Quiz, week #2 Measuring macro outcomes My expectations are that it will take a page or more to answer the two questions below 1.Are people worse off when the price level rises as fast as their income?  Why do people often feel worse off in such circumstances? 2.Identify two groups that benefit from deflation and two that lose. Chapter 5 1.NATIONAL-INCOME ACCOUNTING This chapter introduces national-income accounting.  The data generated by national-income accounting is used to track the economy’s performance.  This chapter provides a framework on which future chapters will build.  The three questions that are to be kept in mind while reviewing the chapter are: 1. How much income is being produced?  What is it being used for? 2. How much income is being generated in the marketplace? 3. What’s happening  to prices and wages? OUTLINE I.          Introduction A.   Government only wants to tackle problems that it can measure. B.   The Great Depression resulted in a commitment to national income accounting. 1.   Definition:     National-Income Accounting – The measurement of aggregate economic activity, particularly national income and its components. 2.   Developed by Simon Kuznets and the U.S. Department of Commerce, it answers questions such as: • How much output is being produced?  What is it being used for? • How much income is being generated in the marketplace? • What’s happening to prices and wages? II.         Measures of Output A.   Gross Domestic Product (GDP)  (Figure 5.1a and b, Table 5.1) 1.   Definition:     Gross Domestic Product (GDP) – The total dollar value of final output produced within a nation’s borders in a given time period. 2.   The use of prices to value market output allows us to summarize output activity and compare outputs of one period with that of another. 3.   GDP vs. GNP • 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. • For example, Apple’s output in Singapore ends up in Singapore’s GDP; the cars produced at Honda’s Ohio plant are counted in US GDP. 4.   International Comparisons • The geographic focus of GDP facilitates international comparisons of economic activity. • The World View in chapter 2 illustrates a comparison of GDP values. 5.   GDP per Capita • Definition:     GDP per Capita - Total GDP divided by total population: average GDP. • GDP per capita is commonly used as a measure of a country’s standard of living. • Disparities in per capita GDP mean that people in low-income countries have little access to telephones, televisions, paved roads, schools, and healthcare. • World View:  “Global Inequalities” Over 1.3 billion people live in nations the World Bank calls “low-income”.   The average income in low-income nations is only $1,500.  Behind sta ...

1. Quiz, week #2
Measuring macro outcomes
My expectations are that it will take a page or more to answer
the two questions below
1.Are people worse off when the price level rises as fast as their
income? Why do people often feel worse off in such
circumstances?
2.Identify two groups that benefit from deflation and two that
lose.
Chapter 5
1.NATIONAL-INCOME ACCOUNTING
This chapter introduces national-income accounting. The data
generated by national-income accounting is used to track the
economy’s performance. This chapter provides a framework on
which future chapters will build. The three questions that are to
be kept in mind while reviewing the chapter are:
1. How much income is being produced? What is it being used
for?
2. How much income is being generated in the marketplace?
3. What’s happening to prices and wages?

2. OUTLINE
I. Introduction
A. Government only wants to tackle problems that it can
measure.
B. The Great Depression resulted in a commitment to national
income accounting.
1. Definition: National-Income Accounting – The
measurement of aggregate economic activity, particularly
national income and its components.
2. Developed by Simon Kuznets and the U.S. Department of
Commerce, it answers questions such as:
• How much output is being produced? What is it being used
for?
• How much income is being generated in the marketplace?
• What’s happening to prices and wages?
II. Measures of Output
A. Gross Domestic Product (GDP) (Figure 5.1a and b, Table
5.1)
1. Definition: Gross Domestic Product (GDP) – The total
dollar value of final output produced within a nation’s borders
in a given time period.
2. The use of prices to value market output allows us to
summarize output activity and compare outputs of one period
with that of another.
3. GDP vs. GNP
• 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.
• For example, Apple’s output in Singapore ends up in

3. Singapore’s GDP; the cars produced at Honda’s Ohio plant are
counted in US GDP.
4. International Comparisons
• The geographic focus of GDP facilitates international
comparisons of economic activity.
• The World View in chapter 2 illustrates a comparison of GDP
values.
5. GDP per Capita
• Definition: GDP per Capita - Total GDP divided by total
population: average GDP.
• GDP per capita is commonly used as a measure of a country’s
standard of living.
• Disparities in per capita GDP mean that people in low-income
countries have little access to telephones, televisions, paved
roads, schools, and healthcare.
• World View: “Global Inequalities”
Over 1.3 billion people live in nations the World Bank calls
“low-income”. The average income in low-income nations is
only $1,500. Behind statistical comparisons of GDP per capita
lie very tangible differences in the way people live. Low GDP
per capita implies a lot of deprivation.
• Measures of per capita GDP tell us nothing about the way
GDP is actually distributed or used; they are only a statistical
average.
B. Measurement Problems
1. Non-market activities
• GDP measures exclude most goods and services produced that
are not sold in the market. For example, the homemaker who
cleans, washes, gardens, shops and cooks produce goods of
value, but they are not exchanged in the market and are thus not
included in GDP.
• Exclusion of non-market activities causes problems when
comparing living standards. As homemakers have entered the
workforce and pay for housekeeping service, current GDP
figures might exaggerate increases in GDP because some
services are now provided through the market.

