7

Importance of Ma
croeconomic Mea
surement
Gross Domestic P
CHAPTER
roduct
Expenditures App
roach
Income Approach
Other National Ac
counts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms
Measuring Domestic Output,
Previous Next
National Income, and
Slide
End
Slide
the Price Level
Show
7-1
Copyright McGraw-Hill/Irwin, 2002
 The Importance of
Importance of Ma Macroeconomic Measurement
croeconomic Mea
surement

National Income Accounting

Gross Domestic P
roduct
Expenditures App
roach
Income Approach
•Health of the Economy
Other National Ac
counts •Comparisons Over Time
Nominal GDP vs.
Real GDP
Shortcomings of
•Formulation of Public Policy
What Are These
GDP
Key Terms

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Slide
Next
Slide
Accounting
End
Show
7-2
Measures?
Copyright McGraw-Hill/Irwin, 2002
 GROSS DOMESTIC PRODUCT
Importance of Ma
croeconomic Mea
surement
The total market value of all
Gross Domestic P
roduct final goods and services
produced in a given year
Expenditures App
roach
Income Approach
Other National Ac
counts
Nominal GDP vs.
•A Monetary Measure
Real GDP
Shortcomings of
GDP
•Avoid Multiple Counting
Key Terms
•Final Goods
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Slide
Next
Slide
•Intermediate Goods
End
Show
•Value Added
7-3
Copyright McGraw-Hill/Irwin, 2002
 GROSS DOMESTIC PRODUCT
Importance of Ma
croeconomic Mea
• Excludes Nonproduction
surement
Gross Domestic P
roduct
Transactions
Expenditures App
roach •Financial Transactions
Income Approach
Other National Ac
•Public Transfer Payments
counts
Nominal GDP vs.
•Private Transfer Payments
Real GDP
•Stock Market Transactions
Shortcomings of
GDP
Key Terms
•Secondhand Sales
• Two Approaches
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Slide
Next
Slide •Expenditures Approach
End
Show •Income Approach
7-4
Copyright McGraw-Hill/Irwin, 2002
 EXPENDITURES APPROACH
Importance of Ma
croeconomic Mea
surement
Personal Consumption Expenditure ( C )
Gross Domestic P
roduct
•Durable Consumer Goods
Expenditures App
roach
•Nondurable Consumer Goods
Income Approach •Consumer Expenditures for Services
Other National Ac
counts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms

Previous Next
Slide Slide
End
Show
7-5
Copyright McGraw-Hill/Irwin, 2002
 EXPENDITURES APPROACH
Importance of Ma
croeconomic Mea
surement
Personal Consumption Expenditure ( C )
Gross Domestic P
roduct
Expenditures App
roach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National Ac
counts
Nominal GDP vs.
•Machinery, Equipment, and Tools
Real GDP
Shortcomings of
•All Construction
GDP
Key Terms
•Changes in Inventories
•Noninvestment Transactions
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•Gross vs. Net Investment
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End
Slide
•Net Private Domestic Investment
Show
7-6
Copyright McGraw-Hill/Irwin, 2002
 EXPENDITURES APPROACH
Importance of Ma
croeconomic Mea
surement
Personal Consumption Expenditure ( C )
Gross Domestic P
roduct
Expenditures App
roach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National Ac
counts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP Government Purchases ( G )
Key Terms
• Expenditures for Goods & Services
Previous Next
• Expenditures for Social Capital
Slide
End
Slide
• Does NOT include Government
Show
7-7
Transfer Payments
Copyright McGraw-Hill/Irwin, 2002
 EXPENDITURES APPROACH
Importance of Ma
croeconomic Mea
surement
Personal Consumption Expenditure ( C )
Gross Domestic P
roduct
Expenditures App
roach
Income Approach
Gross Private Domestic Investment ( Ig )
Other National Ac
counts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP Government Purchases ( G )
Key Terms

Previous Next
Slide
End
Slide
Net Exports ( Xn)
Show Net Exports (Xn) = Exports (X) – Imports (M)
7-8
Copyright McGraw-Hill/Irwin, 2002
 EXPENDITURES APPROACH
Importance of Ma
croeconomic Mea
surement
Gross Domestic P
roduct
Expenditures App
Putting it all together:
roach
Income Approach
Other National Ac

GDP = C + Ig + G + Xn
counts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms

Previous
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Next
Slide
Next: The Income Approach
End
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7-9
Copyright McGraw-Hill/Irwin, 2002
 THE INCOME APPROACH
Importance of Ma
croeconomic Mea
surement
• Compensation of Employees
Gross Domestic P
roduct • Rents
• Interest
Expenditures App
roach
Income Approach
Other National Ac
counts
• Proprietors’ Income
Nominal GDP vs.
Real GDP • Corporate Profits
• Corporate Income Taxes
Shortcomings of
GDP
Key Terms

• Dividends
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Slide
Next
Slide
• Undistributed Corporate
End
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Profits
7 - 10
Copyright McGraw-Hill/Irwin, 2002
 THE INCOME APPROACH

• From National Income to GDP

Importance of Ma
croeconomic Mea
surement
Gross Domestic P
roduct • Indirect Business Taxes
• Consumption of Fixed
Expenditures App
roach
Income Approach
Other National Ac
counts
Capital (Depreciation)
Nominal GDP vs.
Real GDP
• Net Foreign Factor Income
Shortcomings of
GDP
Key Terms

