1. National Income Accounting [NIA]
Gross Domestic Product [GDP]
& Its Four Cousins
[NDP, NI, PI, & DI]

2. [18th Ed.] National Income Accounting
[GDP and its four cousins] -
C Ig G Xn [X-M] =
GDP–Depreciation= [what is for sale]
NDP +NFFIEUS–Statistical discrepancy =
NI–Un Cor Pro–Cor Inc Tax-Soc Sec-Taxes on pro & M+TP=
[PI is what you can spend, save, or pay in taxes]
PI – Personal Income Taxes =
[DI is what you can spend or save ]
[“Replacement capital”]

3. If U.S. Profits in the ROW are greater [$220] than
N.F.F.I.
[U.S.A. Profits Overseas]
Rest of World
$220 bil.
Foreign Profits in U.S.A.
$209 billion
N.F.F.I. = $11 billion
If U.S. Profits in the ROW are greater [$220] than
foreign profits in the U.S. [$209], add the difference.

4. Gross Domestic Product
Components of
Gross Domestic Product
[C + Ig + G + X - M]

5. GDP = C(70%) + Ig(16%) + G(19%) + Xn(-5%)
Expenditures Approach
Personal Consumption Expenditure ( C )
Durable Consumer Goods[11%]
Nondurables[29%][soup & soap]
Consumer Expenditures for Services[60%]
Maytag produced here
Ferrari produced here
Spending by HH on all g/s
except for new housing.

6. U.S. capital stock is over $30 trillion.
Expenditures Approach
Personal Consumption Expenditure ( C )
Let’s say this Porsche is
produced by a foreign company
in Plano, Texas.
Gross Private Domestic Investment (Ig)
3 Subcategories [*spending on output not consumed]
A. Business spending on real capital - tools, machinery, & plants
B. New construction (Residential) investment – construction
of new houses & apartments [can rent for financial return].
C. Unsold inventory output is “inventory investment.” Firms have pur-
chased their unsold output. [A net increase in inventories
is investment; a net decrease in inventories is negative
investment or disinvestment (disinvestment represents
sale of output produced in a previous year)
U.S. capital stock is over $30 trillion.

7. Expenditures Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases (G) [state, local & federal]
[“G” purchases of goods/svcs produced (not transfer payments)
3 Subcategories of Government
A. Federal government [40%]
B. 50 State governments
C. 88,000 local governments [60% for state and local]

8. Expenditures Approach
Personal Consumption Expenditure (C)
Gross Private Domestic Investment (Ig)
Government Purchases (G)
Net Exports( Xn)
Net Exports (Xn)=Exports (X)–Imports (M)
[M represents production outside a country]

9. GDP and Its Components (2007)
Government Purchases
19%
Net Exports
-5 %
Investment
16%
Consumption
70%

10. Comparative GDPs in Trillions, 2008
GLOBAL PERSPECTIVE
Comparative GDPs in Trillions, 2008
U.S.
Japan
China
Germany
France
U.K
Italy
Russia
Brazil
Canada
Spain
India
Mexico
Australia
South Korea
14.3
4.5
4.2
3.8
3.0
2.9
1.8
Calif. 1.8
1.7
1.6
1.5
1.5
1.2
TX 1.1
1.1
1.0
953

11. So, World Per Capita is about $9,000.
We make up 4.7% of the world’s population,
but produce 18% of GDP [output].
Gross World Product is $60 trillion/6.7 bil.= $9,000
So, World Per Capita is about $9,000.
China, India, Indonesia, & Bangladesh have over 40%
of the world’s population, but produce only 20% of the
world’s GDP.
California, with a $1.7 trillion GDP would be number 7.
Texas, at $1.1 trillion would be the 8th largest country.
Texas produces 20% more than India.
We have 18% of the world’s GDP, 25% of global trade,
40% of world stock market capitalization, and nearly
50% of the world’s largest companies.

12. Per Capita GDP - 2008 Country Per Capita Country Per Capita
[Selected Countries]
Country Per Capita
Qatar ,000
Luxembourg 85,100
Bermuda 69,900
Kuwait 60,800
Norway 57,500
U.S $48,000
Ireland 45,600
Hong Kong 42,000
U.A.E. 40,000
Switzerland 39,800
Iceland 39,400
Canada 38,200
Australia 37,500
Denmark 37,400
Country Per Capita
Sweden 36,900
U.K. 35,300
Germany 34,400
France 33,800
Japan 33,800
Italy 31,000
Australia 24,000
Russia 14,600
Mexico 12,500
China ,300
Swaziland 4,800
Liberia
Congo, Rep of
Zimbabwe
China and India are still poorer than he U.S. was in 1900.
75% of Africans live on less than $2 a day & it is getting worse.