4. 2. Unreported income
• The GDP statistics also fail to capture market activities that
are not reported to tax or census authorities.
• The “ underground economy” is motivated by tax avoidance or
the desire to conceal illegal activities.
• IRS estimates that two-thirds of the “underground” income
comes from legitimate services.
• In The News: “A Lot Going On Under the Table”
GDP statistics include only the value of reported market
transactions. Several statistics that estimate the size of the
“underground” economy are listed. Since many transactions are
not included in the official GDP, it likely is significantly
understated.
C. Value Added (Table 5.2)
1. Not all reported market transactions get included at full
value in GDP statistics. If it did, the same output would be
counted repeatedly.
2. The production of most goods and services involves a series
of stages.
3. To accurately measure GDP we must distinguish
intermediate goods from final goods.
4. Definition: Intermediate Goods – Good or services
purchased for use as input in the production of final goods or
services.
5. Two ways to calculate GDP.
• Compute the value of the final output.
• Count only the value added at each stage of production.
• Definition: Value Added – The increase in the market value
of a product that takes place at each stage of the production
process.D. Real vs. Nominal GDP (Tables 5.3 ad 5.4)
1. Changes in GDP brought about by changes in the price level
can give a distorted view of economic activity.
2. Distinguishing increases in quantity from increases in prices
is done by distinguishing between real GDPand nominal GDP.
• Definition: Nominal GDP – The value of final output
produced in a given period, measured in the prices of that

5. period (current prices).
• Definition: Real GDP– The value of final output produced
in a given period, adjusted for changing prices.
• The distinction between nominal and real GDP is important
whenever the price level changes.
• Definition: Base Period – The time period used for
comparative analysis; the basis for indexing (e.g., of price
changes).
•
Formula
3. Inflation tends to obscure actual declines in real output.
4. Definition: Inflation – An increase in the average level of
prices of goods and services.
5. Chain-Weighted Price Adjustments
• Chain-weighted indices use a moving average of price levels
in consecutive years as an inflation adjustment.
E. Net Domestic Product
1. Changes in real GDP tell us how much the economy’s
output is growing.
2. Growth at the expense of future output occurs unless factors
of production are replaced.
3. Next year, we won’t be able to produce as much output
unless we replace factors of production we use this year.
4. Definition: Production Possibilities – The alternative
combinations of final goods and services that could be produced
in a given time period with all available resources and
technology.
5. Value of capital used in producing goods and services is
called depreciation and is estimated by U.S. Department of
Commerce.
6. Definition: Depreciation – The consumption of capital in
the production process; the wearing out of plant and equipment.
7. Definition: Net domestic product (NDP) = GDP-
depreciation.
8. Some of each year’s output will consist of newly produced

6. plant and equipment or investment goods.
9. Definition: Investment – Expenditures on (production of)
new plant, equipment, and structures (capital) in a given time
period, plus changes in business inventories.
10. Distinction between GDP and NDP is mirrored in the
difference between gross investment and net investment.
• Definition: Gross Investment - Total investment
expenditure in a given time period.
• Definition: Net investment - Gross investment less
depreciation.
11. The stock of capital – the total collection of plant and
equipment – will not grow unless gross investment exceeds
depreciation.
III. The Uses of Output
A. The GDP accounts also tell us what mix of output has been
selected, that is, society’ s answer to the question of WHAT to
produce.
B. Consumption
1. The major uses of total output conform to the four sets of
market participants.
2. Goods and services used by households are called
consumption goods.
3. Consumer spending claims over two-thirds of our annual
output. (See Figure 2.3 in chapter 2)
C. Investment
1. Investment goods are the plant, machinery, and equipment
that we produce.
2. Investment spending claims approximately 15% of total
output.
D. Government Spending
1. Third major user of GDP is the public sector.
2. Resources purchased by the government sector are
unavailable for consumption or investment purposes.
3. Claims approximately one-fifth of total output.

