ECON 2 Reviewer

CHAPTER 5: The National Income Approach

National Income Accounting -is the system used to measure the aggregate income and expenditure for a nation
Gross Domestic Product -is the total market or money value of all final goods and services produced in an
economy over a period of one year. Most widely used measure of economic performance.

Approaches in measuring GDP

The Expenditure Approach
GDP = C + I + G + (X - M)
The Income Approach
GDP = NY + IBT + D
NY = W + R + i + P
Industrial Origin or Gross Value Added Approach
GDP = GVA + IBT

GDP Shortcomings
 Nonmarket Transactions
 Distribution, Kind, and Quality of Products
 Neglect of Leisure Time
 The Underground Economy
 Economic Bads

Nominal or Current GDP -is the value of all final goods and services based on the prices existing during the
time of production.
Formula to convert nominal GDP to real GDP:
Real GDP = Nominal GDP ÷ GDP Deflator × 100

CHAPTER 6: Consumption and Savings

Income -in macroeconomics pertains to economic income which is earned through economic activities
undertaken by the household or business sectors.
Consumption -is the expenditure made by households on goods and services.

The Consumption Function

Consumption and Income: Basic Assumption
Y = Cb + ∆C
Where:
Y = Factor income
Cb = Barrowing from the economy’s stock of savings
∆C = Change in consumption
The Multiplier Concept
K = 1 ÷ 1 – MPC or 1 ÷ MPS
Where:
K = Multiplier coefficient
MPC = Marginal propensity to consume
MPS = 1 – MPC = Marginal propensity to save
MPS + MPC = 1
S=i
i = Y - ∆C
Where additionally:
S = Aggregate savings from currently generated income
i = Inflow

Factors of Consumption
 Taste and Preference
 Population
 Income
 Price Level
 Innovation and Promotion