13. GDP – measures legal production in U.S. in one year.
To Be or Not To Be Counted in GDP
What 8 Things Do Not Count In GDP
GDP – measures legal production in U.S in one year.
GDP measures all final goods/services
produced by workers and capital located
in the U.S., regardless of ownership.
[Domestically located resources]
Final goods are goods ready for consumption.

14. What Eight Things Do Not Count In GDP?
1. Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.
B. KFC buys chickens to eventually sell to customers.

15. 57 Chevy [Gas was 30¢ gallon.]
GDP - what is not counted [#2]
2. 2nd Hand Sales
– no current production.
A Chevy bought in 2007
57 Chevy [Gas was 30¢ gallon.]
Salesman
[It has not been produced again in 1963 & would not count.]
The salesman is doing productive work. His commission would count.
B. Boots produced in 1980 are bought in a Thrift Store in 09.
They also have not been produced again.
Salesman’s commission would count.
You are buying his services.
Shoe salesman

16. The next two slides are “Nonproduction Transactions” [ just “Financial Transactions”]
They include: A. Stock Market Transactions B. Public Transfer Payments C. Private Transfer Payments

17. GDP - what is not counted [#3]
3. Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
Ex: If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm. Buying bonds is making a loan.
I’m not buying a Dell computer
but part ownership of Dell.
Exchanging one financial asset for another
[swapping bits of paper]

18. GDP – what is not counted [#4].
4. Public Transfer Payments –welfare, unemployment, social
security. [There is no contribution to final production]
“Now that I’ve gotten my welfare check, I can get an iPhone 3G”
Also, Private Transfer Payments, like your
parents giving you $250 cash for Christmas,
or - $100 for making an “A” in economics.
[Just transferring funds from one private
individual to another private individual]

19. 5. Unreported “Legal” Business Activity
Unreported “legal” business activity [tax avoidance[ does not count.
This is two-thirds of the “underground economy.”
Before LASIK Surgery
Then he has LASIK but the
surgeon doesn’t report
$500 of his $3,400 bill?
And what if the
dentist doesn’t
report $400 for
teeth whitening?
And what if this
waitress doesn’t
report all tips?

20. 6. Illegal business activity is also not counted.
Illegal business activity, because it goes unreported, also does
not count. Making up 1/3 of the “underground economy,” also
called the [“black market”] it includes murder for hire,
gambling, drugs, prostitution, and money laundering.
“I’m getting $1,000 to kill
you, Ziggy, but at least it
will not count in GDP.”
Money Laundering
Making money illegally (drug money)
and making it look like it was legally
earned (like buying a laundry mat
or car wash that deal in cash) and
report it as legally earned.

21. U.S. Underground Economy What doesn’t get reported
Illegal
$300 B
Legal
$600 B
Drugs $120
Bribery $35
Self Employed $255
Gambling and
Loan Sharking $10
Other Legal $25
Rents & Royalties $30
Pornography $20
Fraud $30
Corporate Profits $50
Other Illegal $20
Prostitution $30
Interest $55
Stolen Goods $35
Wages and
Salaries $185
What gets reported is
the “Above Ground”
What doesn’t get reported
is the “Underground”

22. U.S. Underground Economy
Underground Economy [compared to “above ground”]
Unreported exchanges that take place - legal and
Illegal [Hidden – “off the books”]
Total illegal activities - $300 billion
Total legal activities - $600 billion
Total legal and illegal - $900 billion
Underground Economy
1. Illegal business activities (1/3) – gambling,
narcotics trade, prostitution, loan sharking, etc.
2. Unreported legal business activities (2/3)
a. waitresses not reporting all of her tips
b. Cabdriver not reporting all of his income
c. Self employed cheat the most. Off-the-books cash transactions
d. $300 billion
*IRS estimates that about $300 billion in income taxes from
the underground economy escapes federal taxes each year.
$300 B

23. [as a Percentage of GDP for Select Nations]
Underground Economy
[as a Percentage of GDP for Select Nations]
Percentage of GDP
Mexico
S. Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States
Source: Journal of Economic Literature

24. 7. Non-market Transactions Are Not Counted
Work in your own household or volunteer work in
the community does not count because there was no
payment.
You need to do some of
this housework.

