National Income  Accounting Ms. Ross Spring 2006
Three Macroeconomic Goals <ul><li>Economic Growth – target of 3-4% per year </li></ul><ul><li>Full Employment – target une...
Gross Domestic Product (GDP) <ul><li>The market value of all  final  goods and services produced in a country in a year. <...
Real GDP <ul><li>Nominal GDP is output measured in  current dollars. </li></ul><ul><li>Real GDP is GDP adjusted for inflat...
Four Categories of Goods and Services (Expenditure Approach) <ul><li>Consumption (C) :  Spending by households on goods an...
Categories of GDP (cont’d) <ul><li>Government (G) :  Spending by all levels of government on goods and services. Includes ...
Examples:
Events Affecting Spending on C, I, G and (X-M) <ul><li>Due to a tax cut, consumers decide to buy more new cars. </li></ul>...
G + I + C + (X-M)  <ul><li>Due to a tax increase, consumers decrease purchases on vacation travel. </li></ul><ul><li>Due t...
G + I + C + (X-M) <ul><li>Businesses are optimistic about the future and increase construction of new factories within the...
G + I + C + (X-M) <ul><li>Because interest rates increased, businesses cut back on spending for new machinery. </li></ul><...
G + I + C + (X-M) <ul><li>To fight unemployment, the government decides to hire more people to work in the national parks....
Inflation <ul><li>A rise in the average price level of all the goods and services produced in an economy. </li></ul><ul><l...
Consumer Price Index (CPI) <ul><li>A price index that measures the cost of a fixed market basket of consumer goods and ser...
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Gross domestic product

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Gross domestic product

  1. 1. National Income Accounting Ms. Ross Spring 2006
  2. 2. Three Macroeconomic Goals <ul><li>Economic Growth – target of 3-4% per year </li></ul><ul><li>Full Employment – target unemployment rate of ~5 - 6% </li></ul><ul><li>Price Stability – We tend to be comfortable with an inflation rate (CPI) of 1-3% </li></ul>
  3. 3. Gross Domestic Product (GDP) <ul><li>The market value of all final goods and services produced in a country in a year. </li></ul><ul><li>Final goods and services have been purchased for final use. They are not for resale or further manufacture. </li></ul>
  4. 4. Real GDP <ul><li>Nominal GDP is output measured in current dollars. </li></ul><ul><li>Real GDP is GDP adjusted for inflation. </li></ul><ul><li>Real GDP is a much better measure for comparing output over time. </li></ul>
  5. 5. Four Categories of Goods and Services (Expenditure Approach) <ul><li>Consumption (C) : Spending by households on goods and services. Includes spending on things such as cars, food, and visits to the dentist. Makes up roughly 70% of GDP spending. </li></ul><ul><li>Investment (I) : Spending by businesses on machinery, factories, tools, and construction of new buildings. </li></ul>
  6. 6. Categories of GDP (cont’d) <ul><li>Government (G) : Spending by all levels of government on goods and services. Includes spending on the military, schools and highways. </li></ul><ul><li>Net Exports (X-M) : Spending by people abroad on U.S. goods and services (exports, or X) minus spending by people in the U.S. on foreign goods and services (imports or M). </li></ul>
  7. 7. Examples:
  8. 8. Events Affecting Spending on C, I, G and (X-M) <ul><li>Due to a tax cut, consumers decide to buy more new cars. </li></ul><ul><li>Worried about an increasing budget deficit, the government decides to buy fewer military planes. </li></ul><ul><li>Increasing prices in the United States, encourage Americans to buy more foreign goods. </li></ul>
  9. 9. G + I + C + (X-M) <ul><li>Due to a tax increase, consumers decrease purchases on vacation travel. </li></ul><ul><li>Due to increased incomes, Europeans buy more U.S. goods and services. </li></ul><ul><li>A foreign government imposes a tariff that discourages its citizens from buying goods from the U.S. </li></ul>
  10. 10. G + I + C + (X-M) <ul><li>Businesses are optimistic about the future and increase construction of new factories within the United States. </li></ul><ul><li>Many more Americans decide to buy Japanese cars rather than American cars. </li></ul><ul><li>Households worry about future unemployment and decide to spend less income. </li></ul>
  11. 11. G + I + C + (X-M) <ul><li>Because interest rates increased, businesses cut back on spending for new machinery. </li></ul><ul><li>Consumers feel good about the future and take out loans and buy more durable goods such as washing machines. </li></ul><ul><li>Decreases in interest rates encourage businesses to take out loans to construct more buildings. </li></ul>
  12. 12. G + I + C + (X-M) <ul><li>To fight unemployment, the government decides to hire more people to work in the national parks. </li></ul><ul><li>Tax cuts to businesses give businesses incentive to buy more computers. </li></ul><ul><li>To stimulate the economy and provide jobs, the government builds more bridges in California. </li></ul>
  13. 13. Inflation <ul><li>A rise in the average price level of all the goods and services produced in an economy. </li></ul><ul><li>Can be caused by pressure from the demand side of the market (demand-pull inflation) </li></ul><ul><li>Can be caused by pressure from the supply side of the market (cost-push inflation) </li></ul>
  14. 14. Consumer Price Index (CPI) <ul><li>A price index that measures the cost of a fixed market basket of consumer goods and services and compares the cost of this basket in one time period with its cost in some base period. </li></ul><ul><li>Changes in CPI is the most frequently cited measure of the inflation rate. </li></ul><ul><li>CPI can be used to determine the difference between nominal and real income. </li></ul>

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