1. Chapter 6
Tracking the U.S. Economy

2. National Income Accounts
GDP (Gross Domestic Product)
What is it???
It measures the market value of all final goods and
services produced during a year by resources
located in the U.S., regardless of who owns the
resources.

3. National Income Account
It is based on the simple fact that one person’s spending
is another person’s income.
It is measured in two ways: Total spending of the U.S.
production or by the Total income received from that
production.

4. What is included in GDP?
It includes only final goods and services, i.e. goods sold
to the final user.
Example
Intermediate goods and services are not included.
These are goods that are purchased for resale.
Example

5. Expenditure Approach
This approach adds up spending on all final goods and
services produced during the year.

6. Expenditure Approach
For the expenditure approach, its components are
divided into four:
Consumption
Investment
Government purchases
Net Exports

7. Income Approach
This approach adds up earnings during the year by those
who produce all that output.

8. Income Approach
The income approach sums, or aggregates, income
arising from production.
Wages
Interest
Rent
Profit

9. Aggregate Income
Aggregate Income equals the sum of all the income
earned by resource suppliers in the economy.
SO… we can say :
Aggregate Expenditures = GDP=Aggregate Income
Value Added: At each stage of production, the value added to
the product. This is the selling price of the product minus the
cost of the intermediate goods purchased from other firms.

10. Disposable Income (DI)
The income households have available to spend or to
save after paying taxes and receiving transfer payments.
This is income that is adjusted for net taxes(NT).
This subtracts taxes and adds back transfer payments.
Take-home pay for households.

11. Expenditure Half of the Circular Flow
Where does DI (Disposable Income) go?
Part is spent on Consumption (C ) and part is spent on
Savings ( S).
Consumption remains in the circular flow
However, savings flows to financial markets- banks and other
financial institutions.

12. Leakages Equal Injections
Injections
Government purchases
Exports
Leakages
Saving
Net taxes
Imports

13. Some Production is not included in GDP
It ignores all do-it-yourself production
Child care
Meal preparation
House cleaning
Laundry
Home maintenance and repair
It ignores off-the-book production
Underground economies

14. Some Other Limitations
Leisure, Quality, and Variety
It does not take into account depreciation
Net domestic product.
GDP does not reflect all costs.
Environmental costs
Other externalities
GDP and Economic Welfare

15. Nominal GDP
It is based on the prices prevailing when production
takes place.
Since, price levels change over time, then nominal GDP
cannot be compared across years.
It does not adjust for inflation!!

16. Price Indexes
Base year- the point of reference year
Prices in other years are expressed relative to the base-year
price.
A price index is constructed by dividing each year’s price in
the base year and then multiplying by 100.
The price index in the base year is ALWAYS 100.

17. Consumer Price Index (CPI)
The CPI measures changes over time in the cost of
buying a “market basket” of goods and services purchased
by a typical family.
The government used the 36 months of 1982 thru 1984
as the base period for calculating the CPI for a market
basket .
It is reported monthly.
http://data.bls.gov/PDQ/servlet/SurveyOutputServle
t?
data_tool=latest_numbers&series_id=CUSR0000SA0&
output_view=pct_1mth

18. Some Tables:
ftp://ftp.bls.gov/pub/special.requests/ppi/sopnew10.txt
http://www.bls.gov/ppi/#tables

19. Problems with CPI
Quality bias
 It overstates inflation
It ignores the substitution effect.
 It overstates inflation
Discount stores
Widely used products

20. GDP Price Index
 It measures the average price of all goods and services
produced in the economy.

(Nominal GDP/Real GDP)*100

Before 1995


Fixed-weighted system; base year 1987
Chain-weighted system; base year 2000