National Income Accounting

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Chapter 5

• National Income Accounting

2
Economy

• Structure of economic life and activity in an
  area
• Macroeconomics study of the whole economy,
  theories, predictions, events and policies

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Macroeconomics and the Human Body

• Cells perform functions linked to the operation
  of the body
• Cells die off and are replaced
• Blood circulates thru the body providing
  nutrients
• Economic units perform different functions to
  operate the whole economy
• Units die off and are replaced
• Money circulates thru the economy providing
  incentives
• Expectations
• If you expect to feel better then you will
• Economic expectations and action fuel results
• In both economics and medicine there are
  differences of opinion
• Medical people have labs and controlled
  experiments. Economists only have the one
  patient U.S.
• Knowledge in both improves over time as each
  views the performance and results of their
  patients

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National Income Accounting

• Measuring the Economys performance

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Gross Domestic Product

• GDP - market value of all final goods produced in
  a year in a country (not financial transactions)
• Double Counting
• Final goods
• Intermediate Goods

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Approaches

• Expenditures Income GDP
• Expenditures GDP CIGX - M
• Consumption (C)
• Investment (I)
• Net Investment In I Ir or I In Ir
• Replacement Ir Depreciation
• Government Purchases (not transfer payments) (G)
• Net Exports Exports Imports (X - M)

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• Income
• Wages and salaries
• Rent
• Interest
• Profits

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Other Measures

• Net Domestic Product (NDP) GDP Depreciation
• National Income (NI) NDP Indirect Business
  Taxes Net Foreign Income (Americans income
  abroad Their income made here)
• Personal Income (PI) NI Social security taxes
  Corporate taxes undistributed corporate
  profits transfer payments
• Disposable Income (DI) PI Personal Taxes C
  S

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Real GDP

• Real GDP Nominal GDP adjusted for inflation
• Real Per Capita GDP Real GDP/Population

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Why Income Expenditures

• GDP CIGX - M DI T
• CIGX- M CST
• IGX STM
• I S so GX TM
• G T so X M

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Shortcomiings

• Doesnt include home production
• Doesnt measure quality or leisure
• Doesnt reflect purpose
• Doesnt include the underground economy
• Illegal activities
• Tax avoidance
• Environmental damage
• Doesnt include second hand sales, transfer
  payments and financial transactions

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New Measures

• Net Economic Welfare
• Genuine Progress Indicator
• Gross National Income (GNI)

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Macroeconomic Model Aggregate Demand and Supply

• Aggregate Output Real GDP (adjusted for
  inflation)
• Aggregate Demand Negative relationship between
  aggregate output demanded and the price level
• Aggregate Supply relationship between amount of
  Real GDP supplied and the price level
• Equilibrium Intersection of AD and AS

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