1. "The total volume of business sales measured in monetary terms in most economies is
several times larger than the real GDP of the economy examined." Is this statement true
or false? Explain your answer in a couple of sentences.
2. The GDP (in nominal terms) for Australia is $1,500.26 billion, while that of Brazil is
$2,138.92 billion. Given that GDP is a measure of what is produced in a country, and is
used to evaluate well-being in a country, are Brazilians better off than Australians?
Explain your answer. One word answer is not enough. (Data
from http://statisticstimes.com/economy/projected-world-gdp-ranking.php)
3. Calculate all six of the national income accounts.
Personal consumption expenditures
Federal government purchases of goods and services
State and local government’s purchases
Gross private domestic investment
Proprietors’ income
Compensation of employees/wages
Corporate profits after taxes
Corporate profit taxes
Rental income
Depreciation
Indirect business taxes (taxes on production and imports)
Net interest
Exports
Imports
Undistributed corporate profits/retained earnings
Transfer payments
Personal income taxes
Social Security taxes (Social Insurance taxes)
Statistical discrepancy
Net factor earnings from abroad
$ 1,750
351
331
412
150
1,851
188
23
346
295
146
147
299
375
111
66
72
222
15
100
Follow the formulas in table 6.2 and 6.3 or follow the example in the first document posted in
this folder - and calculate the national income accounts for the country above. (Calculate GDP,
GNP, NNP, NI, PI and DI).
SEE ATTACHED DOCUMENT FOR THIS QUESTION
Complete the assignment from the expenditure side.
(Hints: don’t forget government expenditures include all levels of government expenditures. If
you complete the calculations from the income side: Add to Corporate profits = corp. profits
before taxes (includes corporate profits after taxes+ corporate taxes); proprietors’ income should
be included in income from the income side, if the data is given separately).
Each category should only be used once in the calculations.)
Chapter 6 national income accounting
Gross domestic product is a basic measure of macroeconomic performance. This chapter identifies the
component parts of GDP and describes their significance — personal consumption expenditures, gross
private domestic investment, government purchases, and net exports. The circular flow of goods,
services, and resources and the circular flow of money are used to show how gross domestic product
can be viewed as either flows of expenditure on newly produced final goods and services or as
equivalent flows of money income to people who provide the resources used to produce goods and
services. These two views of GDP are represented by the expenditure approach and the income
approach to measuring GDP.
The data generated by national-income accounting is used to track the economy’s performance. This
chapter provides a framework on which future chapters will build. The three questions that are to be kept
in mind while reviewing the chapter are:
1. How much income is being produced? What is it being used for?
2. How much income is being generated in the marketplace?
3. What will happen to prices and wages?
Remember:
GDP vs. GNP
GNP refers to output produced by American-owned factors regardless of location.
GDP refers to output produced within America’s borders.
GDP is geographically focused, including all output produced within a nation’s borders
regardless of whose factors of production are used to produce it.
GDP measures production in dollar terms.
Nominal GDP – The value of final output produced in a given period, measured in the prices of that
period (current prices).
Real GDP – The value of final output produced in a given period, adjusted for changing prices.
Gross private domestic Investment- depreciation=net private domestic investment
Corporate profits= retained earnings + corporate taxes + dividend
Investment = Expenditures on (production of) new plant, equipment, and structures (capital) in a given
time period, plus changes in business inventories.
Wesley Clair Mitchell (1874-1948) furthered the development of index numbers as part of a broader
effort to gather statistical data and improve economists’ ability to assess economic well-being. Mitchell
believed that improving the available data was necessary if economic science was to advance in a
meaningful way. As Mitchell expressed it, "Economics will develop more fruitfully in the future upon the
quantitative side. The economists of today stand the best chances of improving upon the work of their
predecessors if they rely more and more upon the most accurate statistical recording of observations." (1)
Born in Russville, Illinois, the son of Civil War Army doctor turned farmer, Mitchell earned his Ph.D. at
the University of Chicago in 1899. While Mitchell had a distinguished career as a teacher and researcher
at the University of Chicago, University of California, Columbia University, and The New School of
Social Research, Mitchell’s greatest contribution came when he founded the National Bureau of
Economic Research (NBER) in 1920, where he served as the Director of Research from 1925 to 1945.
The bureau still operates today, providing valuable data and studies for economists and policymakers.
