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Chapter 6
Tracking the U.S. Economy
National Income Accounts
GDP (Gross Domestic Product)
What is it???
It measures the market value of all final goods and...
National Income Account
It is based on the simple fact that one person’s spending

is another person’s income.
It is mea...
What is included in GDP?
It includes only final goods and services, i.e. goods sold

to the final user.
Example

Interm...
Expenditure Approach
This approach adds up spending on all final goods and

services produced during the year.
Expenditure Approach
For the expenditure approach, its components are

divided into four:
Consumption
Investment
Gover...
Income Approach
This approach adds up earnings during the year by those

who produce all that output.
Income Approach
The income approach sums, or aggregates, income

arising from production.
Wages
Interest
Rent
Profit
Aggregate Income
Aggregate Income equals the sum of all the income

earned by resource suppliers in the economy.
SO… we ...
Disposable Income (DI)
The income households have available to spend or to

save after paying taxes and receiving transfe...
Expenditure Half of the Circular Flow
Where does DI (Disposable Income) go?
Part is spent on Consumption (C ) and part i...
Leakages Equal Injections
Injections
Government purchases
Exports

Leakages
Saving
Net taxes
Imports
Some Production is not included in GDP
It ignores all do-it-yourself production
Child care
Meal preparation
House clea...
Some Other Limitations
Leisure, Quality, and Variety
It does not take into account depreciation
Net domestic product.

...
Nominal GDP
It is based on the prices prevailing when production

takes place.
Since, price levels change over time, the...
Price Indexes
Base year- the point of reference year
Prices in other years are expressed relative to the base-year

pric...
Consumer Price Index (CPI)
The CPI measures changes over time in the cost of

buying a “market basket” of goods and servi...
Some Tables:
ftp://ftp.bls.gov/pub/special.requests/ppi/sopnew10.txt
http://www.bls.gov/ppi/#tables
Problems with CPI
Quality bias
 It overstates inflation

It ignores the substitution effect.
 It overstates inflation
...
GDP Price Index
 It measures the average price of all goods and services

produced in the economy.


(Nominal GDP/Real G...
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Chapter 6-Macro

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  • Consumption is personal consumption expenditures (e.g. purchases of final goods and services). Consumption is the largest component of GDP and it includes nondurable and durable goods. Investment (Gross Private Domestic Investment) is spending on new capital goods and on net additions to inventories. It also includes new residential construction. It includes inventories. Gov. purchases include government spending for goods and services. It excludes transfer payments. Net exports are Exports-Imports.
  • The value added is the income earned by resource suppliers. “The value added at all stages sums to the market value of the final good, and the value added for all final goods sums to GDP based
  • Transcript of "Chapter 6-Macro"

    1. 1. Chapter 6 Tracking the U.S. Economy
    2. 2. National Income Accounts GDP (Gross Domestic Product) What is it??? It measures the market value of all final goods and services produced during a year by resources located in the U.S., regardless of who owns the resources.
    3. 3. National Income Account It is based on the simple fact that one person’s spending is another person’s income. It is measured in two ways: Total spending of the U.S. production or by the Total income received from that production.
    4. 4. What is included in GDP? It includes only final goods and services, i.e. goods sold to the final user. Example Intermediate goods and services are not included. These are goods that are purchased for resale. Example
    5. 5. Expenditure Approach This approach adds up spending on all final goods and services produced during the year.
    6. 6. Expenditure Approach For the expenditure approach, its components are divided into four: Consumption Investment Government purchases Net Exports
    7. 7. Income Approach This approach adds up earnings during the year by those who produce all that output.
    8. 8. Income Approach The income approach sums, or aggregates, income arising from production. Wages Interest Rent Profit
    9. 9. Aggregate Income Aggregate Income equals the sum of all the income earned by resource suppliers in the economy. SO… we can say : Aggregate Expenditures = GDP=Aggregate Income Value Added: At each stage of production, the value added to the product. This is the selling price of the product minus the cost of the intermediate goods purchased from other firms.
    10. 10. Disposable Income (DI) The income households have available to spend or to save after paying taxes and receiving transfer payments. This is income that is adjusted for net taxes(NT). This subtracts taxes and adds back transfer payments. Take-home pay for households.
    11. 11. Expenditure Half of the Circular Flow Where does DI (Disposable Income) go? Part is spent on Consumption (C ) and part is spent on Savings ( S). Consumption remains in the circular flow However, savings flows to financial markets- banks and other financial institutions.
    12. 12. Leakages Equal Injections Injections Government purchases Exports Leakages Saving Net taxes Imports
    13. 13. Some Production is not included in GDP It ignores all do-it-yourself production Child care Meal preparation House cleaning Laundry Home maintenance and repair It ignores off-the-book production Underground economies
    14. 14. Some Other Limitations Leisure, Quality, and Variety It does not take into account depreciation Net domestic product. GDP does not reflect all costs. Environmental costs Other externalities GDP and Economic Welfare
    15. 15. Nominal GDP It is based on the prices prevailing when production takes place. Since, price levels change over time, then nominal GDP cannot be compared across years. It does not adjust for inflation!!
    16. 16. Price Indexes Base year- the point of reference year Prices in other years are expressed relative to the base-year price. A price index is constructed by dividing each year’s price in the base year and then multiplying by 100. The price index in the base year is ALWAYS 100.
    17. 17. Consumer Price Index (CPI) The CPI measures changes over time in the cost of buying a “market basket” of goods and services purchased by a typical family. The government used the 36 months of 1982 thru 1984 as the base period for calculating the CPI for a market basket . It is reported monthly. http://data.bls.gov/PDQ/servlet/SurveyOutputServle t? data_tool=latest_numbers&series_id=CUSR0000SA0& output_view=pct_1mth
    18. 18. Some Tables: ftp://ftp.bls.gov/pub/special.requests/ppi/sopnew10.txt http://www.bls.gov/ppi/#tables
    19. 19. Problems with CPI Quality bias  It overstates inflation It ignores the substitution effect.  It overstates inflation Discount stores Widely used products
    20. 20. GDP Price Index  It measures the average price of all goods and services produced in the economy.  (Nominal GDP/Real GDP)*100  Before 1995   Fixed-weighted system; base year 1987 Chain-weighted system; base year 2000
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