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 National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components.

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Presentation on theme: " National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components."— Presentation transcript:

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2  National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components.

3  Gross domestic product (GDP) is the total market value of final goods and services produced within a nation’s borders in a given time period. (Usually a year)

4  Total Market Value means the dollar value of every one of the good or service produced during the period of time.  Final goods and service means that production is only counted in the final stage. This is to keep things such as a car’s engine from being counted twice.

5  Gross National Product (GNP) refers to output produced by American-owned factors regardless of location.  GDP refers to output produced within America’s borders.

6  GDP is geographically focused, including all output produced within a nation’s borders regardless of whose factors of production are used to produce it.  Japanese companies producing in America count, but not American companies abroad.

7  GDP per capita is total GDP divided by total population–average GDP.  GDP per capita is commonly used as a measure of a country’s standard of living.  However, it is not always an accurate measure.

8  There are three major exceptions when creating GDP. ◦ Non-Market Activities ◦ Unreported Incomes ◦ Intermediate Goods

9  GDP measures exclude most goods and services produced that are not sold in the market. ◦ A homemaker who cleans, washes, gardens, shops and cooks produces goods of value. ◦ Because they are not exchanged in the market they are not included in GDP.

10  The GDP statistics fail to capture market activities that are not reported to tax or census authorities.  The underground economy is motivated by tax avoidance or to conceal illegal activities.

11  Intermediate goods are goods or services purchased for use as input in the production of final goods or services.  For example, the engine or chassis of a car are not counted, so as to keep them from being counted twice.

12  Value added is the increase in the market value of a product that takes place at each stage of the production process.

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14  Compute the value of the final output.  Count only the value added at each stage of production.

15  Nominal GDP is the value of final output produced in a given period, measured in the prices of that period. n Real GDP is the value of final output produced in a given period, adjusted for changing prices.

16  The base period is the time period used for comparative analysis.  From this base year, we find the GDP deflator for other years.  The GDP deflator is a measure of price changes over time.

17  The general formula for computing real GDP is:

18 $ GDP (billions of dollars per year) Nominal GDP

19  Changes in real GDP tell us how much the economy’s output is growing.  Growth is at the expense of future output unless factors of production are replaced.

20  Depreciation is the consumption of capital in the production process — the wearing out of plant and equipment.

21  Net domestic product is the amount of output we could consume without reducing our stock of capital. NDP = GDP – depreciation

22  Investment is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories.  The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment.

23  Gross investment is total investment expenditure in a given time period. n Net investment is gross investment less depreciation.

24  The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.

25  The GDP accounts also tell us what mix of output has been selected, that is, society’s answer to the core issue of WHAT to produce.

26  The major uses of total output conform to the four sets of market participants: consumers, business firms, government, and foreigners.

27  Goods and services used by households are called consumption goods.  Consumer spending claims nearly two-thirds of our annual output.

28  Investment goods are the plant, machinery, and equipment that we produce.  Also includes net inventory changes and new residential construction.

29  Resources purchased by the government sector are unavailable for consumption or investment purposes.

30  Exports are goods and services sold to foreign buyers.  Imports are goods and services purchased from foreign sources.

31  Exports are added to GDP and imports are subtracted. n Net Exports are the value of exports minus the value of imports.

32  The value of GDP can be computed by adding up expenditures of market participants: GDP = C + I + G + (X – IM) Where: C = Consumption expenditure X = exports I = investment expenditure IM = imports G = government expenditure

33  GDP accounts have two sides. ◦ One side focuses on expenditure – the demand side. ◦ The other side focuses on income – the supply side.

34 VALUE OF INCOMEVALUE OF OUTPUT Net exports Consumer spending Investment spending Wages Profits Interest Rent Government spending Sales taxes Depreciation Factor market Product market

35  By charting the flow of income through the economy, we see FOR WHOM the output is produced.

36  Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production. NDP = GDP – depreciation

37  Wages, interest, and profits paid to foreigners are not part of U.S. income.  They need to be subtracted from the income flow.

38  Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added.

39  Once depreciation charges and indirect business taxes are subtracted from GDP and net foreign income is added, we have national income.

40  National income (NI) is total income earned by current factors of production. NI = NDP – indirect business taxes + net foreign factor income

41  Personal income (PI) is the income received by households before payment of personal taxes. Personal income = National income – (corporate taxes + retained earnings + Social Security taxes) + (transfer payments + net interest)

42  Disposable income (DI) is the after-tax income of households.  It is personal income less personal taxes. Disposable income = personal income – personal taxes

43  Saving is that part of disposable income not spent on current consumption –disposable income less consumption.

44  All disposable income is either consumed or saved. Disposable income = Consumption + Saving

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46  To households, in the form of disposable income.  To businesses, in the form of retained earnings and depreciation allowances.  To government, in the form of taxes.


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