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FIU ECO 3202 - Chapter 2 The Measurement and Structure of the National Economy

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Slide 1Chapter OutlineNational Income AccountingSlide 4Gross Domestic ProductSlide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Saving and WealthSlide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Real GDP, Price Indexes, and InflationTable 2.3 Production and Price DataTable 2.4 Calculation of Real Output with Alternative Base YearsSlide 31Slide 32Slide 33Slide 34Slide 35Interest RatesSlide 37Homework 2© 2008 Pearson Addison-Wesley. All rights reservedThe Measurement and Structure of the National EconomyChapter 2© 2008 Pearson Addison-Wesley. All rights reserved2-2Chapter Outline•National Income Accounting: The Measurement of Production, Income, and Expenditure•Gross Domestic Product•Saving and Wealth•Real GDP, Price Indexes, and Inflation•Interest Rates© 2008 Pearson Addison-Wesley. All rights reserved2-3National Income Accounting•National income accounts: an accounting framework used in measuring current economic activity•Three alternative approaches give the same measurements–Product approach: the amount of output produced–Income approach: the incomes generated by production–Expenditure approach: the amount of spending by purchasers•Juice business example shows that all three approaches are equal (READ)© 2008 Pearson Addison-Wesley. All rights reserved2-4National Income Accounting•Why are the three approaches equivalent?–Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach)–The fundamental identity of national income accounting:total production = total expenditure = total income (2.1)© 2008 Pearson Addison-Wesley. All rights reserved2-5Gross Domestic Product•The product approach to measuring GDP–GDP (gross domestic product) is the market value of final goods and services newly produced within a nation during a fixed period of time –NOTE the KEYWORDS: (1) market value (2) newly produced (3) final goods and services (4) within a nation–Important concept in product approach(implied by “final”): value added = value of output minus value of inputs purchased from other producers© 2008 Pearson Addison-Wesley. All rights reserved2-6Gross Domestic Product•Market value: allows adding together unlike items by valuing them at their market prices–Problem: •Related to “market”: misses nonmarket items such as homemaking•Related to “value”: the value of environmental quality, and natural resource depletion –There is some adjustment to reflect the underground economy (legal (cash payment) and illegal )–Government services (that aren’t sold in markets) are valued at their cost of production (defense, public education, public construction)© 2008 Pearson Addison-Wesley. All rights reserved2-7Gross Domestic Product•Newly produced: counts only things produced in the given period; excludes things produced earlier•Final goods and services–Don’t count intermediate goods and services (those used up in the production of other goods and services in the same period that they themselves were produced) why?–Capital goods (goods used to produce other goods) are final goods since they aren’t used up in the same period that they are produced. –Inventory investment (the amount that inventories of unsold finished goods, goods in process, and raw materials have changed during the period) is also a final good© 2008 Pearson Addison-Wesley. All rights reserved2-8Gross Domestic Product•GNP vs. GDP–GNP (gross national product) = output produced by domestically owned factors of production (ownership)–GDP = output produced within a nation (geography)–GDP = GNP – NFP (2.2)•NFP = net factor payments from abroad= payments to domestically owned factors located abroad minus payments to foreign factors located domestically •NFP: wages, dividends/profit, interests from abroad© 2008 Pearson Addison-Wesley. All rights reserved2-9Gross Domestic Product•GNP vs. GDP–Example: Engineering revenues for a road built by a U.S. company in Saudi Arabia is part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP, and is part of Saudi GDP (built in Saudi Arabia), not Saudi GNP–Difference between GNP and GDP is small for the United States, about 0.2%, but higher for countries that have many citizens working abroad© 2008 Pearson Addison-Wesley. All rights reserved2-10Gross Domestic Product•The expenditure approach to measuring GDP–Measures total spending on final goods and services produced within a nation during a specified period of time–Four main categories of spending: consumption (C), investment (I), government purchases of goods and services (G), and net exports (NX)–Y = C + I + G + NX (2.3)•the income-expenditure identityVERY IMPORTANT© 2008 Pearson Addison-Wesley. All rights reserved2-11Gross Domestic Product•The expenditure approach to measuring GDP–Consumption: spending by domestic households on final goods and services (including those produced abroad)•About 2/3 of U.S. GDP•Three categories–Consumer durables (examples: cars, TV sets, furniture, major appliances)–Nondurable goods (examples: food, clothing, fuel)–Services (examples: education, health care, financial services, transportation)© 2008 Pearson Addison-Wesley. All rights reserved2-12Gross Domestic Product•The expenditure approach to measuring GDP–Investment: spending for new capital goods (fixed investment) plus inventory investment•About 1/6 of U.S. GDP•Business (or nonresidential) fixed investment: spending by businesses on structures and equipment and software•Residential fixed investment: spending on the construction of houses and apartment buildings•Inventory investment: increases in firms’ inventory holdings© 2008 Pearson Addison-Wesley. All rights reserved2-13Gross Domestic Product•The expenditure approach to measuring GDP–Government purchases of goods and services: spending by the government on goods or services•About 1/5 of U.S. GDP•Most by state and local governments, not federal government•Not all government expenditures are purchases of goods and services. Non-purchase spending should be excluded!–Some are payments that are not made in exchange for current goods and services–One type is transfers, including Social Security payments, welfare, and unemployment benefits–Another type is interest payments on the government debt•Some


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