25. 8. U.S. Corporations Producing Goods Overseas
GM in
France
Nike in
Indonesia
If U. S. corporations produce goods overseas,
it does not count in GDP, but would count in GNP.
Remember, we are measuring production inside
the U.S. Imports represent production outside of
the U.S.

26. Eight Things Not Counted in GDP
[no production]
Second Hand Sales[no production]
Public/Private Transfer Payments
Purely Financial Transactions
Intermediate Goods
5. U.S. Corporations producing overseas
6. Non-market transactions
[household or volunteer work]
Underground Economy
7. Illegal business activity
8. Unreported legal business activity

27. - When Outback buys potatoes for baked potatoes
Do These Count in GDP?
- When Outback buys potatoes for baked potatoes
When a tattoo business buys
ink for tattoos
When Tom Thumb buys
spam to sell it to you
When the popsicle maker buys the sticks
Dell buys a computer monitor frame
Ice cream that Braums buys for sundaes
A bakery buys an apple to put in its pies
When Ford buys a windshield wiper for a car
When hooker, J-Lo Ho, is paid $200.00

28. Is It Counted In GDP?
On the next slide, read each sentence and determine,
“To Be or Not To Be Counted?” That is the question.
If “Yes”, put “Y” and tell if it is “C”, “Ig”, “G”, or “X”.
If “No”, put “N” and give the number from below on
why it is not counted in GDP.
GDP DOES NOT INCLUDE
1. Second hand sales [no current production] [but the salesman’s commission counts]
2. Public/Private transfer payments [no current production]
3. Purely financial transactions [no current production] [broker’s fees do count]
4. Intermediate goods [component of final good]
5. U.S. corporations producing overseas.
6. Non-market transactions [ household or volunteer work.
Underground Economy [not reported]
7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.]
8. Unreported legal business activity [“off the books”]
Example:
___ ___ 1. New Toyota Tundra truck manufactured in San Antonio and
sold to your economics teacher the year it was produced.
___ ___ 2. You buy a new Wii at GameStop in Does it
count if you resell it on eBay in March of 2009? C Y 1 N

29. Is It Counted In GDP? C Y 6 N 6 N 3 N 6 N 1 N C Y 6 N 8 N 7 N 6 N 6 N
___ ___ 1. You buy a purple “Tinky Winky” from Wal-Mart.
___ ___ 2. You and your family paint your house. [labor involved]
___ ___ 3. You marry your housemaid. [“working-for-love”] [her services]
___ ___ 4. You buy 100 shares of Microsoft Corporation.
___ ___ 5. You volunteer to babysit your little sister to help your parents while they work.
___ ___ 6. Bob buys a 1965 ford Mustang convertible which is in mint condition.
___ ___ 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2008.
___ ___ 8. You and your friend volunteer to cook at the senior class picnic.
___ ___ 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it.
Does the $500 the dentist keeps and doesn’t report count?
___ ___ 10. You are given s suitcase full of $100 bills from the sale of smuggled drugs.
___ ___ 11. Your mother is teaching you to read [and not having much success].
___ ___ 12. Your dad bakes you a home-baked loaf of bread. [his labor]
___ ___ 13. You buy a loaf of bread from Kroger’s Grocery Store.
___ ___ 14. The U.S. government purchases 5 B-2 Bombers for $2 B each.
___ ___ 15. Ford buys a ton of sheet metal used in making car doors.
___ ___ 16. You buy a new “iPod Classic” from the Apple store,
___ ___ 17. You send in a $90 check to your dentist for cleaning your teeth.
___ ___ 18. Your family buys a new house next to the mansion of Bill Gates.
___ ___ additional teachers are hired by the Frisco ISD.
___ ___ 20. GM invest in $500 million worth of robots to assemble their cars.
___ ___ 21. You volunteer 10 hours a week of your time to work for senior citizens.
___ ___ 22. Ford produces 25,000 new F150s which are not sold by the end of the year.
___ ___ 23. Russia buys 3,000 Dell computers as they become Rusky Dell Dudes.
___ ___ 24. A man’s wife does all his cooking and sewing, working for him 16 hours per day.
___ ___ 25. Nike produces $10 million worth of Nike Air Jordan’s in Vietnam. C Y 6 N 6 N 3 N 6 N 1 N C Y 6 N 8 N 7 N 6 N 6 N
2nd Hd sales
Transfers
Financial
Intermediate
Overseas
Non-market
Illegal
Unreported C Y G Y 4 N C Y C Y Ig Y G Y Ig Y 6 N Ig Y X Y 6 N 5 N

