1. Maclachlan, Macroeconomics, 9/30/04 1 Principles and Policies I: Macroeconomics Chapter 7: National Income Accounting

2. Maclachlan, Macroeconomics, 9/30/04 2 Chapter Seven Learning Objectives You should be able to: State why national income accounting is important. Define GDP and calculate it in a simple example, avoiding double counting. Explain why GDP can be calculated using either the income approach or the expenditures approach. List the four expenditure components of GDP. Distinguish between real GDP and nominal GDP. State some limitations of national income accounting. Describe the shortcomings of using GDP to compare standards of living among countries.

3. Maclachlan, Macroeconomics, 9/30/04 3 National Income Accounting A set of rules and definitions for measuring economic activity in the aggregate economy.

4. Maclachlan, Macroeconomics, 9/30/04 4 Measures of Total Output GDP Total market value of all goods and services produced in an economy in a one year period. GNP Total market value of all goods and services produced by citizens and businesses of an economy in a one year period GNP = GDP + net foreign factor income

5. Maclachlan, Macroeconomics, 9/30/04 5 Important distinction: stocks versus flows

6. Maclachlan, Macroeconomics, 9/30/04 6 Value Added Approach

7. Maclachlan, Macroeconomics, 9/30/04 7 Value Added Approach Eliminates Double Counting

8. The Circular Flow Goods Other countries Financial markets Government Firms (production) Household Taxes Factor services Savings Imports Government Spending Wages, rents, interest, profits Exports Investment Personal consumption McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

9. Maclachlan, Macroeconomics, 9/30/04 9 Two Methods of Calculating GDP Employee compensation + Rents + Interest + Profits __________ National income Consumption + Investment + Government spending on goods and services + (Exports – Imports) ________________ GDP

10. Maclachlan, Macroeconomics, 9/30/04 10 Equality of Expenditure and Income = GDP Net foreign factor income GNP Depreciation Indirect business taxes Rents Interest Profits Employee compensation National Income (3) Income (2) Output Net exports Government expenditures Investment Consumption (1) Expenditures =

11. Maclachlan, Macroeconomics, 9/30/04 11 GDP = C + I + G + (X-M) Add net foreign factor income to get … GNP

12. Maclachlan, Macroeconomics, 9/30/04 12 NDP, NNP

13. Maclachlan, Macroeconomics, 9/30/04 13 NI = GNP – depreciation – indirect business taxes PI = NI + transfer payments + net non- business interest income – corporate retained earnings- social security taxes

14. Maclachlan, Macroeconomics, 9/30/04 14 Personal disposable income = Personal income – personal taxes

15. Maclachlan, Macroeconomics, 9/30/04 15 How can the government have a $2 trillion budget but only have $600 billion of that included in the GDP?

16. Maclachlan, Macroeconomics, 9/30/04 16 Real versus Nominal Nominal GDP = Real GDP * index/100

17. Maclachlan, Macroeconomics, 9/30/04 17 Limitations Measurement problems. Not a measurement of well-being, just economic activity. Misinterpretation of subcategories.

18. Maclachlan, Macroeconomics, 9/30/04 18 Problems comparing per capita GDP across countries Bangladesh $270 USA $35,000 Exchange rate method and purchasing power method.

19. Maclachlan, Macroeconomics, 9/30/04 19 7-5 Personal consumption 700 Investment 500 Net non-biz interest 20 Government purchase 300 Profits 500 Wages 972 Net exports 275 Rents 25 Depreciation 25 Indirect biz taxes 100 Corporate RE 60 Net foreign factor income -3 Interest 150 Social security contribution 0 Transfer payments 0 Personal taxes 165 GDP & GNP expenditure and income, NDP, NI, PI, personal disposable income.