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Click here to sign up. Download Free PDF. A short summary of this paper. Some instructors will want to cover this material in detail in class, but others will prefer to just cover the main points and let students read the chapter on their own as background.
There is no way around it: National income accounting is not the most exciting of topics. Yet it is important, as the preview to the chapter indicates. Students need to be exposed to a basic concept like Gross Domestic Product and how it is measured.
Similarly, they need to understand what the data on unemployment, the consumer price index CPI , inflation, and real interest rates means and how measurement of this data is not always completely straightforward. It also helps students recognize that understanding and measuring macroeconomic data is important to getting policy right. These boxes help explain what data are reported on regularly, how to find it, and how to read it. They encourage students to start paying more attention to the data that feature so prominently in macroeconomics.
Its significance is that macroeconomists can define and measure gross domestic product in three ways: by totaling either the value added in production or the expenditures to buy goods and services or the incomes earned by households, business firms, and government.
GDP is defined as the market value of all final goods and services newly produced in the economy during a fixed period of time. When a market value or price is not available for a good or service, its contribution to the value of total output is either ignored—as in the case of most household services and underground economic activity, imputed—as with the value of the services homeowners enjoy by living in their houses, or considered to be equal to its cost of production—as is the case with the provision of government services, such as national defense and education.
The value of intermediate goods and services that go into the production of final goods and services is included in value of the final products and, therefore, is not counted separately because doing so would result in double counting and cause GDP to overstate the amount of economic activity.
A flow measure is a quantity per period of time and a stock measure is an amount at a given point in time. GDP measures the value of final goods and services produced during a given time period; thus, it is a flow measure that indicates how much economic activity occurred per period of time. Intermediate goods and services are used up completely in the production of final goods and services during a given time period.
Because this is so, their value is completely incorporated into the value of those final goods and services and is not counted separately. This is not the case with capital goods and inventories. A capital good is a final good that is produced during a given time period and is then available to use in the production of other goods and services during one or more future time periods. It is not completely used up during the time period in which it is produced, and therefore, it is not treated the same way an intermediate good is.
According to the national income identity, GDP Y can be measured by summing consumption expenditure C , investment expenditure I , government purchases of goods and services G , and net exports NX. Consumption expenditure includes consumer durable goods, nondurable goods, and services. Investment expenditure includes business fixed investment capital goods , inventory investment, and residential investment. Government purchases include spending on currently produced goods and services by federal, state, and local governments but do not include transfers such as payments for Social Security and unemployment insurance benefits.
Net exports equal exports minus imports, so goods and services that domestic households, business firms, and governments purchase that are produced elsewhere are subtracted from GDP and not counted as domestic production. The same is true of indirect business taxes. Adjusting national income by adding in depreciation, indirect business taxes, and factor income paid to the rest of the world, subtracting factor income received from the rest of the world, and adjusting for the relatively small statistical discrepancy that arises from measuring GDP in two different ways—the production approach and the income approach—reconciles the two approaches.
Variables measured in terms of dollars or other monetary units, such as GDP and its various income and expenditure components, can be measured using either current market prices or the prices of a base year.
The nominal value of a variable is measured using current market prices and will change when either current market price or quantity changes. The measure of a real value, however, always uses the prices of a base year. The personal consumption expenditure deflator measure of the price level uses just consumption expenditure rather than total GDP, so it is nominal personal consumption expenditure divided by real personal consumption expenditure for a given time period.
Measuring Inflation 9. The consumer price index CPI is a widely followed measure of the average prices of the goods and services a typical urban consumer purchases. This cost is compared to the cost of purchasing those same items in a base year whose index value is set to The CPI figure reported each month, then, tells how high prices are relative to the base year.
