1. What is national income accounting and why should I care?
Measures the economy’s performance by looking at and measuring the flows of expenditures and incomes.
Serves the same purpose as income statements for firms or individuals do
Consistent definition of terms allows us to compare conditions over time
Provides the basis for appropriate public policy to improve or augment economic performance

2. What is GDP?
The monetary measure of the total market value of all final goods and services produced in an economy within a country in one calendar year (Jan1 to Dec 31 ).
Valuing in money terms allows us to compare unalike items.
GDP includes only FINAL products and services

3. WHAT is GDP? Cont.
Final production or service is used to avoid double and/or multiple counting by eliminating counting of intermediate goods.
What is an intermediate good? A good which is used to make other goods such as the steel in an automobile

4. What is GDP?cont.II
GDP is the value of what has been produced in an economy not what has been sold. This is a significant difference.
GDP excludes:
A. Purely financial transactions
B. Transfer payments
C. Private transfer payments
D. Sales or exchange of stocks and bonds

5. What is GDP cont.III
Second hand or used goods sales are excluded as they do not represent current output.

6. Expenditure Approach to GDP
GDP can be divided into categories corresponding to buyers in the market
Households, businesses, government, and foreign buyers

7. Personal Consumption or C
Personal consumption expenditures include:
Durable goods
Nondurable goods
Services

8. Gross Private Domestic Investment or Ig
All final purchases of machinery, equipment, and tools by business
All construction including residential
Changes in Business Inventories
If output exceeds current sales inventories build
If sales exceed output inventories will shrink and this will be a negative quantity in dollars

9. How Change in Inventory Works
If a product is produced but not accounted for by C, Ig, G, or Xn then it is placed in Inventory.
If it is sold in the future then C, Ig, G, or Xn is created in that future year. This would lead to double counting since it was counted in the year it was produced.
Solution: Value of product is subtracted from current year Inventory.
Example: Carry over product worth $25. Product is sold in next year. This adds $25 to GDP in that future year. Since it was not produced in that future year this is a problem. So it would be subtracted from Inventory: +$25 C - $25 inventory(Ig)= 0

10. Ig Cont. Net Private Investment or In.
Depreciation is the using up of capital equipment in production
Gross Investment minus depreciation (also called capital consumption allowance) equals net investment
More capital produced than used signals expansion of the economy’s capacity to produce
If Ig is less than depreciation the productive capacity will decline

11. How depreciation works
Ig is all private investment
Depreciation is what is destroyed in the process of production and is subtracted from Ig.(consumption of fixed capital)
What is left after depreciation is net investment. I˷
If I˷ is positive the economy should be expanding
If I˷ is negative the economy should be contracting
Ig – CFC= I˷

12. Government Purchases or G
Includes purchases of G and S at all level of government (in the US federal, state, local)
Includes all direct purchase of resources including labor
Excludes transfer payments as these do not reflect current production

13. A word about production and Transfer Payments
Although most transfer payments result in the purchase of something (C mostly) there is a temptation to think of transfer payments as part of GDP.
However, since the payment is not for PRODUCING anything there is no GDP created regardless of what the intended USE is.
So if you think of payment here as just moving something from one place to another with nothing else going on, that would be close to the reality.

14. Net Exports or Xn
All spending on goods produced in the US must be accounted for whether purchased here or overseas. Those shipped overseas are called exports
Goods purchased here but made elsewhere must be removed from GDP. These are called imports
Net exports = exports(value of) minus imports(value of)

15. Some Thoughts on Exports and Imports
Many folks act as if we should cut ourselves off from the world and only consume our own products. This is ridiculous on the face of it.
The primary impact of having imports exceed exports (other than it reduces GDP for our purposes in this chapter) is that we have to sell assets (real property) in order to pay for it. At some time in the future, this will be a problem if we don’t generate more assets than we sell.

16. THE EXPENDITURE EQUATION
C + Ig + G + Xn=
GDP

17. What GDP doesn’t measure
GDP only measures those things for which income is generated that are legal and reported. It also doesn’t measure some things that may add to the quality of life or subtract from it simply because they are generally not amenable to measurement.

18. GDP shortcomings
Cannot measure the value of things such as homemaker, volunteer work, home improvement)
Doesn’t measure improvements in product quality or increased leisure time
Doesn’t adjust for change in composition of output or distribution of income

19. Shortcomings Underground economy: Illegal activities are not counted
Legal “untaxed” activities are not counted
GDP and the environment:
Harmful effects of pollution are not deducted from GDP
Nor are costs associated with cleaning things up such as payments for oil spills etc

20. GDP FINALE
Per capita GDP is a better, although, not perfect way to measure standards of living
Non economic sources of well being such as courtesy, lack of crime, health, and happiness are not covered in GDP