National Income

and Product Accounts

• National income and product

accounts are data collected and
published by the government describing
the various components of national
income and output in the economy.

• The Department of Commerce is

responsible for producing and
maintaining the “National Income and
Product Accounts” that keep track of
GDP.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Gross Domestic Product

• Gross domestic product (GDP) is

the total market value of all final
goods and services produced within
a given period by factors of
production located within a country.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Final Goods and Services

• The term final goods and services

refers to goods and services
produced for final use.

• Intermediate goods are goods

produced by one firm for use in
further processing by another firm.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Value Added

• Value added is the difference

between the value of goods as they
leave a stage of production and the
cost of the goods as they entered that
stage.
• In calculating GDP, we can either sum up
the value added at each stage of
production, or we can take the value of
final sales. We do not use the value of
total sales in an economy to measure
how much output has been produced.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Exclusions from GDP

• GDP ignores all transactions in

which money or goods change
hands but in which no new goods
and services are produced.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 GDP Versus GNP

• GDP is the value of output produced by

factors of production located within a
country. Output produced by a
country’s citizens, regardless of where
the output is produced, is measured by
gross national product (GNP).

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Calculating GDP

GDP can be computed in two ways:

• The expenditure approach: A
method of computing GDP that
measures the amount spent on all
final goods during a given period.
• The income approach: A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Expenditure Approach

Expenditure categories:
• Personal consumption expenditures
(C)—household spending on consumer
goods.
• Gross private domestic investment
(I)—spending by firms and households
on new capital: plant, equipment,
inventory, and new residential structures.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Expenditure Approach

Expenditure categories:

• Government consumption and

gross investment (G)

• Net exports (EX – IM)—net

spending by the rest of the world, or
exports (EX) minus imports (IM)

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Expenditure Approach

• The expenditure approach calculates

GDP by adding together these four
components of spending. In equation
form:

GDP  C  I  G  ( X  M )

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Personal Consumption Expenditures

• Personal consumption expenditures (C)

are expenditures by consumers on the
following:
• Durable goods: Goods that last a relatively
long time, such as cars and household
appliances.
• Nondurable goods: Goods that are used up
fairly quickly, such as food and clothing.
• Services: The things that we buy that do not
involve the production of physical things, such
as legal and medical services and education.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Gross Private Domestic Investment

• Investment refers to the purchase of

new capital.

• Total investment by the private

sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private (or non-government) sector.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Gross Private Domestic Investment

• Nonresidential investment includes

expenditures by firms for machines, tools,
plants, and so on.

• Residential investment includes

expenditures by households and firms on
new houses and apartment buildings.

• Change in inventories computes the

amount by which firms’ inventories change
during a given period. Inventories are the
goods that firms produce now but intend to
sell later.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Gross Investment versus
Net Investment

• Gross investment is the total value

of all newly produced capital goods
(plant, equipment, housing, and
inventory) produced in a given period.
• Depreciation is the amount by which
an asset’s value falls in a given
period.
• Net investment equals gross
investment minus depreciation.
capitalend of period = capitalbeginning of period + net investment
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Government Consumption and
Gross Investment

• Government consumption and

gross investment (G) counts
expenditures by federal, state,
and local governments for final
goods and services.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Net Exports

• Net exports (EX – IM) is the difference

between exports (sales to foreigners of
U.S.-produced goods and services) and
imports (U.S. purchases of goods and
services from abroad). The figure can be
positive or negative.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Income Approach

• National income is the total income

earned by the factors of production
owned by a country’s citizens.
• The income approach to GDP breaks
down GDP into four components:

GDP = national income + depreciation + (indirect taxes –

subsidies) + net factor payments to the rest of the world
+ other

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 From GDP to Disposable Income

• Net national product equals gross

national product minus depreciation;
a nation’s total product minus what is
required to maintain the value of its
capital stock.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 From GDP to Disposable Income

• Personal income is the total income

of households. Equals (national
income) minus (corporate profits
minus dividends) minus (social
insurance payments) plus (interest
income received from the government
and households).
• Personal income is the income
received by households after paying
social insurance taxes but before
paying personal income taxes.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Disposable Personal Income and
Personal Saving

• The personal saving rate is the

percentage of disposable personal
income that is saved. If the personal
saving rate is low, households are
spending a large amount relative to
their incomes; if it is high,
households are spending cautiously.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Nominal versus Real GDP

• Nominal GDP is GDP measured in

current dollars, or the current prices
we pay for things. Nominal GDP
includes all the components of GDP
valued at their current prices.

• When a variable is measured in

current dollars, it is described in
nominal terms.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Calculating Real GDP

• A weight is the importance attached

to an item within a group of items.

• A base year is the year chosen for

the weights in a fixed-weight
procedure.

• A fixed-weight procedure uses

weights from a given base year.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Calculating the GDP Price Index

• The GDP price index is one measure of the

overall price level.
• The old procedure used by the Bureau of
Economic Analysis (BEA) to estimate
changes in the overall price level used the
quantities produced in a chosen year (the
base year) as weights. But overall price
increases are sensitive to the choice of the
base year. The new procedure, known as
the chained price index, avoids the
problems associated with the use of fixed
weights.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Problems of Fixed Weights

The use of fixed price weights to

estimate real GDP leads to problems
because it ignores:
1. Structural changes in the economy.

2. Supply shifts, which cause large

decreases in price and large increases in
quantity supplied.

3. The substitution effect of price increases.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Limitations of the GDP Concept

• Society is better off when crime

decreases, but a decrease in crime
is not reflected in GDP.

• An increase in leisure is an increase

in social welfare, not counted in
GDP.

• Nonmarket and domestic activities

are not counted even though they
amount to real production.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Limitations of the GDP Concept

• GDP accounting rules do not adjust

for production that pollutes the
environment.

• GDP has nothing to say about the

distribution of output. Redistributive
income policies have no direct
impact on GDP.

• GDP is neutral to the kinds of goods

an economy produces.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Underground Economy

• The underground economy is the

part of an economy in which
transactions take place and in which
income is generated that is
unreported and therefore not
counted in GDP.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Per Capita GDP/GNP

• Per capita GDP or GNP measures a

country’s GDP or GNP divided by its
population.

• Per capita GDP is a better measure

of well-being for the average person
that its total GDP or GNP.

© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair