Chapter 7: Measuring Domestic Output and National Income

national income accounting

The techniques used to measure the overall production of a country’s economy as well as other related variables

gross domestic product (GDP)

The total market value of all final goods and services produced annually within the boundaries of a nation.

final goods and services

Products that have been purchased for final use (rather than for resale or further processing or manufacturing).

intermediate goods and services

Products that are purchased for resale or further processing or manufacturing

value added

The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product

gross output (GO)

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output.

multiple counting

Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.

expenditures approach

The method that adds all expenditures made for final goods and final services to measure the gross domestic product

income approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product

personal consumption expenditures (C)

The expenditures of households for both durable and nondurable consumer goods.

durable good

A consumer good with an expected life (use) of three or more years.

nondurable good

A consumer good with an expected life (use) of less than three years.

service

An (intangible) act or use for which a consumer, firm, or government is willing to pay

gross private domestic investment (Ig)

Expenditures that increase the nation’s stock of capital, which is the collection of physical objects and intangible ideas that help to produce goods and services. Includes spending on final purchases of plant, machinery, and equipment by business enterprises; residential construction; changes in inventories; expenditures on the research and development (R&D) of new productive technologies; and money spent on the creation of new works of art, music, writing, film, and software

net private domestic investment

Gross private domestic investment less consumption of fixed capital; the addition to the nation’s stock of capital during a year.

government purchases (G)

Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services.

net exports (Xn)

Exports minus imports.

taxes on production and imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price

national income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors’ income, and such taxes

consumption of fixed capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation

net domestic product (NDP)

Gross domestic product minus the part of the year’s output that is needed to replace the capital goods worn out in producing the output; the nation’s total output available for consumption or additions to the capital stock.

= GPD - consumption of fixed capital (depreciation)

personal income (PI)

The earned and unearned income available to resource suppliers and others before the payment of personal taxes

disposable income (DI)

Personal income minus personal taxes; income available for personal consumption expenditures and personal saving

= Consumption(C) + Savings(S)

nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation. Compare with real gross domestic product (real GDP)

real GDP

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal. Compare with nominal GDP

price index

An index number that shows how the weighted-average price of a “market basket” of goods changes over time relative to its price in a specific base year

base year

The year with which other years are compared when an index is constructed; for example, the base year for a price index.