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National Income Accounting• National Income and Product Accounts

(NIPA) measure output and income in the U.S.

• Simon Kuznets led team that established and estimated national income accounts.

– Developed in 1930s at NBER and U.S. Department of Commerce

– During World War II, Kuznets was an associate director at the U.S. War Production Board.

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GDP “Output”• Gross Domestic Product (Gross Domestic Product (GDPGDP)) is the market

value of final goods and services produced within a country during a year.

Market Value: The worth of a thing is the price it will bring.

Only Final Goods and Services Count: Counting intermediate goods would result in double counting.

GDP excludes financial transactions and income transfers

these do not reflect production.

GDP must be produced within our borders Net additions to inventory are current output so they

are also included in GDP.

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GDP: What’s Produced • GDP includes final output sold plus

goods produced but not sold.

• Inventory is a firm’s stock of unsold goods.

– Planned inventory changes add or reduce working capital investment

– Unplanned inventory changes are also treated as current period investment or disinvestment

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GDP as Valued-Added

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Two Ways of Measuring GDP

ExpendituresExpenditures on Final Goods

= GDPGDP =

IncomeIncome Received for producing Final Goods

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GDP as Expenditures (1) Components of GDP (Final expenditures):

personal consumption expenditures (C) gross private domestic investment (I) government purchases (G) of goods

and services net exports (X or NX) (exports - imports)

GDP = C + I + G + XGDP = C + I + G + X

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GDP as Expenditures: C + I + G + XGDP as Expenditures: C + I + G + X

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GDP as Expenditures Who Produces it?

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GDP Produced by Households?• According to international convention –

the System of National Accounts (SNA)

Household production included in GDP– Housing services by owner occupiers– Subsistence agriculture– Production of foodstuffs and clothing for own use

Household production not included in GDP– Care of family members– Meal preparation– Home improvements– Most household “production”

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GDP: Income earned from production The sum of the income (including profits)

received in producing final goods and services equals value of what’s produced.

Payments include: Wages and benefits paid to workers Proprietors’ income Rents Interest Corporate profits Capital consumption allowance Indirect business taxes Net factor income from abroad GNP

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GDP vs. GNP• Gross Domestic Product (GDP): total value

of final goods and services produced within a country … regardless of who produces it

• Gross National Product (GNP): total value of final goods and services produced by the citizens (residents) of a country and by the capital stock they own no matter where it’s produced.– Earnings of Americans working abroad add to our

GNP but not to our GDP– Foreign interest and profits earned by U.S.

residents and firms add to our GNP but not our GDP

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GDP (GNP) as Income

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GDP – GNP – NNP – NI – PI – DI

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• Net National Product (NNP) is GNP net of depreciation. – NNP includes net investment, not gross investment.

• National Income (NI) is income that actually goes to factors of production (wages of labor, etc.)– NI excludes indirect business taxes firms collect but don’t

keep– NI also excludes depreciation that subtracts from the profits

firms truly earn• Personal Income (PI) is national income

– Plus net income received but not earned (e.g., interest on gov’t debt, transfer payments like social security)

– Minus net income earned but not received (e.g., retained corporate earnings).

• Disposable Personal Income (DI) is PI minus personal taxes. – DI is divided between consumption expenditure (C) and

saving (S)

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Real and Nominal GDP• “Real“ GDP adjusts for inflation. • Nominal GDP ($GDP) measures national

output based on current prices of goods and services.

• Real GDP measures of the quantity of final goods and services produced– Real GDP measures current output at

constant prices– Real GDP eliminates the influence of

price changes from nominal GDP.

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Did GDP Really Increase?

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• Consumer Price IndexConsumer Price Index (CPI)(CPI) – measures the cost over time of a typical bundle

of goods and services purchased by households.

• Producer Price Index (PPI)Producer Price Index (PPI)– measures average prices received by

producers over time for raw materials, intermediate, and final goods.

• GDP Price Deflator (GDP Price Index, GDPPI)GDP Price Deflator (GDP Price Index, GDPPI)– measures average prices over time of all goods

and services included in GDP.– includes prices of things government buys,

capital goods businesses buy, things foreigners buy from us, etc.

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Price Indexes • The value of a price index in any year

indicates how prices have changed relative to a base year.– The index is 100 the percent change in prices

from the base year.

• CPI suffers from substitution bias– buyers change the mix of goods they buy in

response to price changes.

• Chain-type indexes of real GDP correct for this bias.

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Composition of CPI: The Shopping Basket

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GDPPI (GDP Price Deflator), CPI, and PPIGDPPI (GDP Price Deflator), CPI, and PPI