Lecture Macroeconomics (19/e) - Chapter 7: Measuring domestic output and national income

After reading this chapter, you should be able to: Explain how gross domestic product (GDP) is defined and measured; describe the relationships among GDP, net domestic product, national income, personal income, and disposable income; discuss the nature and function of a GDP price index, and describe the difference between nominal GDP and real GDP; list and explain some limitations of the GDP measure.

Measuring Domestic Output and National 

Income

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• National Income Accounting measures economy’s overall performance

National Income and Product Accounts

Assessing the Economy’s Performance

Gross Domestic Product

transactions

production

income, profit

the final goods

G D P

= =

+

Consumption by Households

Investment by Businesses

Government Purchases

Expenditures

By Foreigners

+ +

+ + +

Wages Rents Interest Profits

Statistical

Two Approaches to GDP

Expenditures or Output Approach

Income or Allocations Approach

expenditures (C)

services

produced

Expenditures Approach

• Expenditures for publicly owned capital

• Xn = exports – imports

• GDP = C + I g + G + X n

Compensation Rents

Interest Proprietor’s Income Corporate Profits Taxes on Production and Imports

National Income

Net Foreign Factor Income (-) Statistical Discrepancy (+) Consumption of Fixed Capital (+)

Gross Domestic Product

$ 7792 268 788 1041 1309

1090

$12,288

105 209

1864

$ 14,256

Personal Consumption (C) Gross Private Domestic Investment (I g )

Government Purchases (G) Net Exports (X n )

Gross Domestic Product

In Billions

Receipts

$10,089

1628 2931 -392

$ 14,256

U.S. Economy 2009

Comparative GDP

The Income Approach

The Income Approach

Gross Domestic Product (GDP)

Less: Consumption of Fixed Capital

Equals: Net Domestic Product (NDP)

Less: Statistical Discrepancy

Plus: Net Foreign Factor Income

Equals: National Income (NI)

Less: Taxes on Production and Imports

Less: Social Security Contributions

Less: Corporate Income Taxes

Less: Undistributed Corporate Profits

Plus: Transfer Payments

Equals: Personal Income (PI)

Less: Personal Taxes

Equals: Disposable Income (DI)

$ 14,256

1864

$ 12,392

209 105

$ 12,288

1090 967 315 418 2528

$ 12,026

1102

$ 10,924

production

GDP

Price Index

in Given Year

Price of Market Basket

in Specific Year Price of Same Basket

in Base Year

Real

Price Index (in hundredths)

output

Underground Economy