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Eco 200 – Principles of Macroeconomics

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

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Eco 200 – Principles of Macroeconomics

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

  2. 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

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

  4. 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)

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

  6. 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

  7. 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)

  8. 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

  9. 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

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

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