The percentage changes in the CPI from month to month measure the rate of increase in the price level—the inflation rate. Measuring Unemployment The unemployment rate, calculated monthly by the BLS, measures the fraction of civilians who want to work but do not have jobs. To estimate this fraction, the BLS surveys about 60, households each month and classifies people aged 16 and older as either employed if they worked full time or part time or were temporarily away from their jobs , unemployed if they did not work but looked for a job within the past four weeks or were laid off and waiting to be recalled , or not in the labor force full-time students, retirees, people who choose to stay at home, and discouraged workers who would like to work but have not looked for a job within the past four weeks.
Together the employed and unemployed make up the civilian labor force. The unemployment rate is the number of unemployed people divided by the labor force. Measuring Interest Rates A nominal interest rate is the interest rate stated on a loan or other financial instrument that is not adjusted for inflation. The nominal interest rate on a loan, for example, indicates how much money the borrower will pay in interest to the lender, but it does not measure that interest payment in real terms.
It does not measure how much purchasing power the borrower will pay the lender. The real interest rate provides this measure because it adjusts for inflation. According to the Fisher equation, the real interest rate equals the nominal interest rate minus the expected inflation rate.
This is an ex ante real interest rate because it indicates how well a lender expects to do in real terms at the time the loan is made. An ex post real interest rate, for which the actual inflation rate is subtracted from the nominal interest rate, measures how well the lender actually did in real terms after the fact. This might happen as a particular case, but in general, households choose either not to spend all their income i.
This conclusion is the same if we consider a firm rather than a household that produces any good or service: Its income does not necessarily equal its expenditure. However, when we consider all economic agents together i. Note that this conclusion does not imply that income must equal expenditure for all firms, households, and the government individually. Consequently, the value of that transaction represents income for one party and expenditure for the other, independently of which agent buys or sells the particular good or service.
According to the production approach, which measures GDP by adding the value added from each firm, GDP will increase in this case. This is interpreted as good news, as this measure is intended to measure economic activity.
We cannot say that both countries are better off for sure. We can say that economic activity has increased in both countries, but GDP cannot measure, by definition, many important aspects of human welfare including our perceptions about the environment.
Theoretically, it is possible that the impact of pollution is so negative that it actually decreases the quality of life in these countries. We can say for sure that the inhabitants of Utopia will benefit more from this increase in economic activity than the inhabitants of Pandora, who value their environment twice as much.
Because individual preferences about issues like environmental protection are inherently difficult to measure, these considerations are often left out of the discussion and most policymakers focus only on the GDP measure when evaluating alternative policies.
In this alternative scenario, inhabitants of Utopia will not benefit as much from the increased economic activity if it undermines one of their fundamental values: a more equal income distribution. As before, it might even be the case that inhabitants of Pandora will suffer a lot from observing a more skewed income distribution, but they will always benefit more from this situation than their counterparts in Utopia.
A household purchase of a home built in will not affect GDP because only currently produced goods and services are considered by the GDP measure. Counting previously produced goods will overestimate GDP, as these goods were already counted the year they were produced. A household purchase of a newly built dishwasher will count toward GDP and will be included in consumption expenditure as durable goods expenditure.
This transaction will be considered fixed investment. An individual receipt of any type of transfer from the government including tax credits is not included in GDP because this transaction is not meant to pay for any currently produced good or service.
Department of Defense purchase of equipment could be considered government consumption or government investment. In this case, however, the helicopters are manufactured in another country, and therefore, this transaction will not affect GDP. Net factor income is the difference between gross national product, which measures the value of total income earned by U. David Begg Economics 10th Edition is one of the digital book titles stored in our online library that consists of millions of digital books in our online library that can be easily read and downloaded using a wide variety of devices such as laptops, tablets and even smartphones.
The main goal of our site is to assist our users to get a digital book easily and quickly. Gianluigi Vernasca 10th ed. Economics 10th edition John Johnston, Econometrica, B2B Michael D. Hutt, Thomas W. Speh 10th ed. Professor of Economics in the News from Professor David Begg 6 Alumni events Economics, 1st Edition , Leeds Axel A. Weber Problemsuc with Professor David Begg Special Edition No. Connolly uamp; Carolyn E. David J. New York Land Economics 70 2 : Barton, David N.
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