1. 4 GDP & National income accounting

2. 4.1 Output &The Price Level
GDP v GNP
Gross domestic product (GDP) is a measure of output which excludes domestic items produced abroad & includes foreign goods produced domestically
Gross national product (GNP) is a measure of output that excludes foreign goods produced domestically & includes domestic goods produced abroad.
GDP includes (GNP excludes) income earned by foreigners here & excludes (GNP includes) income earned by citizens abroad.

3. 4.1 Output &The Price Level
Nominal v Real Output
Nominal output is the market value of all final goods & services produced within a country in a given period of time, usually a year or a quarter (three months), the market value is determined by the Price Level.
Nominal output is valued at current prices & records only the value of current final goods, not intermediate goods nor past transactions nor items produced & sold illegally.
An accurate view of the economy requires adjusting nominal to real output by using an index.

4. 4.1 Output &The Price Level
Nominal v Real Output
Real output values the production of goods & services at constant (base year) prices.
The GDP deflator is an index that measures the current level of prices relative to the level of prices in the base year.
The GDP deflator tells indicates change in nominal GDP that is attributable to changes in prices rather than changes in the actual quantities produced.

5. 4.1 Output &The Price Level
GDP is the best single measure of the economic well-being of a society.
Per capita GDP is GDP per person & indicates income & expenditure of the average person in the economy.
Higher per capita GDP indicates a higher standard of living (wealth).
GDP is not a perfect measure of happiness/ quality of life: some things that contribute to well-being are not included in GDP (eg leisure, clean environment, volunteer work, Church, charity).

6. 4.2 The Components of GDP: Expenditure Approach
GDP (Y) = C + I + G + NX
Consumption (C) is spending by households on goods & services (excluding new home sales; 0.7Y)
Investment (I) is business spending on capital equipment (inventories, structures) including new housing (0.15*Y)
Government spending (G) is spending on goods & services by local, state & federal governments (excludes transfer payments) not made in exchange for currently produced goods or services (0.2*Y)
Net Exports (NX; -0.05Y): Exports (X; ) – Imports (M; -0.1*Y)

7. 4.2 The Components of GDP: Income Approach
Income (Y) = W + I + R +/- П
The amount of factor income earned by owners is always equal to the value of output produced (GDP)
A business cycle is looming when the rate at which GDP is produced differs materially from the rate at which GDP is consumed over a material amount of time.

8. 4.2 The Components of GDP: Income v Expenditure Approaches
GDP, 1995 (in 1992 dollars)
Expenditure
Income
Consumer goods & services
$4924
Wages & salaries
$3844
Investment in plant, equipment, & inventory
1065
Corporate profits
589
Government goods & services
1359
Proprietors’ income
449
Exports
805
Farm income 29
Imports
(907)
Rents
122
Interest
715
Sales taxes
621
Depreciation
826
Adjustments* 51
Total value of output
$7246
Total value of income

9. 4.2 The Components of GDP: Value-added Approach
Net National Product (NNP) is the total income earned/produced (GDP) less depreciation.
Depreciation is the wear & tear on the economy’s stock of equipment & structures.
NNP = GDP – depreciation
National Income is the total income earned by a nation’s residents in the production of goods & services.
NI differs from NNP by excluding indirect business taxes (eg, sales taxes) & including business subsidies.
NI = NNP – indirect business taxes

10. 4.2 The Components of GDP: Value-added Approach
Personal Income is the income that households & non-corporate businesses receive.
Unlike National Income, Personal Income excludes retained earnings, which is income that corporations have earned but have not paid out to their owners.
Personal Income includes households’ interest income & government transfers.
Personal income = National income – Corporate taxes - Retained earnings - Social Security taxes + Transfer payments + Net interest
Disposable personal income is the income that household & non-corporate businesses have left after satisfying all their obligations to the government.
Disposable income = Personal income – Personal taxes

11. 4.3 Nominal v Real GDP Matrix
Year
Nominal Y
(USD B)
Index
Real Y
Q effect
P effect
2005
900 90
2006*
1,000
100
2007
1,500
150
2008
1,600
110
2009
2,000

12. 4.3 Nominal v Real GDP Matrix
Year
Nominal Y
(USD B)
Index
Real Y
Q effect
P effect
Check
2005
900 90
1,000 -
(100)
2006*
100
2007
1,500
150
500
2008
1,600
110
2009
2,000
1,250
250

13. 4.3 Nominal v Real GDP Matrix
Year
Nominal Y
(USD B)
Index
Real Y
Q effect
P effect
Check
2010
1,000 75
2011
2,000
100
2012
5,000
175
2013
9,000
150
2014
5,500 25
2015
10,000
4,000

14. 4.3 Nominal v Real GDP Matrix
Year
Nominal Y
(USD B)
Index
Real Y
Q effect
P effect
Check
2010
1,000 75
1,333
(667)
(333)
2011*
2,000
100 -
2012
5,000
175
2,857
857
2,143
2013
9,000
150
4,000
1,143
2014
5,500 25
3,667
(3,167)
2015
10,000  
333
4,167