Module 2: National Income Accounting
GROSS DOMESTIC PRODUCT
- the market value of all final goods and services produced domestically in a
single year and is the single most important measure of macroeconomic performance.
GDP VS. GNP
The difference between GDP and GNP is rather technical GDP includes only goods
and services produced by a nation's own citizens and firms Goods and services
produced outside a nation's boundaries by the nation's own citizens and firms are
included in GNP but are excluded from GDP Goods and services produced within a
nation's boundaries by foreign citizens and firms are excluded from GNP but are
included in GDP
The Expenditure and Income Approaches
There are two ways of measuring GDP, the expenditure approach and the income
approach The expenditure approach is to add up the market value of all domestic
expenditures made on final goods and services in a single year Final goods and
services are goods and services that have been purchased for final use or goods and
services that will not be resold or used in production within the year Intermediate goods
and services which are used in the production of final goods and services, are not
included in the expenditure approach to GDP because expenditures on intermediate
goods and services are included in the market value of expenditures made on final
goods and services Including expenditures on both intermediate and final goods and
services would lead to double counting and an exaggeration of the true market value of
GDP.
Four Categories of Expenditure Approach
1. Consumption expenditures Personal consumption expenditures on goods and
services comprise the largest share of total expenditure Consumption good
expenditures include purchases of nondurable goods such as food and clothing,
and purchases of durable goods such as appliances and automobiles.
2. Investment expenditures
TWO CATEGORIES
Expenditures on fixed investment goods - the cost of replacing existing
investment goods that have become worn out or obsolete The market value of all
investment goods that must be replaced in a single year is referred to as the
depreciation for that year Inventory goods are final goods waiting to be sold that
firms have on hand at the end of the year to year change in the market value of
firms' inventory goods is considered an investment expenditure because these
inventory goods will eventually yield a flow of consumption or production services
Inventory investment Fixed investment goods expenditure on investment in
capital goods. In the contrast, inventory investment refers to the expenditure
incurred on investment in stock.
3. Government expenditures - consumption and investment goods and services
are treated as a separate category in the expenditure approach to GDP
Examples of government expenditures include the hiring of civil servants and
military personnel and the construction of roads and public buildings.
4. Net exports - Exports are goods and services produced domestically but sold to
foreigners, while imports are goods and services produced by foreigners but sold
domestically. In the expenditure approach to GDP, expenditures on exports are
added to total expenditures, while expenditures on imports are subtracted from
total expenditures.
Nominal GDP, Real GDP, and Price Level
Nominal GDP is GDP evaluated at current market prices Therefore, nominal
GDP will include all of the changes in market prices that have occurred
during the current year due to inflation or deflation
Inflation is defined as a rise in the overall price level, and deflation is defined
as a fall in the overall price level To abstract from changes in the overall price
level, another measure of GDP called real GDP is often used
INCOME APPROACH - measuring GDP is to add up all the income earned by
households and firms in a single year The rationale behind the income approach
is that total expenditures on final goods and services are eventually received by
households and firms in the form of wage, profit, rent and interest income.
TWO TYPES OF EXPENDITURE
1. Depreciation expenditures - made to replace existing but deteriorated
investment goods, do increase the incomes of those providing the replacement
goods, but they also decrease the profit incomes of those purchasing the
replacement goods
The result is that aggregate income remains unchanged Indirect
2. Indirect business - taxes are not included in the income approach to GDP
measurement but are included in the expenditure approach.
GROWTH RATE OF GDP
The value of GDP by itself is not very interesting What is interesting is the annual
growth rate or year-to-year percentage change, in the value of GDP
To calculate the percentage change in a statistic, such as GDP, one needs to
know the value of the statistic at two dates in time Suppose that the value of
GDP last year was Y L and the value of GDP in the current year is Y C Then, the
percentage change, or growth rate, of GDP is given by
A positive growth rate of GDP implies that the economy is expanding, while a
negative growth rate of GDP implies that the economy is contracting An
expanding economy is said to be in a boom while a contracting economy is said
to be in a recession