12-1The Measurement and Structure of the National Economy2-2Agenda• National Income Accounting• Gross Domestic Product• Saving and Wealth• Real GDP, Price Indexes, and Inflation• Interest Rates2-3National Income Accounting• The national income and product accounts are an accounting framework used to measure current economic activity or GDP.2-4National Income Accounting• 3 different approaches give identical results:¾ Product approach: the dollar amount of output produced.¾ Income approach: the dollar incomes generated by production.¾ Expenditure approach: the dollar amount spent by purchasers.22-5National Income Accounting• Why the three approaches are equivalent:¾ Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach).2-6National Income Accounting• Therefore, the fundamental identity of national income accounting is:Total Production = Total Income = Total Expenditure2-7Gross Domestic Product•The Product Approach to measuring GDP:¾ GDP (gross domestic product) is the market value of final goods and services newly produced within a nation during a fixed period of time.2-8Gross Domestic Product• Market value: allows adding together unlike items by valuing them at their market prices.32-9Gross Domestic Product• Newly produced: counts only things produced in the given period; excludes things produced during an earlier time period.2-10Gross Domestic Product• Final goods and services: those goods and services that are not used up in the production process, i.e., are not intermediate goods.¾ Intermediate goods and services are those used up in the production of other goods and services in the same period that they themselves were produced.¾ Adding up value added works because it automatically excludes intermediate goods.2-11Gross Domestic Product• Final goods and services: Two caveats¾ Capital goods are used to produce other goods but are final goods because they are not completely used up in the same period that they are produced.¾ Inventory investment—the amount that inventories of unsold finished goods, goods in process, and raw materials have changed during the period—is also treated as a final good.2-12Gross Domestic Product• GNP vs. GDP¾ GNP (gross national product) is the output produced by domestically owned factors of production.¾ GDP is the output produced within a nation.GDP = GNP – NFP¾ NFP are the net factor payments from abroad.42-13Gross Domestic Product•The Expenditure Approach to measuring GDP.¾ Measures total spending on final goods and services produced within a nation during a specified period of time.2-14Gross Domestic Product• The expenditure approach to measuring GDP:¾ Four main categories of spending: 1. consumption (C), 2. investment (I), 3. government purchases of goods and services (G), and 4. net exports (NX)2-15Gross Domestic Product• The expenditure approach to measuring GDP:Y = C + I + G + NX¾ This is known as the income-expenditure identity.2-16Gross Domestic Product• The expenditure approach to measuring GDP:¾ Consumption: spending by domestic households on final goods and services (including imports).• About 2/3 of U.S. GDP.• Three categories:– Consumer durables. – Nondurable goods.–Services.52-17Gross Domestic Product• The expenditure approach to measuring GDP:¾ Investment: spending for new capital goods (fixed investment) plus inventory investment.• About 1/6 of U.S. GDP.• Three categories:– Business (or nonresidential) fixed investment.– Residential fixed investment.– Inventory investment.2-18Gross Domestic Product• The expenditure approach to measuring GDP:¾ Government purchases of goods and services: spending by the government on goods or services.• About 1/5 of U.S. GDP.• Mostly by state and local, not federal, governments.2-19Gross Domestic Product• The expenditure approach to measuring GDP:¾ Net exports: exports minus imports.• Exports are goods produced in the country that are purchased by foreigners.• Imports are goods produced abroad that are purchased by residents in the country.2-20Table 2.1 Expenditure Approach to GDP, 200562-21Gross Domestic Product•The Income Approach to measuring GDP:¾ Measures the income generated by production, including profits and taxes paid to the government.• National income = compensation of employees (including benefits) + proprietors’ income + rental income of persons + corporate profits + net interest + taxes on production and imports + business current transfer payments + current surplus of government enterprises.2-22Gross Domestic Product• The income approach to measuring GDP:¾ National income + statistical discrepancy = net national product (NNP).¾ NNP + depreciation (the value of capital that wears out in the period) = GNP.¾ GNP – NFP = GDP2-23Table 2.2 Income Approach, 20052-24Gross Domestic Product• The income approach to measuring GDP:¾ Private sector income:• Private sector disposable income = private sector income earned at home (Y or GDP) and abroad (NFP) + payments from the government sector (transfers, TR, and interest on government debt, INT) – taxes paid to government (T).Y + NFP + TR + INT – T72-25Gross Domestic Product• The income approach to measuring GDP:¾ Government sector income:• Government sector net income = taxes – transfers –interest payments:T –TR –INT2-26Gross Domestic Product• The income approach to measuring GDP:¾ Private sector + government sector income = GNP:[ Y + NFP + TR + INT – T ] + [ T – TR – INT ]= GDP + NFP= GNP2-27Saving and Wealth• Wealth: assets minus liabilities.¾ National wealth = sum of all household, business, and government wealth within the nation.• Saving by individuals, businesses, and government partially determines wealth.¾ Saving = current income – current spending.2-28Saving and Wealth• Measures of aggregate saving:¾ Private saving = private disposable income –consumption.Spvt=(Y + NFP – T + TR + INT) – C82-29Saving and Wealth• Measures of aggregate saving:¾ Government saving = net government income –government purchases of goods and services.Sgovt=(T – TR – INT) – G• Government saving = Government receipts – government outlays =Government budget surplus. 2-30Saving and Wealth• Measures of aggregate saving: National saving.¾ National saving = private saving + government saving.S = Spvt+