# 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

• Expanded Circular-Flow Diagram

# 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

# 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

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

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

# 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.