI
Business
Government
Households DI
Consumption
Product market
Investment
Sales revenue

33. Equilibrium GDP
The level of GDP will depend on the total spending for consumption, investment, and government
Anytime there is a change in the LEVEL
of spending the GDP will begin to move toward the new level of spending.

34. When GDP is exactly equal to the level of total spending, the economy is in equilibrium.
Achieving equilibrium is not necessarily the goal. The goal is to have growth towards full employment without excessive inflation

35. So…how do you calculate growth?
Value of GDP by itself is not very interesting.
What is interesting is the year-to-year percentage change in the value of GDP.
How to calculate percentage change:
Need to know the value of the statistic at two dates in time. Growth rate last year is Yl and the value of the current year is Yc

36. Formula
Yc – Yl x100 Yl
This formula is valid for calculating the percentage change in any statistic, not just the percentage change in GDP.
% change = _change___
original number
If we move from 150 to 200 what is the % change?

37. Answer
33 l/3 %
150 – 200 = 50
50 = =

38. Computing Real GDP
The general formula for computing real GDP is:

39. Calculate this:::::::
In 1999 – Real GDP was 9,299
In 2000 – Real GDP was 9,767
What was the % growth from 1999 to 2000 5%
9,767-9,299 = 468
468/9,299 = 5

40. Distinguishing Between Nominal and Real Values
Nominal Values
Measurements in terms of the actual market prices at which goods are sold; expressed in current dollars, also called money values
Real Values
Measurements after adjustments have been made for changes in the average of prices between years; expressed in constant dollars 40

41. Example: Correcting GDP for Price Index Changes
Nominal (current) dollars GDP
Real (constant) dollars GDP
Nominal GDP
Price index*
Real GDP =
x 100
*Price index: measured by the GDP deflator 41

42. What is the bottom line?
The amount left after evaluating the income approach is:
Disposable Income
(this is what we have to spend or save)

43. Would this change GDP?