The Juice
chapter seven measuring domestic output and national income
CHAPTER OVERVIEW
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.
INSTRUCTIONAL OBJECTIVES
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.
CHAPTER OVERVIEW
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.
INSTRUCTIONAL OBJECTIVES
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.