7. E. Net Exports
1. Definition: Exports – Goods and services sold to foreign
buyers.
2. Definition: Imports – Goods and services purchased from
foreign sources.
3. We exportsome goods; thus, GDP will be larger than the
sum of our own consumption, investment, and government
purchases.
4. We import some goods and services which are not
calculated as part of America’s GDP since they were not
produced within our borders.
5. Exports are added to GDP and imports are subtracted.
Exports - imports = net exports.
6. Definition: Net Exports – The value of exports minus the
value of imports.
7. The value of GDP can be computed by adding up
expenditures of market participants.
8.
Formula
Where C = Consumption expenditure
I = investment expenditure
G = government expenditure
X = exports
M = imports
IV. Measures of Income (Table 5.5, and Figure 5.2)
A. GDP accounts have two sides: one is expenditure (demand),
the other is income (supply).
B. The total value of market incomes must equal the total
value of final output, or GDP.
C. National Income
1. By charting the flow of income through the economy, we
see FOR WHOM the output is produced.
2. Depreciation

8. • 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
Formula
• Once depreciation charges are subtracted from GDP, we are
left with Net Domestic Product. To this we add net foreign
factor income to calculate national income.
• Definition: National Income (NI) – Total income earned by
current factors of production: NDP plus foreign factor income
D. Personal Income (Table 5.6)
1. Corporate taxes, indirect business taxes and retained
earnings are subtracted from national income before
determining consumer income.
2. Social security tax is then removed giving the personal
income before the payment of personal taxes.
3. Households receive income in the form of transfer
payments.
4. Definition: Personal Income (PI) – Income received by
households before payment of personal taxes.
Personal income = National income - (corporate taxes +
retained earnings + Social Security taxes) + (transfer payments
+ capital income)
E. Disposable income (Table 5.6)
1.
Disposable Income = personal income – personal taxes
Definition: Disposable Income (DI) – After-tax income of
households; personal income less personal taxes.

9. 2. Formula
3. Households end up with roughly 70% of revenue generated
from GDP.
4.
Disposable income = consumption + saving
All disposable income is either consumed or saved.
5. Formula
6. Definition: Saving – That part of disposable income not
spent on current consumption; disposable income less
consumption.
V. The Flow of Income
A. The dollar value of output will always equal the dollar
value of income.
B. Total income (GDP) ends up distributed the following way:
1. To households, in the form of disposable income.
2. To businesses, in the form of retained earnings and
depreciation allowances.
3. To government, in the form of taxes.
C. Income and Expenditure (Figure 5.3) - Flow of income that
starts with GDP ultimately returns to the market in the form of
new consumption (C), investment (I), and government purchases
(G).
VI. The Economy Tomorrow: The Quality of Life
0. Do the GDP accounts – either the expenditure side or the
income side – tell us anything we really want to know about the
quality of life?
0. Intangibles –< /span> Economic measures do not capture the
completeness of the way in which we view the world or the
totality of what makes our lives satisfying. For example a clear
day, a sense of accomplishment or even a smile can do more for
a person’s well-being than movement in the GDP account, but

10. cannot be measured.C. Index of Well-Being – Researchers at
Fordham University have devised an alternative index of well-
being called the Index of Social Health.
D. In the News: “Material Wealth vs. Social Health”< /b>
According to the “Index of Social Health” the nation’s social
performance has been declining, even as economic variables
have shown improvement. The conclusion is that national-
income accounts emphasize material well being but are
incomplete as a gauge of societal welfare.
Summary
· Inflation is an increase in the average price level. Typically
it’s measured by changes in a price index such as the Consumer
Price Index (CPI). LO1
· At the micro level, inflation redistributes income by altering
relative prices, income, and wealth. Because not all prices rise
at the same rate and because not all people buy (and sell) the
same goods or hold the same assets, inflation doesn’t affect
everyone equally. Some individuals actually gain from inflation,
whereas others suffer a loss of real income or wealth. LO2
· At the macro level, inflation threatens to reduce total output
because it increases uncertainties about the future and thereby
inhibits consumption and production decisions. Fear of rising
prices can also stimulate spending, forcing the government to
take restraining action that threatens full employment. Rising
prices also encourage speculation and hoarding, which detract
from productive activity. LO2
· Fully anticipated inflation reduces the anxieties and real
losses associated with rising prices. However, few people can
foresee actual price patterns or make all the necessary
adjustments in their market activity. LO1
· The U.S. goal of price stability is defined as an inflation rate
of less than 3 percent per year. This goal recognizes potential
conflicts between zero inflation and full employment as well as
the difficulties of measuring quality improvements and new

11. products. LO3
· From 1800 to 1945, prices both rose and fell, leaving the
average price level unchanged. Since then, prices have risen
nearly every year but at widely different rates. LO3
· Inflation is caused by either excessive demand (demand-pull
inflation) or structural changes in supply (cost-push inflation).
LO1
· Cost-of-living adjustments (COLAs) and adjustable-rate
mortgages (ARMs) help protect real incomes from inflation.
Universal indexing, however, wouldn’t eliminate inflationary
redistributions of income and wealth. LO2
· Worldwide inflation rates have diminished in recent years.
Experience with inflation and changing patterns of asset
ownership are creating political pressure for greater price
stability. LO3