Nominal GDP – The value of final output produced in a given period, measured in the prices of that
period (current prices). (Current output at current prices.)
Real GDP – The value of final output produced in a given period, adjusted for changing prices. (Current
output*base year prices.)
Watch YouTube video on calculating GDP ( http://www.youtube.com/watch?v=yUiU_xRPwMc)
Watch YouTube video (http://www.youtube.com/watch?v=QiNZdGAZzeAon) on the difference between
GDP and GNP.
http://www.businessinsider.com/deutsche-bank-hurricane-sandy-on-gdp-2012-11
National income accounting:
http://www.youtube.com/watch?v=beyOEvMKK48
GDP:
http://www.youtube.com/watch?v=LzriizHyYhs
Calculating real and nominal GDP: http://www.khanacademy.org/science/macroeconomics/gdptopic/real-nominal-gdp-tutorial/v/real-gdp-and-nominal-gdp VERY IMPORTANT!!!!!
A.
B.
C.
D.
E.
Three Ways to Compute GDP
Economists use three approaches to compute GDP—the expenditure approach, the
income approach, and the value-added approach.
What GDP Omits
Some exchanges that take place in an economy are not included in GDP. These include
some nonmarket goods and services, legal and illegal underground activities, sales of
used goods, financial transactions, government transfer payments, and leisure.
GDP is Not Adjusted for Bads Generated in the Production of Goods
Some economists argue that GDP overstates our overall economic welfare, since it does
not net out bads.
Per Capita GDP
Per capita GDP is found by dividing a country’s GDP by its population.
Is Either GDP or Per Capita GDP a Measure of Happiness or Well-Being?
GDP figures are useful for obtaining an estimate of the productive capabilities of an
economy, but they do not necessarily measure happiness or well-being.
SOLVED PROBLEM. Nominal and Real GDP. In this exercise, you calculate nominal and real GDP
for a simple economy. You then calculate real GDP using a base year
Suppose than an economy consists of only two types of products: computers and cars.
Sales and price data for these two products for two different years are as shown below:
year
No. of
Computers Sold
2001 5000
2012 10000
Price per
Computer
$6,000
$2,000
No. of
cars
1000
5000
Price per
car
$12,000
$20,000
Nominal GDP in any year is calculated by multiplying the quantity of each final product sold by its price
and summing over all final goods and services. Assuming that all computers and automobiles are final
goods, nominal GDP in 2001 is= 5000*$6,000+1,000*$12,000 = 30,000,000+12,000,000= 42,000,000
nominal GDP in 2012 is= 10000*$2,000+5,000*$20,000 = 20,000,000+ 100,000,000= 120,000,000
If 2012 is the base year
REAL GDP in 2001 is: 5000*$2,000+1,000*$20,000=10,000,000 +20,000,000 = 30,000,000
Real GDP in 2012 is= 10000*$2,000+5,000*$20,000 = 20,000,000+ 100,000,000= 120,000,000
In words: the value of cars and computers sold (nominal GDP/current GDP) at 2001 prices in 2000 was
$42 million and in 2012 at 2012 prices was $120 million. The increase was caused by more of both items
sold, while the price of cars increased, the price of computers decreased.
To make the data for the two years comparable, real GDP is calculated. The real GDP in 2001 was $30
million, that is, had the products been sold at 2012 prices this is the revenue that would have been earned.
Thus we know that between 2001 and 2012 production increased from $30 million to $120 million
showing the increased quantity of both goods sold.
Table 6.3 from the textbook –national income accounts
Table 6.3 From GDP to Disposable Personal Income
GDP, a measure of total output, equals GDI, the total income generated in the production of
goods and services in an economy. The chart traces the path from GDP to disposable
personal income, which equals the income households actually receive.
GDP= C+I+ G (all levels of Government) + exports- imports
GDP + net factor earnings from abroad
= gross national product (GNP)
GNP − depreciation (consumption of fixed capital)
= net national product (NNP)
NNP − statistical discrepancy
= national income (NI)
NI − income earned but not received [e.g., taxes on
production and imports, social security payroll taxes,
corporate profit taxes, and retained earnings] + transfer
payments and other income received but not earned in =
personal income (PI)
the production of GNP
Or simply put……
[NI - corporate profit taxes – undistributed corp.
earnings (retained earnings) - Social security taxes +
transfer payments] =Personal income
PI − personal income taxes
= disposable personal income (DPI)
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