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Chapter 2Measuring National Income1.Outline of measuring national incomeFinal goods and serviceshouseholdsBuying for goods and servicesProductive servicesexpenditure(=GDP)businessesIncome(=GDP)Wages,rents,profits,(=GDP)Income(=GDP)Selling for goods and servicesFlow of goods and servicesFlow of money2.Two measures of national output1)Flow-of-product Approach(goods flow)2)Earnings or cost Approach(earnings flow)3)Equivalence of the two approaches1)Flow-of-product ApproachnIn this measure,we only calculate the final products,not intermediate goods(avoiding double counting).If we add all the consumption spent on the final goods and services,well get the two-part-modes GDP.(as the figure:the upper loop)2)Earnings or costs approachnThe businesses must pay for the productive inputs:wage,rent,profit,etc.These we call the cost the business must expend.The cost are also the earnings the households receive from the business.Add all the cost well get the total GDP.(as the figure:the lower loop)3)Equivalence of the two approachThe results by the two approaches are equal.Why?*National accounts derived from business accounts.(P.392)3.About the“Double Counting”nFinal goods:the product that is produced and sold for consumption or investment.nIntermediate goods:goods that are used up to produce other goods.nValue added:the difference between a firms sales and its purchases of materials and services from other firms.Final goods and intermediate goodsFirm AFirm BFirm CAll FirmsA intermediate goods from other firms$0$100$130$230(exchange each other)B Productive inputs purchased$100$30$50$180(value added)A+B=output$100$130$180$410Bread receipts,Costs,and Value addedStage of productionSales receiptsCost of intermediate goodsValue added(wage,profit,etc)Wheat24-024Flour33-249Baked dough60-3327Delivered bread90-6030207-117904.Details of the national account1)Real GDP&Nominal GDPNominal GDP:GDP measured in actual market prices.Real GDP:GDP measured in constant or invariant prices.GDP Deflator:Nominal GDP/Real GDPQ=real GDP=Nominal GDP/GDP DeflatorExample:P395,396ExampleyearPrice of hotdog($)Output of hotdogPrice of hamburgerOutput of hamburger 20191100250201921503100201932004150If the economy only includes the hotdog and hamburger production and consumption,please calculate the nominal and real GDP(based on year 2019),and the GDP deflator.2)Investment and capital formationnInvestment:the additions to the nations capital stock of buildings,equipment and inventories during a year.nGross Investment:the investment includes all investment goods produced.(includes depreciation which is the amount of capital that has been used up in a year)nNet Investment=Gross Investment-Depreciation3)GovernmentnTransfer Payment nGovernment Purchases&the Official Government Budget the official government budget includes government purchases and the transfer payment.GDP4)TaxesnDirect taxesnIndirect taxes When we calculate GDP in the flow-of cost way,we must add the indirect tax into the GDP.5)Net ExportsnNet exports:the difference between exports and imports of goods and services.nExports means the nation provides the goods and services to other nations.nImports means the foreign countries provide goods and services to the nation.6)Total national investmentnTotal national investment:I+X nTotal net national investmentnNet foreign investment(net exports)7)GDP,NDP,GNPnGDP:Gross Domestic Product,the market value of all final products and services produced in a nation during one year.It includes gross investment.nNDP:Net Domestic Product.(GDP-Depreciation)nGNP:Gross National Product.conclusionnGoods Flow(upper loop):GDP=C+I+G+XnEarnings Flow(lower loop):GDP=Wage or other income+Interest,Rent or other property income+indirect taxes+depreciation+profit nThe result by the two ways is equal.Some Examples8)From GDP to DInGDP=total incomes by different factors+indirect taxes+depreciationnNI(national income)=GDP-indirect taxes-depreciationnDI(disposable income)=NI-direct taxes-net business saving+transfer paymentFrom GDP to NI to DINet exportsGovernmentInvestmentConsumptionGDPNational incomeDepreciationIndirect taxesNIDirect taxesNet business savingTransferpaymentDIExample:GDP by income sideWages and others 10,363Rents 233Firms profits 1,281Other income 880Net interest 884NI 13641Firms transfer payment 81Firms indirect tax 1505Statistical discrepancy 47NNP 15274Depreciation 1790GNP 17064Earnings from the foreign inputs 32GDP 17096 9)The identity of measured saving and investmentnThis is an identity of national income accounting by definition.nInvestment means the additions to the nations capital stock of building,equipment and inventories during a year.From the figure,the investment is the part of upper-loop output which is not consuming.The saving means the part of the lower-loop disposable income(or GDP)that is not spent on consumption.(assume:two-part-economy)nTo summarize:I=product-approach GDP minus C S=earnings-approach GDP minus C The amount GDP measured by the two ways is same.So,I=S:the identity between measured saving and investment.Open-economyITGross private domestic investment(I)Net exports(X)IT=I+X Gross savingPS(private saving):personal saving+business savingGS(government surplus):tax revenues-expenditure I+X=PS+GSI=SIT=I+XS=PS+GS Domestic investment plus net exports equals private savings plus government surplus conclusionnNational saving always equals national investment.The components of investment are domestic investment in plant,equipment and inventories and foreign investment or net exports.The source of saving includes private saving(by household and business)and government saving(the government budget surplus).10)Other details about national income accountnPrice index and inflation nComment on the calculate of GDPPrice index and inflationDefinitionnPrice index:a measure of the average level of pricenInflation:a rise in the general level of price(rate of inflation)nDeflation:a falling in the general level of pricePrice indexnCPI:the consumer price index.It measures the cost of buying a standard basket of goods at different times.(some examples)nGDP deflator(Nominal GDP/Real GDP)nPPI:the Producer Price Index.It measures te level of prices at the wholesale or producer stage.What is in the basket of CPI?谢谢!
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