1. ECO 121 Macroeconomics Lecture Four Aisha Khan Section L & M
Spring 2010
Aisha Khan
Section L & M
Lecture Four

2. Recap Introduction to Growth and Instability of an economy
Distribution of income in the economy
Households, businesses and the government
Introduction to trade and exchange rate
International trade agreements

3. Output and National Income
M&B Chapter 6
Assessing the economy’s performance

4. National income accounting
Measures the country’s entire output performance
Compiling the accounts for the economy
Assess the health of the economy by comparing levels of production at regular intervals
Track the long run course of the economy
Formulate policies that will safeguard and improve the economy’s health

5. GDP Gross Domestic Product Primary monetary measure
Annual total output of goods and services
Also known as Aggregate Output
Total market value of all final goods and services produced in a given year
(includes all g&s produced by either citizen-supplied or foreign-supplied resources employed in the country)

6. GDP To measure accurately Avoiding multiple counting
Each g&s must be counted once and only once
How can we ensure this?
Total market value of all final goods and services produced in a given year
Intermediate goods vs final goods

7. Sales Value of Materials or Product
Value-added example
Stage of production
Sales Value of Materials or Product
Value Added
0 $
Firm A (sheep ranch)
120
Firm B (wool processor)
180
60 ( = 180 – 120 )
Firm C (suit manufacturer)
220
40 ( = 220 – 180 )
Firm D (clothing wholesaler)
270
50 ( = 270 – 220 )
Firm E (retail clothier)
350
80 ( = 350 – 270 )
Total Sales values
1140

8. GDP Excludes non-production transactions
Many monetary transactions don’t necessarily result in generation of final goods
Financial transactions
Public transfer payments
Private transfer payments
Stock market transactions
Second hand sales

9. Two ways of looking at GDP
Expenditure Approach (Output approach)
How the final user paid for
Income Approach (Earnings or Allocation approach)
Add up the entire wage, rental, interest, profit incomes that were created while producing the good or service

10. Expenditure Approach
Add up all the spending on final g&s that has taken place throughout the year

11. Expenditure Approach Personal consumption expenditures ( C )
Durable, Nondurable consumer goods, spending on services
Gross Private Domestic Investment ( I )
Investment  creation of new capital assets
All final purchases of machinery, equipment, construction
Changes in inventories
Increase in inventory (stock of unconsumed output)
Decrease in inventory (counted in last years GDP therefore negative investment)

12. Gross Private Domestic Investment ( I )
Gross investment vs net investment
Net investment = gross investment - depreciation
Government Purchases ( G )
Expenditure in providing public services
Expenditures for social capital (highways)
Net Exports ( NX )

13. National Income Identity
Y = C + I + G + NX

14. Income Approach Compensation of employees Rents Interest
Proprietors income
Corporate profits
National Income

15. Balancing National Income
Balance national income by adding the following
Consumption of fixed capital
Net foreign factor income
Statistical Discrepancy

16. Other national accounts
Additional useful information
Through various adjustments to GDP

17. Net Domestic Product Depreciation is a cost to production
GDP includes depreciation
NDP = GDP – depreciation(consumption of fixed capital)
NDP is adjusted for depreciation

18. National Income
Includes all income earned through the use of American-owned resources (home or abroad)
NI = NDP- net foreign factor income – statistical discrepancy

19. Why do economists include only final goods and services in measuring GDP?
Why don’t they include the value of stocks and bonds bought and sold?
Why don’t they include the value of the used furniture bought and sold?
Calculate GDP using the expenditure & theincome method.

20. Personal consumption expenditures
$245
Proprietors income 33
Net foreign factor income 4
Net exports 11
Transfer payments 12
Dividends 16
Rents 14
Compensation of employees
223
Statistical discrepancy 8
Taxes on production and imports 18
Consumption of fixed capital 27
Undistributed corporate profits 21
Social security contributions 20
Personal taxes 26
Interest 13
Corporate income taxes 19
Corporate profits 56
Government purchases 72
Net private domestic investment
Personal saving