National Accounts

  • National income and product accounts, or national accounts refers to how the Department of Commerce tracks spending in the aggregate

  • Macroeconomic equation

    • Y = C + I + G + (NX)

    • Y: GDP = Aggregate Demand

    • C: Consumer expenditures (or spending)

    • I: Investment spending by businesses

    • G: Government purchases of goods & services

    • NX: Net Exports = Exports - Imports

  • GNP vs. GDP

    • GDP: within the country's borders

    • GNP: with nationality

Circular Flow of the Economy

  • Simplistic representation of a complex macroeconomy

  • Household

    • person or group of people who own the factors of production

  • Firms

    • businesses that produce goods and services (resource processors)

  • Product Market

    • Place in which goods and services are bought and sold

  • Factor Market

    • Market in which land, labor & capital are bought and sold

  • Circular-Flow Diagram

    Product Market Physical Flow Monetary Flow Households HHH Monetary Flow Physical Flow Factor Market Firms

    Goods and services so d FIRMS • produce and sell goods and services • Hire and use factors of producfon Labor, land, Factors of production Wages, rent, and profit MARKETS FOR GOODS AND SERVICES • Firms sell • Households buy MARKETS FOR S end'n Goods and services bought • • HOUSEHOLDS Buy and consume goods and services Own and sell factors of production FACTORS OF PRODUCTION • Households sel • Firms buy and capital Income = Flow of •nputs and outputs = Flow of dollars

  • Expanded Circular-Flow Diagram

    Government purchases of goods and services Government Government borrowing Government transfers Taxes Consumer spending Markets for goods and semces Gross domestic product Investment spending Exports Imports Households Firms Rest of world Private savings Wages, profit, interest, rent Factor markets Wages, profit, interest, rent Financial markets Borrowing and stock issues by firms Foreign borrowing and sales of stock Foreign lending and purchases of stock

GDP Explained

  • Gross Domestic Product

    • Total value of all final goods and services produced in an economy in a given year

  • Approaches to GDP

    • First method of calculating is by surveying firms and adding up the total value of their production of final goods and services (Intermediate goods not counted)

    • Second method adds up aggregate spending on domestically produced final goods and services

    • Third method adds up all factor income (wages, interest, rent, profit) made from sales

    Components Of GDP (billions Of dollars) $15,000 Value added by government = $1,760 (12.3%) Value added by households - $1,830 (12.8%) 10,000 Value added by business 5,000 $10,669 (74.8%) Value added by sector -5,000 Government purchases of goods and services G $2,933 (20.6%) nves men spen ng - $14,649 Consumer spending c. $10,093 (70.8%) Net exports X - 1M -$390 (-2.7%) Spending on domestically produced final goods and services

Real vs. Nominal GDP

  • Nominal GDP

    • Total value of all final goods and services produced in the economy using the current year's prices

  • Real GDP

    • Total value of all final goods and services in the economy using the base year's prices.

  • Real GDP accounts for inflation whereas nominal GDP does not!

  • Real GDP is a more accurate measure of economic growth than is Nominal GDP

  • Which measure is a more accurate means of measuring economic growth

    • You have to keep it real!

  • Calculation

    • GDP Deflator=Nominal GDPReal GDP×100 \text{GDP Deflator} = \dfrac{\text{Nominal GDP}}{\text{Real GDP}} \times 100

    • Real GDP=Nominal GDPGDP Deflator×100 \text{Real GDP} = \dfrac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100

    Prices and Quantities Year 2010 201 1 2012 2010 201 1 2012 2010 201 1 2012 2010 201 1 2012 Price of Hot Dogs $1 $2 $3 Quantity of Hot Dogs 100 150 200 Price of Hamburgers $2 $3 $4 Quantity of Hamburgers 50 100 150 Calculating Nominal GDP ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200 ($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) — - $600 ($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) -$1,200 Calculating Real GDP (base year 2010) ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200 ($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) — - $350 ($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) - $500 Calculating the GDP Deflator ($200 / $200) x 100 = 100 ($600 / $350) x 100 = 171 ($1,200 / $500) x 100 = 240

Real GDP Per Capita

  • Definition

    • GDP divided by the size of the population, equivalent to the average GDP per person

  • Imperfect measure but generally the best measure of standard of living

  • Real GDP per capita is a measure of an economy's average aggregate output per person—and so of what it can do.

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