National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components.

Gross domestic product (GDP) is the total market value of final goods and services produced within a nation’s borders in a given time period. (Usually a year)

Total Market Value means the dollar value of every one of the good or service produced during the period of time.

Final goods and service means that production is only counted in the final stage. This is to keep things such as a car’s engine from being counted twice.

Gross National Product (GNP) refers to output produced by American-owned factors regardless of location.

GDP refers to output produced within America’s borders.

GDP is geographically focused, including all output produced within a nation’s borders regardless of whose factors of production are used to produce it.

Japanese companies producing in America count, but not American companies abroad.

GDP per capita is total GDP divided by total population–average GDP.

GDP per capita is commonly used as a measure of a country’s standard of living.

However, it is not always an accurate measure.

There are three major exceptions when creating GDP.◦ Non-Market Activities◦ Unreported Incomes◦ Intermediate Goods

GDP measures exclude most goods and services produced that are not sold in the market.◦ A homemaker who cleans, washes, gardens,

shops and cooks produces goods of value.◦ Because they are not exchanged in the market

they are not included in GDP.

The GDP statistics fail to capture market activities that are not reported to tax or census authorities.

The underground economy is motivated by tax avoidance or to conceal illegal activities.

Intermediate goods are goods or services purchased for use as input in the production of final goods or services.

For example, the engine or chassis of a car are not counted, so as to keep them from being counted twice.

Value added is the increase in the market value of a product that takes place at each stage of the production process.

Compute the value of the final output. Count only the value added at each stage of

production.

Nominal GDP is the value of final output produced in a given period, measured in the prices of that period.

Real GDP is the value of final output produced in a given period, adjusted for changing prices.

The base period is the time period used for comparative analysis.

From this base year, we find the GDP deflator for other years.

The GDP deflator is a measure of price changes over time.

The general formula for computing real GDP is:

billion $9,7671.02

billion$9,963 =2000 in GDP Real

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Nominal GDP

Changes in real GDP tell us how much the economy’s output is growing.

Growth is at the expense of future output unless factors of production are replaced.

Depreciation is the consumption of capital in the production process — the wearing out of plant and equipment.

Net domestic product is the amount of output we could consume without reducing our stock of capital.

NDP = GDP – depreciation

Investment is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories.

The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment.

Gross investment is total investment expenditure in a given time period.

Net investment is gross investment less depreciation.

The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.

The GDP accounts also tell us what mix of output has been selected, that is, society’s answer to the core issue of WHAT to produce.

The major uses of total output conform to the four sets of market participants: consumers, business firms, government, and foreigners.

Goods and services used by households are called consumption goods.

Consumer spending claims nearly two-thirds of our annual output.

Investment goods are the plant, machinery, and equipment that we produce.

Also includes net inventory changes and new residential construction.

Resources purchased by the government sector are unavailable for consumption or investment purposes.

Exports are goods and services sold to foreign buyers.

Imports are goods and services purchased from foreign sources.

Exports are added to GDP and imports are subtracted.

Net Exports are the value of exports minus the value of imports.

The value of GDP can be computed by adding up expenditures of market participants:

GDP = C + I + G + (X – IM)Where:

C = Consumption expenditure X = exports I = investment expenditure IM = importsG = government expenditure

GDP accounts have two sides. ◦ One side focuses on expenditure – the demand

side.◦ The other side focuses on income – the supply

side.

VALUE OF INCOMEVALUE OF OUTPUT

Net exports

Consumer spending

Investment spending

Wages

Profits

Interest

Rent

Government spending

Sales taxes Depreciation

Factor market

Product market

By charting the flow of income through the economy, we see FOR WHOM the output is produced.

Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production.

NDP = GDP – depreciation

Wages, interest, and profits paid to foreigners are not part of U.S. income.

They need to be subtracted from the income flow.

Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added.

Once depreciation charges and indirect business taxes are subtracted from GDP and net foreign income is added, we have national income.

National income (NI) is total income earned by current factors of production.

NI = NDP – indirect business taxes + net foreign factor income

Personal income (PI) is the income received by households before payment of personal taxes.

Personal income = National income – (corporate taxes + retained earnings +

Social Security taxes)+ (transfer payments + net interest)

Disposable income (DI) is the after-tax income of households.

It is personal income less personal taxes.

Disposable income = personal income – personal taxes

Saving is that part of disposable income not spent on current consumption –disposable income less consumption.

All disposable income is either consumed or saved.

Disposable income = Consumption + Saving

To households, in the form of disposable income.

To businesses, in the form of retained earnings and depreciation allowances.

To government, in the form of taxes.