Measuring a Nations

Income
 National Income Accounts
The national income accounts are based on the simple fact that one persons
spending is another persons income.
GDP can be measured either by total spending on U.S. production or by total income
received from that production.
Gross domestic product includes only final goods and services, which are goods and
services sold to the final, or end user.
Intermediate goods and services are those purchased for additional processing and
resale.
Sale of intermediate goods and services are excluded from GDP to avoid the problem
of double counting.
GDP also ignores most of the secondhand value of used goods, such as existing
homes used cars and used textbooks.
 Gross Domestic Product
The market value of all final goods and
services produced in a nation in a given
period, usually a year.
 Calculating GDP
EXPENDITURE APPROACH TO GDP calculating GDP by adding
up spending on all final goods and services produced in the
nation during the year.
INCOME APPROACH TO GDP calculating GDP by adding up all
earnings used to produce output in the nation during the year.
DOUBLE COUNTING the mistake of including both the value of
intermediate products and the value of final products in
calculating gross domestic product; counting the same
production more than once.
 GDP Based on the Expenditure
Approach
The easiest way to understand the spending approach is
to divide aggregate expenditure into its components:
1. Consumption
2. Investment
3. Government purchases
4. Net exports
 Consumption
Household purchases of final goods and services, except for new residences, which
counts as investment; personal consumption expenditures
Consumption is the largest spending category.
It includes services, durable and non durable goods.

Examples:
Dry cleaning, haircuts, air travel, soap, furniture, kitchen appliances

Durable goods are expected to last at least three years.

 Investment
The purchase of new plants, new equipment, new building, and new
residences, plus net additions to inventories; gross private domestic
investment
The most important investment is physical capital, such as new buildings
and new machinery.
Also includes new residential construction; consists of spending on
current production that is not used for current consumption
A net increase to inventories also counts as investment because it
represents current production not used for current consumption
 Investment
INVENTORIES are stock of goods in process, such as computer parts,
and stocks of finished goods, such as new computer awaiting sale; this
help manufacturers cope with unexpected changes in the supply of their
resources and in the demand for their products.
Investment excluded purchases of existing buildings and machines and of
financial assets, such as stock and bonds.
Existing buildings and machines were counted in GDP when they were
produced. Stock and bonds are not investments themselves but simply
indications of ownership.
 Government Purchases
Spending for goods and services by all levels of government; government
consumption and gross investment.
It exclude transfer payments, such as Social Security welfare benefits, and
unemployment insurance.

Examples:
Clearing snowy roads; buying library books; paying librarians
 Net Exports
The value of a countrys exports minus the value of its imports;
reflects international trade in goods and services.
Includes physical items such as bananas and DVD players (stuff
you can put in a box)
Foreign purchases of U.S. goods and services are counted as
part of U.S GDP but U.S purchases of foreign goods and services
are subtracted from U.S GDP.
 GDP: The Nations Aggregate
Expenditure
Using the expenditure approach, the nations aggregate expenditure sums
consumption, investment, government purchases, and net exports.

C + I + G + (X M) = Aggregate Expenditure = GDP

C = Consumption
I = Investment
G = Government purchases
(X M) = Net Exports = Exports Imports
AGGREGATE EXPENDITURE total spending on final goods and services in an economy
during a given period, usually a year.
 GDP Based on the Income Approach
The income approach sums, or aggregates, income arising from that
production.
AGGREGATE INCOME all earnings of resource suppliers in an economy
during a given period, usually a year.
Aggregate expenditure = GDP = Aggregate income
To avoid double counting, its either the market value of a certain product
is included or by summing the value added at each stage of production.
VALUE ADDED at each stage of production, the selling price of a product
minus the cost of intermediate goods purchased from other firms.
Computation of Value Added for a New
Desk
Stage of Production (1) Sale Value (2) Cost of (3) Value Added
Intermediate Goods (3) = (1) (2)
Logger $20 $20
Miller 50 $20 30
Manufacturer 120 50 70
Retailer 200 120 80
Market Value of Final Good $200
 Limitations of National Income
Accounting
Some Production Is Not Included in GDP
GDP includes only those products that are sold in markets.
This ignores all do-it-yourself production child care, meal preparation,
house cleaning, laundry, home maintenance and repair.
GDP also ignores off-the-books production.
UNDERGROUND ECONOMY market transactions that go unreported
either because they are illegal or because people involved want to evade
taxes.
 Limitations of National Income
Accounting
Leisure, Quality and Variety
Leisure is not reflected in GDP because it is not directly bought and sold in a market.
The GDP fails to capture changes in the availability of leisure time and often fails to
reflect changes in the quality of products or in the availability of new products.
Whats Gross about Gross Domestic Product?
Gross domestic product is called gross because it fails to take into account this
depreciation.
DEPRECIATION the value of capital stock used up to produce GDP or that becomes
obsolete during the year.
 Limitations of National Income
Accounting
GDP Does Not Reflect All Costs
Negative externalities costs that fall on those not directly involved in the
transactions are mostly ignored in GDP calculations.
Examples:
Truck and automobiles pump pollution into the atmosphere
Housing developments displace scenic open space and forests
Paper mills foul the lungs and burn the eyes
This accounting ignores the depletion of natural resources, such as oil reserves, fish
stocks and soil fertility.