Transcript The National Accounts

The National
Accounts
Chapter 7-1
What you will learn in this
chapter:
How economists use aggregate measures to track the
performance of the economy.
What gross domestic product , or GDP, is and the three
ways of calculating it
The difference between real GDP and nominal GDP and why
real GDP is the appropriate measure of real economic activity
The significance of the unemployment rate and how it
moves over the business cycle
What a price index is and how it is used to calculate the
inflation rate.
The National Accounts
Almost
all countries calculate a set of
numbers known as the national income and
product accounts.
The
national income and product accounts, or
national accounts, keep track of the flows of
money between different parts of the economy.
An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy
The National Accounts
Households earn income via the factor
markets from wages, interest on bonds,
dividends on stocks, and rent on land.
Income from the
Factor Market
Income received by
Households
• Wages
• Rent
• Interest
• Profit
Factors of
Production
• Labor
• Land
• Financial Capital
• Physical Capital
 In addition, they receive government
transfers from the government.
 Disposable income, total household
income minus taxes, is either expended as
consumer spending (C) or goes into
private savings.
The Flow Not Stock
• We are measuring a Flow or a
movement NOT a Stock
– The store of wealth is a stock concept.
Flows must equal
• Total sum of flows of
money out of any
box is equal to the
sum of money into
that box.
The National Accounts
Via the financial markets, private
savings is channeled to firms for
investment spending (I).
Investment Spending
• Spending on productive physical capital
and changes to inventories
– Inventories seen as contributing to the
future sales of the firm
• Spending on additional inventory adds to
Investment spending
• Drawing down inventories is counted as fall in
Investment spending
The National Accounts
 Government purchases of goods and
services (G) is paid for by tax receipts as well
as by government borrowing.
The National Accounts
• Exports (X) generate an inflow of funds into
the country from the rest of the world
• imports (IM) lead to an outflow of funds to
the rest of the world. Foreigners can also
buy stocks and bonds in the U.S. financial
markets.
Flows must Equal
• Imports lead to flow
of funds out
• Lending by
Foreigners is a flow
of funds in
• Purchase of assets
in U.S. is a flow of
funds in
GDP=C+I+G+(X-IM)
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C
I
G
X
IM
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Consumer spending
Investment
Government
Exports
Imports
Gross Domestic Product
Gross domestic product or GDP
measures the value of all final goods
and services produced in the economy. It
does not include the value of
intermediate goods.
Why only Final Goods
• Counting the sale of final goods and
intermediate products would result in
double and triple counting.
Calculating GDP
GDP can be calculated three ways:
 add up the value added of all producers;
 add up all spending on domestically produced final
goods and services, leading to the equation GDP =
C+I+G+X-IM;
 add up the all income paid to factors of production
Calculating GDP
Value Added Approach
Eliminates Double Counting
Participants
Farmer
Cone factory
and ice
cream-maker
Middleperson
Vendor
Totals
Cost of
Materials
$ 0
100
Value of
Sales
$ 100
250
Value Added
250
400
$ 750
400
500
$1,250
150
100
$500
$ 100
150
Pitfalls:
GDP: WHAT’S IN AND
WHAT’S OUT
Included
• Domestically produced
final goods and
services (including
capital goods)
• New construction of
structures
• Changes to inventories
Not Included
• Intermediate goods and
services
• Inputs
• Used goods
• Financial assets like
stocks and bonds
• Foreign-produced
goods and services
Two Methods of Calculating GDP
What GDP tells us
• GDP figures are used to make
comparisons among countries and to
measure economic welfare over time.