30. expenditure approach]
18th Ed. NIA – 2007 [$13,841]
“U Can See Those Thunderducks”
$9,734
[“C”]
Consumption
[66%]
-Depreciation
$1,687
-$344 Undis Cor Pro
-$467 Corp Inc Tax
-$8979Soc Sec Con
-1009 Taxes on pro.& M
+N.F.F.I.
$34
Y earned/not received
$12,154
[Replacement
capital]
[births-deaths]
“Available
for sale”
-Statistical Discrep.
$29
[to make the income
approach match the
expenditure approach]
+$2,237 Trans Pay
Y received/not earned
$11,659
PI is what we
can spend, save,
or pay in taxes.
“Income
received by
households,
whether
earned or
unearned”
Personnel
Taxes
-$1,482
Gross Private
Domestic
Investment
$2,125
$12,221
“Income earned
by U.S. resources”
plus taxes on pro-
duction & imports
$10,177 DI
is what we can
SPEND or
SAVE.
ROW[$264]
U.S. [$230]
NFFI = $34
Government
Purchases
$2,690
Xn(X-M)
-$708
GDP
NDP NI PI DI

31. Depreciation, Investment & Disinvestment
Negative Net Investment
Depreciation exceeds Ig
Positive Net Investment
Ig exceeds Depreciation In
Investment
of $531 bil. Ig
$2,105 Trillion
Depreciation
1933
$7.6 billion
[in current dollars]
Disinvestment
of $6 billion
Great Depression
[1933]
Declining productive capacity
Expanding productive capacity
Depreciation
2005
$1,574 Trillion Ig
$1.6 billion
Ig($1.6) - D($7.6) = (Disinv. of $6)
(Disinvest. of $6) + D($7.6)=($1.6)
Ig($1.6)–Disinv.($6)=(Depr. of $7.6)
Ig($2,105) - D($1,574) = (In of $531)
In($531) + D($1,574) = (Ig of $2,105)
Ig($2,105)-In($531)=(Depr. of $1,574)

32. A Century of GDP Changes
Manufacturing 22%
Government 10%
THE MIX OF OUTPUT IN 1900
Construction and Mining 9%
Farming 37%
Services 22%
Services 54%
Government 18%
Manufacturing 20%
Construction and Mining 6%
THE MIX OF OUTPUT IN 2000
Farming 2%

33. If U.S. profits in the ROW [$220] are greater than
N.F.F.I.
[U.S.A. Profits Overseas]
Rest of World
$220 billion
Foreign Profits in U.S.A.
$210 billion
N.F.F.I. = $10 billion
If U.S. profits in the ROW [$220] are greater than
foreign profits in the U.S. [$210], add the difference.

34. Elaborate Circular Flow Showing NIAD P PI DI
NDP NI

35. $112 ROW $100 NFFI = -$12 -307 -12 -10 -46 -88 -534 -169 -231 +283
[18th Edition] NIA Practice – “How To Do It”
Personal taxes Undistributed corp. profits
Imports Social Security contrib
+Transfer payments Personal consumption ,316
-Corporate Income Taxes Gross private domes invest
-Taxes on prod. & imports Government purchases
Exports Depreciation [Capital consumption] 307
Statistical Discrepancy N.F.F.I.E. in the U.S
C = $_______
Ig = $_______
G = $_______
Xn = $_______
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
I’m going through an academic recession.
2,316
$_____
______
$______
English C
Accounting C
American History D
Economics F
503
673
+103
ROW
$100
3,595
-307
3,288
-12
-10
$112
3,266
-46
-88
-534
-169
NFFI = -$12
-231
+283
3,015
-403
2,612

36. National Income Accounting

37. $100 NIA #1 ROW $110 NFFI = $10 -Consumption of fixed capital
[18th Edition]
Personal taxes Undistributed corp. profits 65
Statistical Discrepancy Social Security contrib
+Transfer payments Personal consumption ,820
-Corporate Income Taxes Gross private domes invest
-Taxes on prod. & imports 265 Government purchases
Exports Depreciation [capital consumption]
Imports N.F.F.I.E. in the U.S
NIA #1
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
1,820
447
587
+29
$2,883
-317
$2,566
+10
-12
$2,564
-65
-98
-158
-265
+330
$2,308
-370
$1,938
ROW
$110
$100
NFFI = $10

38. $118 NIA #2 ROW $100 NFFI = -$18 $545 -Consumption of fixed capital
[18th Edition]
Exports Undistributed corp. profits 37
Imports Social Security contrib. 25
+Transfer payments Personal consumption
-Corporate Income Taxes Gross private domes invest
-Taxes on prod. & imports Government purchases
Personal taxes N.F.F.I.E
Statistical Discrepancy Depreciation
NIA #2
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
310 85
130
+20
$545
-25
$520
-18
-15
$487
-37
-55
+39
$394
-60
$334
ROW
$100
$118
NFFI = -$18

39. $123 NIA #3 ROW NFFI = -$23 $100 -Consumption of fixed capital
[18th Edition]
Personal taxes Undistributed corp. profits
Exports Social Security contrib
Imports Personal consumption
+Transfer payments Gross private domes invest
-Corporate income taxes 38 Government purchases
-Taxes on prod. & imports 21 Depreciation [capital consumption] 45
Statistical Discrepancy N.F.F.I.E. in the U.S
NIA #3
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. and imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
358
130
165
+20
$673
-45
$628
-23 -8
$597
-38
-40
-21
+41
$516
-50
$466
ROW
$100
$123
NFFI = -$23

40. $130 NIA #4 ROW $100 NFFI = -$30 A “streaker”
[18th Edition]
Personal taxes Undistributed corp. profits 16
Exports Social Security contrib
Imports Personal consumption
+Transfer payments Gross Investment
-Corporate income taxes Government purchases
-Taxes on prod. & imports N.F.F.I.E. in the U.S
Depreciation [cap. Consumption] 24 Statistical Discrepancy
NIA #4
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. and imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
312
104
110
+14
$540
-24
$516
-30
-14
$472
-16
-42
-32
-34
+50
$398
-60
$338
A “streaker”
ROW
$100
$130
NFFI = -$30

41. GDP Expenditure approach [C+Ig+G+Xn]
GDP can be measured either by total spending on U.S. production or by total income received from that production.
Expenditure approach [C+Ig+G+Xn]
Adds up the aggregate expenditure on all final goods and services produced during that year Gross Domestic Production
Income approach [R+I+P+SA+W (RIP SAW)]
Adds up the aggregate income earned during the year by those who produce that output Gross Domestic Income[sales]

42. + + + + + + + G D P = = Two Approaches to GDP Expenditure Approach
Gross Domestic Production
Income Approach
Gross Domestic Sales
Consumption by
Households
Rents + +
Interest +
Investment by
Businesses G D P +
Profits + = =
Government
Purchases
Statistical Adjustments
[corporate income taxes,
Dividends, undistributed
Corporate profits] + +
Expenditures
By Foreigners
Wages

43. The Circular-Flow Diagram
Resource Market 1 2 $ $
Goods/services?
Consumer expenditures?
Land, labor, capital and
entrepreneurial ability?
Rent, wages, interest,
and profits?
Businesses
Households $ $ 3 4
Product Market 5

44. THE INCOME APPROACH [RIP SAW]
Compensation of Employees
Rents
Interest
Profits [Proprietors’ Income]
SA [statistical adjustments]
Corporate Income Taxes
Dividends
Undistributed Corporate Profits
Wages

45. Expenditure and Income Approach to GDP [2007]
Receipts: Expenditures Approach
C $9734 Ig G Xn
GDP $13,841
Expenditure and Income Approach to GDP [2007]
Allocations: Income Approach____
Compensation of employees $7874
Rents
Interest
Proprietor’s income
Corporate Profits 1627
Taxes on production & imports 1009
National Income $12,221
Net Foreign Factor Inc
Statistical Discrepancy
Consumption of fixed capital 1687
GDP $13,841

46. 3. [8 pts] Indicate whether each of the following is counted in
the U.S. GDP for the year Explain each of your answers.
(a) The value of used textbook sold through online auction in 2006.
FRQ 2007
Answer: No, it was counted the year it was produced. Because it was
not produced again, it would not be counted. That would be double counting.
[2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]
b. Rent paid in 2006 by residents in an apartment building built in 2000
Answer: Yes, rents consist of the income received by the households and
businesses that supply property resources. The properties have to be maintained
or “serviced” each year. It is included in the income approach to GDP.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
c. Commissions earned in 2006 by a stockbroker
Answer: Yes, payment is being made for productive services of the
broker. So the purchase of stocks would not count but his work would.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
d. The value of autos produced in 2006 entirely in South Korea by a
firm fully owned by U.S. citizens
Answer: No, GDP measures production inside the U.S. regardless of
ownership. These autos were produced in South Korea.
[2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]

