 National-income accounting refers to the

measurement of aggregate economic activity,

particularly national income and its
components.
 Gross domestic product (GDP) is the total
market value of final goods and services
produced within a nation’s borders in a given
time period. (Usually a year)
 Total Market Value means the dollar value of
every one of the good or service produced
during the period of time.
 Final goods and service means that

production is only counted in the final stage.

This is to keep things such as a car’s engine
from being counted twice.
 Gross National Product (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.
 Japanese companies producing in America

count, but not American companies abroad.

 GDP per capita is total GDP divided by total
population–average GDP.
 GDP per capita is commonly used as a

measure of a country’s standard of living.

 However, it is not always an accurate

measure.
 There are three major exceptions when
creating GDP.
◦ Non-Market Activities
◦ Unreported Incomes
◦ Intermediate Goods
 GDP measures exclude most goods and
services produced that are not sold in the
market.
◦ A homemaker who cleans, washes, gardens, shops
and cooks produces goods of value.
◦ Because they are not exchanged in the market they
are not included in GDP.
 The GDP statistics fail to capture market
activities that are not reported to tax or
census authorities.
 The underground economy is motivated by

tax avoidance or to conceal illegal activities.

 Intermediate goods are goods or services
purchased for use as input in the production
of final goods or services.
 For example, the engine or chassis of a car

are not counted, so as to keep them from

being counted twice.
 Value added is the increase in the market
value of a product that takes place at each
stage of the production process.
 Compute the value of the final output.
 Count only the value added at each stage of

production.
 Nominal GDP is the value of final output
produced in a given period, measured in the
prices of that period.

 Real GDP is the value of final output

produced in a given period, adjusted for
changing prices.
 The base period is the time period used for
comparative analysis.
 From this base year, we find the GDP deflator

for other years.

 The GDP deflator is a measure of price

changes over time.

 The general formula for computing real GDP
is:

$9,963 billion
Real GDP in 2000 =  $9,767 billion
1.02
 $10000

9000
GDP (billions of dollars per year)

8000

7000

6000
Nominal GDP

5000

4000

3000
1980 1985 1990 1995 1996 2000
 Changes in real GDP tell us how much the
economy’s output is growing.
 Growth is at the expense of future output

unless factors of production are replaced.

 Depreciation is the consumption of capital in
the production process — the wearing out of
plant and equipment.
 Net domestic product is the amount of output
we could consume without reducing our
stock of capital.

NDP = GDP – depreciation

 Investment is spending on (production of)
new plant, equipment, and structures (capital)
in a given time period, plus changes in
business inventories.
 The distinction between GDP and NDP is

mirrored in the difference between gross

investment and net investment.
 Gross investment is total investment
expenditure in a given time period.

 Net investment is gross investment less

depreciation.
 The stock of capital — the total collection of
plant and equipment — will not grow unless
gross investment exceeds depreciation.
 The GDP accounts also tell us what mix of
output has been selected, that is, society’s
answer to the core issue of WHAT to produce.
 The major uses of total output conform to the
four sets of market participants: consumers,
business firms, government, and foreigners.
 Goods and services used by households are
called consumption goods.
 Consumer spending claims nearly two-thirds

of our annual output.

 Investment goods are the plant, machinery,
and equipment that we produce.
 Also includes net inventory changes and new

residential construction.
 Resources purchased by the government
sector are unavailable for consumption or
investment purposes.
 Exports are goods and services sold to
foreign buyers.
 Imports are goods and services purchased

from foreign sources.

 Exports are added to GDP and imports are
subtracted.

 Net Exports are the value of exports

minus the value of imports.
 The value of GDP can be
computed by adding up
expenditures of market
participants:
GDP = C + I + G + (X – IM)
Where:
C = Consumption expenditure X = exports
I = investment expenditure IM = imports
G = government expenditure
 GDP accounts have two sides.
◦ One side focuses on expenditure – the demand
side.
◦ The other side focuses on income – the supply side.
VALUE OF OUTPUT VALUE OF INCOME

Consumer spending
Wages

Investment spending Profits

Product Factor
market market Interest
Government spending

Rent
Net exports

Sales taxes
Depreciation
 By charting the flow of income through the
economy, we see FOR WHOM the output is
produced.
 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

 Wages, interest, and profits paid to foreigners
are not part of U.S. income.
 They need to be subtracted from the income

flow.
 Incomes earned by U.S. citizens in other
nations represents an inflow of income to
U.S. households and are added.
 Once depreciation charges and indirect
business taxes are subtracted from GDP and
net foreign income is added, we have national
income.
 National income (NI) is total income earned
by current factors of production.

NI = NDP – indirect business taxes +

net foreign factor income
 Personal income (PI) is the income received by
households before payment of personal taxes.

Personal income = National income –

(corporate taxes + retained earnings +
Social Security taxes)
+ (transfer payments + net interest)
 Disposable income (DI) is the after-tax
income of households.
 It is personal income less personal taxes.

Disposable income = personal income –

personal taxes
 Saving is that part of disposable income not
spent on current consumption –disposable
income less consumption.
 All disposable income is either consumed or
saved.

Disposable income = Consumption +

Saving
 To households, in the form of disposable
income.
 To businesses, in the form of retained

earnings and depreciation allowances.

 To government, in the form of taxes.