Chapter 07 - Measuring Domestic Output, National Income, and the Price
Level
Assessing the Economy's Performance
National income accounting measures the economy's performance by measuring the flows of income and
expenditures over a period of time.
National income accounts serve a similar purpose for the economy, as do income statements for business firms.
Consistent definition of terms and measurement techniques allows us to use the national accounts in comparing
conditions over time and across countries.
The national income accounts provide a basis for of appropriate public policies to improve economic performance.
Gross Domestic Product
GDP is the monetary measure of the total market value of all final goods and services produced within a country
in one year.
Money valuation allows the summing of apples and oranges; money acts as the common denominator.
GDP includes only final products and services; it avoids double or multiple counting, by eliminating any
intermediate goods used in production of these final goods or services.
GDP is the value of what has been produced in the economy over the year, not what was actually sold.
GDP Excludes Nonproduction Transactions
GDP is designed to measure what is produced or created over the current time period.Existing assets or
property that sold or transferred, including used items, are not counted.
Purely financial transactions are excluded.
Public transfer payments, like social security or cash welfare benefits.
Private transfer payments, like student allowances or alimony payments.
The sale of stocks and bonds represent a transfer of existing assets. (However, the brokers' fees are
included for services rendered.)
Secondhand sales are excluded, they do not represent current output.
Two Ways to Look at GDP:Spending and Income.
What is spent on a product is income to those who helped to produce and sell it.
This is an important identity and the foundation of the national accounting process.
Expenditures Approach(See Figure 7.1 and Table 7.3)
GDP is divided into the categories of buyers in the market; household consumers, businesses, government,
and foreign buyers.
Personal Consumption Expenditures-(C)-includes durable goods, nondurable goods and services.
Gross Private Domestic Investment-(Ig)
All final purchases of machinery, equipment, and tools by businesses.
All construction (including residential).
Changes in business inventory.
If total output exceeds current sales, inventories build up.
If businesses are able to sell more than they currently produce, this entry will be a negative
number.
Net Private Domestic Investment-(In).
Each year as current output is being produced, existing capital equipment is wearing out and
buildings are deteriorating; this is called depreciation or capital consumption allowance.
Gross Investment minus depreciation (capital consumption allowance) is called net investment.
If more new structures and capital equipment are produced in a given year than are used up, the
productive capacity of the economy will expand.
When gross investment and depreciation are equal, a nation's productive capacity is static.
When gross investment is less than depreciation, an economy's production capacity declines.
Government Purchases (of consumption goods and capital goods) - (G)
Includes spending by all levels of government (federal, state and local).
Includes all direct purchases of resources (labor in particular).
This entry excludes transfer payments since these outlays do not reflect current production.
Net Exports-(Xn)
All spending on goods produced in the U.S. must be included in GDP, whether the purchase is made
here or abroad.
Often goods purchased and measured in the U.S. are produced elsewhere (Imports).
Therefore, net exports, (Xn) is the difference: (exports minus imports) and can be either a positive or
negative number depending on which is the larger amount.
Level
Assessing the Economy's Performance
National income accounting measures the economy's performance by measuring the flows of income and
expenditures over a period of time.
National income accounts serve a similar purpose for the economy, as do income statements for business firms.
Consistent definition of terms and measurement techniques allows us to use the national accounts in comparing
conditions over time and across countries.
The national income accounts provide a basis for of appropriate public policies to improve economic performance.
Gross Domestic Product
GDP is the monetary measure of the total market value of all final goods and services produced within a country
in one year.
Money valuation allows the summing of apples and oranges; money acts as the common denominator.
GDP includes only final products and services; it avoids double or multiple counting, by eliminating any
intermediate goods used in production of these final goods or services.
GDP is the value of what has been produced in the economy over the year, not what was actually sold.
GDP Excludes Nonproduction Transactions
GDP is designed to measure what is produced or created over the current time period.Existing assets or
property that sold or transferred, including used items, are not counted.
Purely financial transactions are excluded.
Public transfer payments, like social security or cash welfare benefits.
Private transfer payments, like student allowances or alimony payments.
The sale of stocks and bonds represent a transfer of existing assets. (However, the brokers' fees are
included for services rendered.)
Secondhand sales are excluded, they do not represent current output.
Two Ways to Look at GDP:Spending and Income.
What is spent on a product is income to those who helped to produce and sell it.
This is an important identity and the foundation of the national accounting process.
Expenditures Approach(See Figure 7.1 and Table 7.3)
GDP is divided into the categories of buyers in the market; household consumers, businesses, government,
and foreign buyers.
Personal Consumption Expenditures-(C)-includes durable goods, nondurable goods and services.
Gross Private Domestic Investment-(Ig)
All final purchases of machinery, equipment, and tools by businesses.
All construction (including residential).
Changes in business inventory.
If total output exceeds current sales, inventories build up.
If businesses are able to sell more than they currently produce, this entry will be a negative
number.
Net Private Domestic Investment-(In).
Each year as current output is being produced, existing capital equipment is wearing out and
buildings are deteriorating; this is called depreciation or capital consumption allowance.
Gross Investment minus depreciation (capital consumption allowance) is called net investment.
If more new structures and capital equipment are produced in a given year than are used up, the
productive capacity of the economy will expand.
When gross investment and depreciation are equal, a nation's productive capacity is static.
When gross investment is less than depreciation, an economy's production capacity declines.
Government Purchases (of consumption goods and capital goods) - (G)
Includes spending by all levels of government (federal, state and local).
Includes all direct purchases of resources (labor in particular).
This entry excludes transfer payments since these outlays do not reflect current production.
Net Exports-(Xn)
All spending on goods produced in the U.S. must be included in GDP, whether the purchase is made
here or abroad.
Often goods purchased and measured in the U.S. are produced elsewhere (Imports).
Therefore, net exports, (Xn) is the difference: (exports minus imports) and can be either a positive or
negative number depending on which is the larger amount.