47. Nominal GDP Real GDP and What is the difference between
[prices of output in the current year]
[measures “output and prices”]
and
Real GDP
[base year prices of the year being measured]
[measures “only output”]

48. Importance of Real GDP in Determining a Recession
Real GDP measures current output at base-year prices.
Apple GDP Example
A country produces 10 apples in base year x $1;
Nominal [current] & Real [constant] GDP both=$10
Year 2: A country produces 10 apples x $1.25;
Nominal GDP=$12.50 (no recession but worse off)
[Real GDP would = $10 (10 apples x $1)]
Or Year 2: A country produces 9 apples x $1.25;
Nominal GDP=$11.25 but real is $9 (9 apples x $1)
(recession although nominal GDP is up)

49. Nominal [money] GDP v. Real GDP
An increase in prices and/or output will increase
nominal GDP.
Only an increase in output will increase real GDP.
Nominal GDP could increase even if output falls.
Real GDP = Nominal Y/GDP deflator x 100
So, nominal GDP measures output & prices.
Real measures only output [actual production]
Constant (real) GDP v. current (money) GDP

50. [Real GDP must decline for 6 months]
No Recession
[Real GDP must decline for 6 months]

51. Recession [Real, not nominal GDP has declined]
Inflation
component
Real GDP

52. Long-term average growth (3%)
The Business Cycle in U.S. History [12 Recessions since WWII, from 6 months to 16 months]
Recessions 20
Annual growth 15 10 5 3
GROWTH RATE (percent per year) -5
Zero growth
Long-term average growth (3%)
-10
1930
1940
1950
1960
1970
1980
1990
2000
2007

53. Positive Net Investment [Ig>D] [increasing product. capac.]
Gross Investment -
Depreciation =
Net Investment
Net
Investment
Gross
Investment
Depreciation
Increased
[increasing product. capac.]
Consumption
and
Government
Spending
Stock of
Capital
Stock of
Capital
January 1
Year’s GDP
December 31

54. Depreciation, Investment & Disinvestment
Negative Net Investment
Depreciation exceeds Ig
Positive Net Investment
Ig exceeds Depreciation In
Investment
of $531 bil. Ig
$2,105 Trillion
Depreciation
1933
$7.6 billion
[in current dollars]
Disinvestment
of $6 billion
Great Depression
[1933]
Declining productive capacity
Expanding productive capacity
Depreciation
2005
$1,574 Trillion Ig
$1.6 billion
Ig($1.6) - D($7.6) = (Disinv. of $6)
(Disinvest. of $6) + D($7.6)=($1.6)
Ig($1.6)–Disinv.($6)=(Depr. of $7.6)
Ig($2,105) - D($1,574) = (In of $531)
In($531) + D($1,574) = (Ig of $2,105)
Ig($2,105)-In($531)=(Depr. of $1,574)

55. Expanding/Static/Declining Productive Capacity
increased
Expanding Productive Capacity
Maintaining
our production
possibilities
No change
Static Productive Capacity
decreased
Declining Productive Capacity

56. SHORTCOMINGS OF GDP Non-market Transactions don’t count
Earthquakes, divorces, etc. increase GDP
Leisure isn’t factored in
Improved Product Quality
The Underground Economy
GDP’s impact on the Environment
Per Capita Output
Countries with low GDP per capita have more infants with low birth weight, higher rates of infant mortality, higher rates of maternal mortality, higher rates of child malnutrition, and less common access to safe drinking water. Also, fewer go to school and they have fewer teachers. They have fewer TVs and telephones, fewer paved roads. They also win fewer Olympic medals.

