ECO285ECO285National Income Accounting IINational Income Accounting II

Dr. Dennis Foster – Spring 2014

Required additional reading:Required additional reading:

• Should we believe the GDP?

• Mises wiki on GDP and problems

• Higgs and Real GDPP

• Rothbard’s Private Product Remaining

• Counting what counts: GDP redefined

• Beyond GDP – Enlarged GDP &FAQs

• Skousen – Gross Domestic Expenditures

Interpreting the GDPInterpreting the GDP• From the circular flow, we get:

Income = Y = C + S + T

Income = Expenditures

Y = C + I + G + (Ex-Im)• Substitute, cancel C and rearrange to get:

S + T + Im = I + G + Ex

Leakages = Injections

Interpreting the GDPInterpreting the GDP

• Further rearrange to get:

I = S + (T-G) + (Im-Ex)• Investment comes from three sources:– Private sector savings.– Government “savings.”– Foreign sector savings.

• Where economic growth is primarily determined by investment . . .

2011: $2.34 t ≈ $2.83 t - $1.0 t + $570 b

GDP as the sum of “values added”GDP as the sum of “values added”

• Finding C, I, G and net X is difficult.

• Values are estimated based on statistical analysis.

• GDP is calculated by adding up all values added.

VA = (sales revenue) – (cost of inputs)

• This data is obtainable from tax info.

GDP: Nominal vs. RealGDP: Nominal vs. Real• Nominal = “current dollar” value• Real = “constant dollar” value

Q P Q*Pbread 100 $2.50 $250.00shoes 9 $22.50 $202.50

movies 15 $8.00 $120.00hammocks 2 $45 $90.00

$662.50 GDP

2013

current dollar

Q P Q*Pbread 95 $3.00 $285.00shoes 10 $23.00 $230.00

movies 17 $8.00 $136.00hammocks 2 $45 $90.00

$741.00 GDP

2014

current dollar

Q P Q*Pbread 95 $2.50 $237.50shoes 10 $22.50 $225.00

movies 17 $8.00 $136.00hammocks 2 $45 $90.00

$688.50 GDP

2014

constant dollar

11.8%

3.9%

Next – GDP IssuesNext – GDP Issues

• What are we really measuring?• What are we trying to measure?• How good a job to we do at this?• What gets left out?• Are there better measures?

• Why do we even want tomeasure economic activity?

ECO285ECO285National Income Accounting IINational Income Accounting II

Dr. Dennis Foster – Spring 2014