National Income Accounting

Goal: Establish working definitions for key economic

variables; decompose our measure of output into
subcomponents that we will model separately.

Output = GDP = Y:

The final value of all currently produced goods and

services in the U.S. economy, valued at current, or market,
prices.

final value: To avoid double counting, inputs to production

are not counted in GDP.

currently produced: The resale of an old car does not count

towards current GDP; the sale of a new car does.

in the U.S.: Toyotas built in the U.S. count towards GDP;

Chevys built in Canada do not. (The opposite is true with
the old measure of output: GNP).

current prices: if prices double and output is constant,

GDP will double. We refer to this as nominal GDP.

Econ. 1110 Lecture #5, D.N. DeJong

Real GDP:
The final value of all currently produced goods and services
in the U.S. economy, valued using fixed prices
corresponding to a base year.

Changes in this measure of output are attributable

exclusively to changes in output.

Measuring Aggregate Prices

GDP Deflator

Let Qi denote the quantity of product i produced in 1999, Pi

denote the price of product i produced in 1999, and PBi
denote the price of product i produced in an arbitrary base
year. Let n represent the total number of goods produced in
the economy.

GDP Deflator = ( ∑ i =1 Pi Q i ) / ( ∑ i =1 PBi Q i ) x 100

n n

Note: the base year is arbitrary, since no matter what year is

chosen as the base, the DGP deflator will be 100 in that
year.

CPI

Replace Qi by QBi, and restrict the number of goods n to

include a relatively small basket of consumer goods.
Econ. 1110 Lecture #5, D.N. DeJong
Measuring Inflation:

Percentage change in the aggregate price level

(approximated by the GDP deflator or the CPI).

E.G., suppose CPI('97) = 100,

CPI('98) = 110,
CPI('99) = 120.

Then inflation in 1998 =

( (CPI('98) - CPI('97))/CPI('97) ) x 100 = 10%;

inflation in 1999 =

( (CPI('99) - CPI('98))/CPI('98) ) x 100 = 9.1%.

Econ. 1110 Lecture #5, D.N. DeJong

Converting from nominal to real

Real = (Nominal/(Price Index)) x 100

Consider the following data:

Year Nominal GDP Real Infl. Growth
GPD Deflator GDP Rate of
Real GDP
1990 6,689 85.52
1991 6,616 88.97
1992 6,793 91.03
1993 6,987 93.34
1994 7,219 95.42
1995 7,480 97.55
1996 7,671 99.45
1997 8,033 101.15
1998 8,413 102.35
1999 8,738 103.83

Econ. 1110 Lecture #5, D.N. DeJong

National Income Accounting

GDP = C + I + G + (X - IM)
- Depreciation

NDP
- Ind. Bus. Taxes

NI = Wages + Proprieter's Income + Rent

+ Corp. Profits + Interest Payments
- Corp. Profits Taxes
- Personal Income Taxes
- S.S. Contributions
+ Gov't Transfer Payments
+ Gov't Interest Payments

DI
- Undist. Corp. Profits
- Inventory Adj.
+ Bus. Transfer Payments

PDI =C+S

Econ. 1110 Lecture #5, D.N. DeJong

For Modelling Purposes, Some Simplifications

Y = NI (so ignore depreciation, sales taxes)

PDI = DI = Y - TA + TR,

where TA = personal income taxes, TR = gov't transfer

payments
(so ignore corp. profits taxes, s.s. contributions, bus.
transfers, etc.)

Three Useful Identities:

(1) Y = C + I + G + NX
(2) YD = Y + TR - TA
(3) YD = C + S

Econ. 1110 Lecture #5, D.N. DeJong