57. NIA NS 1-10 produced (by/within) a nation in one year.
1. GDP is the monetary value of all final domestic goods/services
produced (by/within) a nation in one year.
2. If N.F.F.I. is positive, which means U.S. profits are greater in the
ROW than foreign profits in the U.S., then (GDP/GNP) is larger.
3. Double or multiple counting can be avoided by counting only
(intermediate/final) goods.
4. (Final/Intermediate) goods and services refer to products
purchased by the ultimate users.
5. Transfer payments [when you take tax money from those who
are working & give it to those who are not working] (do/do not)
count in GDP because they (do/do not) reflect current production.
6. (The purchase of 100 shares of Playboy stock/
The purchase of a drill press) is not considered real investment.
7. If depreciation exceeds gross private domestic investment,
it can be concluded that In is (positive/negative) & we have
declining productive capacity.
8. Depreciation can be determined by (adding/subtracting) In from Ig.
9. The largest component of GDP (spending) is (C/Ig/G/Xn)
and the smallest is (C/Ig/G/Xn).
10. NDP is (GDP-indirect business taxes/GDP-Depreciation).
NIA NS 1-10

58. GDP NS 11 and 14
11. Real GDP and nominal GDP differ because real GDP has
been adjusted for changes in (depreciation/inflation).
14. Which economy has expanding productive capacity (positive Ig)?
(A/B/C). Which has declining productive capacity [negative Ig?
(A/B/C). Which has static productive capacity? (A/B/C).

59. ROW $120 $100 NIA #5 NFFI = $20 -Capital Consumption
[18th Edition]
Exports Undistributed corp. profits
Imports Social Security contrib
+Transfer payments Personal consumption
-Corporate Income Taxes Gross private domes invest
-Taxes on prod. & imports Government purchases
Personal Taxes Depreciation [capital consumption]
Statistical discrepancy N.F.F.I
NIA #5
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Capital Consumption
Net Domestic Product (NDP)
+Net Foreign Factor Inc. Earned in the U.S.
-Statistical discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on production and imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
260 75
100 +2
$437
-15
$422
+20
-30
$412
-35
-40
-25
+42
$324
-50
$274
ROW
$120
$100
NFFI = $20

60. ROW $115 $100 NIA #6 NFFI = $15 -Capital Consumption
[18th Edition]
Exports Undistributed corp. profits
Imports Social Security contrib
+Transfer payments Personal consumption
-Corporate Income Taxes Gross private domes invest
-Taxes on prod. & imports Government purchases
Personal taxes Depreciation [capital consumption]
Statistical discrepancy N.F.F.I
NIA #6
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Capital Consumption
Net Domestic Product (NDP)
+Net Foreign Factor Inc. Earned in the U.S.
-Statistical discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on production and imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
340
116
170
-20
$606
-25
$581
+15
-24
$572
-16
-28
-32
+36
$508
-58
$450
ROW
$115
$100
NFFI = $15

61. ROW $244 $210 NIA for 2005 NFFI = 34 -Capital Consumption
[17th Edition]
Personal taxes 1,210 -Undistributed corp. profits
Exports 1,101 -Social Security contrib
Imports ,828 Personal consumption ,746
+Transfer payments 1,970 Gross private domes invest ,105
-Corporate income taxes Government purchases ,363
-Taxes on prod. & imports Depreciation [capital consumption] ,574
Statistical Discrepancy N.F.F.I
NIA for 2005
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Capital Consumption
Net Domestic Product (NDP)
+Net Foreign Factor Inc. Earned in the U.S.
-Statistical discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on production & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
8,746
2,105
2,363
-727
$12,487
-1,574
$10,913 34
-43
$10,904
-460
-378
-871
-917
+1,970
$10,248
-1,210
$9,038
ROW
$244
$210
NFFI = 34

62. ROW $286 $190 NIA for 2007 NFFI = 96 -Capital Consumption
[18th Edition]
Personal taxes 1,482 -Undistributed corp. profits
Exports 1,625 -Social Security contrib
Imports ,333 Personal consumption ,734
+Transfer payments 2,237 Gross private domes invest ,125
-Corporate income taxes Government purchases ,690
-Taxes on prod. & imports 1,009 Depreciation [capital consumption] ,687
Statistical Discrepancy N.F.F.I
NIA for 2007
C = $
Ig = $
G = $
Xn = $
Gross Domestic Product (GDP)
-Capital Consumption
Net Domestic Product (NDP)
+Net Foreign Factor Inc. Earned in the U.S.
-Statistical discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on production & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
9,734
2,125
2,690
-708
$13,841
-1,687
$12,154 96
-29
$12,221
-344
-467
-979
-1,009
+2,237
$11,659
-1,482
$10,177
ROW
$286
$190
NFFI = 96