2. 7 - 1 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Measuring Domestic Output, National Income, and the Price Level 7 C H A P T E R

3. 7 - 2 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show The Importance of Macroeconomic Measurement National Income Accounting: Health of the Economy Comparisons Over Time Formulation of Public Policy What Are These Accounting Measures?

4. 7 - 3 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show A Monetary Measure Avoid Multiple Counting Final Goods Intermediate Goods Value Added GROSS DOMESTIC PRODUCT The total market value of all final goods and services produced in a given year

5. 7 - 4 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Excludes Nonproduction Transactions Financial Transactions Public Transfer Payments Private Transfer Payments Stock Market Transactions Secondhand Sales Two Approaches Expenditures Approach Income Approach more… GROSS DOMESTIC PRODUCT

6. 7 - 5 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Personal Consumption Expenditure ( C ) EXPENDITURES APPROACH Durable Consumer Goods Nondurable Consumer Goods Consumer Expenditures for Services

7. 7 - 6 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Machinery, Equipment, and Tools All Construction Changes in Inventories Noninvestment Transactions Gross vs. Net Investment Net Private Domestic Investment

8. 7 - 7 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Government Purchases ( G ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Expenditures for Goods & Services Expenditures for Social Capital Does NOT include Government Transfer Payments

9. 7 - 8 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Government Purchases ( G ) Net Exports ( X n ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Net Exports (X n ) = Exports (X) – Imports (M)

10. 7 - 9 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Putting it all together: GDP = C + I g + G + X n EXPENDITURES APPROACH Next: The Income Approach

11. 7 - 10 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Compensation of Employees Rents Interest Proprietors’ Income Corporate Profits Corporate Income Taxes Dividends Undistributed Corporate Profits THE INCOME APPROACH

12. 7 - 11 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show From National Income to GDP Indirect Business Taxes Consumption of Fixed Capital (Depreciation) Net Foreign Factor Income THE INCOME APPROACH

13. 7 - 12 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show OTHER NATIONAL ACCOUNTS Gross Domestic Product (GDP)$9966 Consumption of fixed capital -1257 Net Domestic Product (NDP)$8709 Net foreign factor income earned in the U.S. - 9 Indirect business taxes -682 National Income (NI)$8018 Social security contributions -706 Corporate income taxes -286 Undistributed corporate profits -274 Transfer payments+1530 Personal Income (PI)$8282 Personal Taxes 1292 Disposable Income (DI)$6990 U.S. GDP, NDP, NI, PI, & DI, 2000

14. 7 - 13 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Nominal Values Deflate GDP when prices rise Inflate GDP when Prices fall Nominal GDP Calculating Real GDP NOMINAL GDP vs. REAL GDP (4) (2)Unadjusted, (1)Price(3)or Nominal,(5) Units ofPizzaPrice IndexGDP,Adjusted, or YearOutputPer UnitYear 1 = 100(1)x(2)Real, GDP 1 5$10100$ 50 2 7 20200 140 70 3 8 25250 200 80 410 30--- 511 28---

15. 7 - 14 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Adjustment Process GDP Price Index Price Index in a given year = Price of market basket in specific year Price of same market basket in base year x 100 Real GDP = Nominal GDP Price Index (in hundredths) Price Index (in hundredths) = Nominal GDP Real GDP An Alternative Method NOMINAL GDP vs. REAL GDP

16. 7 - 15 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Consumer Price Index = Price of the same market basket in 1982-1984 x 100 CPI Price of 1993-1995 market basket in any given year NOMINAL GDP vs. REAL GDP

17. 7 - 16 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Nonmarket Transactions Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of Output Per Capita Output Noneconomic Sources of Well- Being SHORTCOMINGS OF GDP

18. 7 - 17 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 0 5 10 15 20 25 30 Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland GLOBAL PERSPECTIVE The Underground Economy as a Percent of GDP Source: The Journal of Economic Literature, 2000

19. 7 - 18 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Chapter Conclusions

20. END national income accounting gross domestic product intermediate goods final goods multiple counting value added expenditures approach income approach personal consumption expenditures (C) gross private domestic investment (I g ) net private domestic investment government purchases (G) net exports (X n ) national income indirect business taxes consumption of fixed capital net domestic product (NDP) personal income (PI) disposable income (DI) nominal GDP price index real GDP consumer price index (CPI) per capita output BACK Copyright McGraw-Hill/Irwin, 2002

21. 7 - 20 Copyright McGraw-Hill/Irwin, 2002 Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Next... Introduction to Economic Growth And Instability Chapter 8