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Principles and Policies I: Macroeconomics

Principles and Policies I: Macroeconomics. Chapter 7: National Income Accounting. Chapter Seven Learning Objectives You should be able to:. State why national income accounting is important. Define GDP and calculate it in a simple example, avoiding double counting.

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Principles and Policies I: Macroeconomics

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  1. Principles and Policies I: Macroeconomics Chapter 7: National Income Accounting Maclachlan, Macroeconomics, 9/30/04

  2. Chapter Seven Learning ObjectivesYou should be able to: • State why national income accounting is important. • Define GDP and calculate it in a simple example, avoiding double counting. • Explain why GDP can be calculated using either the income approach or the expenditures approach. • List the four expenditure components of GDP. • Distinguish between real GDP and nominal GDP. • State some limitations of national income accounting. • Describe the shortcomings of using GDP to compare standards of living among countries. Maclachlan, Macroeconomics, 9/30/04

  3. National Income Accounting A set of rules and definitions for measuring economic activity in the aggregate economy. Maclachlan, Macroeconomics, 9/30/04

  4. GDP Total market value of all goods and services produced in an economy in a one year period. GNP Total market value of all goods and services produced by citizens and businesses of an economy in a one year period GNP = GDP + net foreign factor income Measures of Total Output Maclachlan, Macroeconomics, 9/30/04

  5. Important distinction: stocks versus flows Maclachlan, Macroeconomics, 9/30/04

  6. Value Added Approach Maclachlan, Macroeconomics, 9/30/04

  7. Value Added Approach Eliminates Double Counting Maclachlan, Macroeconomics, 9/30/04

  8. Government Spending Wages, rents, interest, profits Factor services Goods Firms (production) Household Government Taxes Investment Savings Financial markets Personal consumption Imports Exports Other countries The Circular Flow McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

  9. Employee compensation + Rents + Interest + Profits __________ National income Consumption + Investment + Government spending on goods and services + (Exports – Imports) ________________ GDP Two Methods of Calculating GDP Maclachlan, Macroeconomics, 9/30/04

  10. Net foreign factor income Depreciation Net exports Indirect business taxes Government expenditures Rents Interest Investment Profits GNP GDP National Income Consumption Employee compensation Equality of Expenditure and Income (1) Expenditures (2) Output (3) Income = = Maclachlan, Macroeconomics, 9/30/04

  11. GDP = C + I + G + (X-M) Add net foreign factor income to get … GNP Maclachlan, Macroeconomics, 9/30/04

  12. NDP, NNP Maclachlan, Macroeconomics, 9/30/04

  13. NI = GNP – depreciation – indirect business taxes PI = NI + transfer payments + net non-business interest income – corporate retained earnings- social security taxes Maclachlan, Macroeconomics, 9/30/04

  14. Personal disposable income = Personal income – personal taxes Maclachlan, Macroeconomics, 9/30/04

  15. How can the government have a $2 trillion budget but only have $600 billion of that included in the GDP? Maclachlan, Macroeconomics, 9/30/04

  16. Real versus Nominal Nominal GDP = Real GDP * index/100 Maclachlan, Macroeconomics, 9/30/04

  17. Limitations Measurement problems. Not a measurement of well-being, just economic activity. Misinterpretation of subcategories. Maclachlan, Macroeconomics, 9/30/04

  18. Problems comparing per capita GDP across countries Bangladesh $270 USA $35,000 Exchange rate method and purchasing power method. Maclachlan, Macroeconomics, 9/30/04

  19. 7-5 Personal consumption 700 Investment 500 Net non-biz interest 20 Government purchase 300 Profits 500 Wages 972 Net exports 275 Rents 25 Depreciation 25 Indirect biz taxes 100 Corporate RE 60 Net foreign factor income -3 Interest 150 Social security contribution 0 Transfer payments 0 Personal taxes 165 GDP & GNP expenditure and income, NDP, NI, PI, personal disposable income. Maclachlan, Macroeconomics, 9/30/04

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