Previous Next
Slide Slide
End
Show
7 - 11
Copyright McGraw-Hill/Irwin, 2002
 OTHER NATIONAL ACCOUNTS
Importance of Ma
U.S. GDP, NDP, NI, PI, & DI, 2000
croeconomic Mea
surement Gross Domestic Product (GDP) $9966
Gross Domestic P
roduct
Consumption of fixed capital -1257
Expenditures App Net Domestic Product (NDP) $8709
roach
Net foreign factor income earned
Income Approach
in the U.S. - 9
Other National Ac
counts Indirect business taxes -682
Nominal GDP vs.
Real GDP
National Income (NI) $8018
Shortcomings of Social security contributions -706
GDP
Corporate income taxes -286
Key Terms
Undistributed corporate profits -274
Transfer payments +1530
Previous Next Personal Income (PI) $8282
Slide Slide Personal Taxes 1292
End
Show
Disposable Income (DI) $6990
7 - 12
Copyright McGraw-Hill/Irwin, 2002
 NOMINAL GDP vs. REAL GDP
Importance of Ma
• Nominal Values
croeconomic Mea
surement • Deflate GDP when prices rise
Gross Domestic P
roduct
Expenditures App
• Inflate GDP when Prices fall
roach
Income Approach
• Nominal GDP
Other National Ac
counts • Calculating Real GDP (4)
Nominal GDP vs.
Real GDP (2) Unadjusted,
Shortcomings of (1) Price (3) or Nominal, (5)
GDP
Key Terms
Units of Pizza Price Index GDP, Adjusted, or
Year Output Per Unit Year 1 = 100 (1)x(2) Real, GDP
1 5 $10 100 $ 50 $50
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2 7 20 200 140 70
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3 8 25 250 200 80
End
Show 4 10 30 - - -
7 - 13 5 McGraw-Hill/Irwin,
11 28 - - -
Copyright 2002
 NOMINAL GDP vs. REAL GDP
Importance of Ma
croeconomic Mea
• Adjustment Process
• GDP Price Index
surement
Gross Domestic P
roduct Price of market basket
Price Index

= x 100
Expenditures App in specific year
roach
in a given
Income Approach
year Price of same market
Other National Ac basket in base year
counts

=
Nominal GDP vs. Nominal GDP
Real GDP
Real GDP Price Index
Shortcomings of
GDP (in hundredths)
Key Terms

An Alternative Method
Previous Next

=
Slide Slide Price Index Nominal GDP
End (in hundredths) Real GDP
Show
7 - 14
Copyright McGraw-Hill/Irwin, 2002
 NOMINAL GDP vs. REAL GDP
Importance of Ma
croeconomic Mea
surement
• Consumer Price Index
Gross Domestic P Price of 1993-1995 market

CPI =
roduct

x 100
basket in any given year
Expenditures App
roach Price of the same market
Income Approach basket in 1982-1984
Other National Ac
counts
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms

Previous Next
Slide Slide
End
Show
7 - 15
Copyright McGraw-Hill/Irwin, 2002
 SHORTCOMINGS OF GDP
Importance of Ma
croeconomic Mea
• Nonmarket Transactions
• Leisure
surement
Gross Domestic P
roduct
Expenditures App
roach
• Improved Product Quality
Income Approach • The Underground Economy
Other National Ac
counts
Nominal GDP vs.
• GDP and the Environment
Real GDP
Shortcomings of
• Composition and Distribution
GDP
Key Terms of Output
• Per Capita Output
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Slide
Next
Slide • Noneconomic Sources of Well-
End
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7 - 16
Being
Copyright McGraw-Hill/Irwin, 2002
 GLOBAL PERSPECTIVE
Importance of Ma
The Underground Economy as a Percent of GDP
croeconomic Mea
surement
0 5 10 15 20 25 30
Gross Domestic P
roduct Greece
Expenditures App Italy
roach
Spain
Income Approach
Other National Ac
Portugal
counts Belgium
Nominal GDP vs.
Real GDP Sweden
Shortcomings of Germany
GDP
France
Key Terms
Holland
United
Previous Next Kingdom
Slide Slide
Japan
End
Show United States
Source: The Journal of Economic Literature, 2000
CopyrightSwitzerland
7 - 17
McGraw-Hill/Irwin, 2002
Importance of Ma
croeconomic Mea
surement
Gross Domestic P
roduct
Expenditures App

Chapter
roach
Income Approach
Other National Ac
counts

Conclusions
Nominal GDP vs.
Real GDP
Shortcomings of
GDP
Key Terms

Previous Next
Slide Slide
End
Show
7 - 18
Copyright McGraw-Hill/Irwin, 2002
national income accounting government purchases (G)
gross domestic product net exports (Xn)
intermediate goods national income
final goods indirect business taxes
multiple counting consumption of fixed capital
value added net domestic product (NDP)
expenditures approach personal income (PI)
income approach disposable income (DI)
personal consumption expend nominal GDP
itures (C)
price index
gross private domestic invest
ment (I real GDP
g) consumer price index (CPI)
net private domestic investme per capita output
nt BACK END
Copyright McGraw-Hill/Irwin, 2002
 Next...
Importance of Ma
croeconomic Mea
surement
Gross Domestic P
roduct
Expenditures App
roach
Income Approach
Other National Ac
counts
Introduction to
Nominal GDP vs.
Real GDP
Shortcomings of
Economic Growth
And Instability
GDP
Key Terms

Previous Next

Chapter 8
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End
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7 - 20
Copyright McGraw-Hill/Irwin, 2002