National income accounting - Measures inflows of income + expenditures for economy as a whole

Gross domestic product (GDP) - Defines aggregate output as the dollar value of all final goods and services produced within the borders of a given country during a given period of time, typically a year

• Compare relative values of goods + services produced in different years

Avoiding multiple counting

• Intermediate goods - Goods and services that are purchased for resale or for further processing or manufacturing

• Final goods - Consumption goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing

• Potatoes are counted as intermediate goods, while French fries, the final product, are counted as final goods

• Multiple counting - Including both intermediate + final goods; distorts GDP value

• Value added - Market value of a firm’s output less the value of the inputs the firm has bought from others

GDP excludes non-production transactions

• Financial transactions

  • Transfer payments

  • Stock market transactions

• Secondhand sales

Expenditures approach - Viewing GDP as sum of all money spent in buying it

• Personal consumption expenditures - Covers all expenditures by households on durable consumer goods (automobiles, refrigerators, video recorders), nondurable consumer goods (bread, milk, vitamins, pencils, toothpaste), and consumer expenditures for services (of lawyers, doctors, mechanics, barbers)

• Gross private domestic investment - Purchases of capital + construction, changes in inventories

  • Net private domestic investment - Only investment in form of added capital

  • Net investment = gross investment - depreciation

• Government purchases - (1) expenditures for goods and services that government consumes in providing public services and (2) expenditures for publicly owned capital such as schools and highways, which have long lifetimes

• Net exports - Exports - imports

• Gross Domestic Product (GDP) = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (Xn)

Income approach - Viewing GDP in terms of income derived from producing it

• Compensation of employees

• Rents

• Interest - The money paid by private businesses to the suppliers of loans used to purchase capital and the interest households receive on savings deposits, certificates of deposit, and corporate bonds

• Proprietors’ income - The net income of sole proprietorships, partnerships, and other unincorporated businesses

• Corporate profits

  • Corporate income taxes

  • Dividends

  • Undistributed corporate profits

• Taxes on production and imports - General sales taxes, excise taxes, business property taxes, license fees, and customs duties

• National income - Total of all sources of private income (employee compensation, rents, interest, proprietors’ income, and corporate profits) plus government revenue from taxes on production and imports

  • Net foreign factor income

  • Consumption of fixed capital - Huge depreciation charge made against private and publicly owned capital each year

Other national accounts

• Net domestic product - GDP - consumption of fixed capital (depreciation)

• National income

• Personal income - All income received, whether earned or unearned

• Disposable income - Personal income less personal taxes

Circular flow

• Flows of expenditures + allocations

• Households, gov’t, businesses

• Foreign sector

Nominal GDP - GDP based on the prices that prevailed when the output was produced is called unadjusted GDP

Real GDP - GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP

Adjusting nominal GDP

• Price index - Measure of the price of a specified collection of goods and services, called a “market basket,” in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year

• Real GDP = Nominal GDP / Price index

Shortcomings of GDP as a measure of both total output and well-being (total utility)

• Non-market activities - Certain productive activities do not take place in any market

• Leisure + vacation time - The average workweek (excluding overtime) in the United States has declined since the beginning of the 1900s

• Improved product quality - Because GDP is a quantitative measure rather than a qualitative measure, it fails to capture the full value of improvements in product quality

• Underground economy - Business done by gamblers, smugglers, prostitutes, “fences” of stolen goods, drug growers, and drug dealers