measuring domestic output and national income
News headlines frequently report the status of the nation’s economic conditions, but to many citizens the information is confusing or incomprehensible. This chapter acquaints students with the basic language of macroeconomics and national income accounting. GDP is defined and explained. Then, the differences between the expenditure and income approaches to determining GDP are discussed and analyzed in terms of their component parts. The income and expenditure approaches are developed gradually from the basic expenditure-income identity, through tables and figures.
The importance of investment is given considerable emphasis, including the nature of investment, the distinction between gross and net investment, the role of inventory changes, and the impact of net investment on economic growth. On the income side, nonincome charges—depreciation and indirect business taxes—are covered in detail because these usually give students the most trouble.
Other measures of economic activity are defined and discussed, with special emphasis on using price indexes. The purpose and procedure of deflating and inflating nominal GDP are carefully explained and illustrated. Finally, the shortcomings of current GDP measurement techniques are examined. Global comparisons are made with respect to size of national GDP and size of the underground economy.
The Last Word looks at the sources of data for the GDP accounts.
After completing this chapter, students should be able to
1. State the purposes of national income accounting.
2. List the components of GDP in the output (expenditures) approach and in the income approach.
3. Compute GDP using either the expenditure or income approach when given national income data.
4. Differentiate between gross and net investment.
5. Explain why changes in inventories are investments.
6. Discuss the relationship between net investment and economic growth.
7. Compute NDP, NI, PI, and DI when given relevant data.
8. Describe the system represented by the circular flow in this chapter when given a copy of the diagram.
9. Calculate a GDP price index using simple hypothetical data.
10. Find real GDP by adjusting nominal GDP with use of a price index.
11. List seven shortcomings of GDP as an index of social welfare.
12. Explain what is meant by the underground economy and state its approximate size in the U.S. and how that compares to other nations.
13. Give an estimate of actual 2002 (or later) U.S. GDP in trillions of dollars and be able to rank the U.S. relative to a few other countries.
14. Define and identify terms and concepts listed at the end of the chapter.
Assessing the Economy’s Performance
National income accounting measures the economy’s performance by measuring the flows of income and expenditures over a period of time. B.
National income accounts serve a purpose for the economy similar to income statements for business firms. C.
Consistent definition of terms and measurement techniques allows us to use the national accounts in comparing conditions over time and across countries. D.
The national income accounts provide a basis for appropriate public policies to improve economic performance.
Gross Domestic Product
GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year. 1.
Money valuation allows the summing of apples and oranges; money acts as the common denominator. (See Table 7.1.) 2.
GDP includes only final products and services; it avoids double or multiple counting by eliminating any intermediate goods used in production of these final goods or services. (Table 7.2 illustrates how including sales of intermediate goods would overstate...
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