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7 - 1Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
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Measuring Domestic Output,and National Income
7C H A P T E R
7 - 2Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
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EndEndShowShow
Assessing the Economy’sPerformance
National Income Accounting:•Health of the Economy•Comparisons Over Time•Formulation of Public Policy
What Are These Accounting Measures?
7 - 3Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
•A Monetary Measure•Avoid Multiple Counting
•Intermediate Goods•Final Goods
•Value Added
GROSS DOMESTIC PRODUCT
The total market value of all final goods and services produced in a given year
7 - 4Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
•Excludes Nonproduction Transactions•Financial Transactions
•Public Transfer Payments•Private Transfer Payments•Stock Market Transactions
•Secondhand Sales•Two Approaches
•Expenditures Approach•Income Approach more…
GROSS DOMESTIC PRODUCT
7 - 5Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
+
+
+
++
++
GROSS DOMESTIC PRODUCT
Consumptionby Households
Investmentby Businesses
GovernmentPurchases
Expendituresby Foreigners
Expenditures Approach Income ApproachWages
Rents
Interest
Profits
StatisticalAdjustments
= =GDP
7 - 6Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )
EXPENDITURES APPROACH
•Durable Consumer Goods•Nondurable Consumer Goods•Consumer Expenditures for Services
7 - 7Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )Gross Private Domestic Investment ( Ig )
EXPENDITURES APPROACH
•Machinery, Equipment, and Tools•All Construction•Changes in Inventories•Noninvestment Transactions•Gross vs. Net Investment
•Net Private Domestic Investment
7 - 8Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EXPENDITURES APPROACH
Net Investment
Gross InvestmentDepreciation-
=
Stock ofCapital
Consumptionand
GovernmentSpending
Stock ofCapital
Depreciation
NetInvestment
January 1 Year’s GDP December 31
Increased
GrossInvestment
7 - 9Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Government Purchases ( G )Government Purchases ( G )
Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )Gross Private Domestic Investment ( Ig )
EXPENDITURES APPROACH
•Expenditures for Goods & Services•Expenditures for Social Capital•Does NOT include Government Transfer Payments
7 - 10Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Government Purchases ( G )Government Purchases ( G )
Net Exports ( Xn)Net Exports ( Xn)
Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )Gross Private Domestic Investment ( Ig )
EXPENDITURES APPROACH
Net Exports (Xn) = Exports (X) – Imports (M)
7 - 11Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Putting it all together:
GDP = C + Ig + G + Xn
EXPENDITURES APPROACH
7 - 12Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
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0 1 2 3 4 5 6 7 8 9 10United States
JapanGermany
United Kingdom
FranceChina
ItalyCanadaMexico
SpainBrazilIndia
Korea, Rep.Netherlands
Australia
GLOBAL PERSPECTIVEComparative GDPs in Trillions, 2001
Source: World Bank
Next:
The Income Approach
7 - 13Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
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• Compensation of Employees• Rents• Interest• Proprietors’ Incomes• Corporate Profits
•Corporate Income Taxes•Dividends•Undistributed Corporate Profits
THE INCOME APPROACH
7 - 14Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
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•From National Income to GDP• Indirect Business Taxes• Consumption of Fixed Capital (Depreciation)
• Net Foreign Factor Income
THE INCOME APPROACH
7 - 15Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
OTHER NATIONAL ACCOUNTS
Gross Domestic Product (GDP) $10,446Consumption of fixed capital -1,393
Net Domestic Product (NDP) $9,053Net foreign factor income earned
in the U.S. - 10Indirect business taxes -695
National Income (NI) $8,348Social security contributions -748Corporate income taxes -213 Undistributed corporate profits -141Transfer payments +1,683
Personal Income (PI) $8,929Personal Taxes -1,113
Disposable Income (DI) $7,816
U.S. GDP, NDP, NI, PI, & DI, 2002
7 - 16Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Nominal Values• Deflate GDP when prices rise• Inflate GDP when prices fall• Nominal GDP• Calculating Real GDP
NOMINAL GDP vs. REAL GDP
12345
578
1011
$ 1020253028
100200250
--
$ 50140200
--
$ 507080
--
(2)PricePizza
Per Unit
(1)Units ofOutputYear
(3)Price Index
Year 1 =100
(4)Unadjusted,or Nominal,
GDP,(1)x(2)
(5)Adjusted,Or Real,
GDP
7 - 17Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
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• Adjustment Process• GDP Price Index
Price Indexin a given
year =Price of market basket
in specific year
Price of same marketbasket in base year
x 100
Real GDP= Nominal GDP
Price Index(in hundredths)
Price Index(in hundredths)= Nominal GDP
Real GDP
An Alternative Method
NOMINAL GDP vs. REAL GDP
7 - 18Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
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•Nonmarket Activities•Leisure•Improved Product Quality•The Underground Economy•GDP and the Environment•Composition and Distribution of Output
•Noneconomic Sources of Well-Being
SHORTCOMINGS OF GDP
7 - 19Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
0 5 10 15 20 25 30Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United
Kingdom
Japan
United States
Switzerland
GLOBAL PERSPECTIVEThe Underground Economy as a Percent of GDP
Source: The Journal of Economic Literature, 2000
END
national income accounting
gross domestic product
intermediate goods
final goods
multiple counting
value added
expenditures approach
income approach
personal consumption expenditures (C)
gross private domestic investment (
Ig)
net private domestic investment
government purchases (G)
net exports (Xn)
national income
indirect business taxes
consumption of fixed capital
net domestic product (NDP)
personal income (PI)
disposable income (DI)
nominal GDP
real GDP
price indexBACK
Copyright McGraw-Hill/Irwin, 2005
7 - 21Copyright McGraw-Hill/Irwin, 2005
Assessing the Economy’s Performance
Gross Domestic Product
Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs. Real GDP
Shortcomings of GDP
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Next...
Introduction toEconomic Growth
And Instability
Chapter 8
