1 Chapter2National IncomeAccounting GrossDomesticProductandthePriceLevel 2 NominalandRealGDP NominalGDPmeasuresthedollar oreuro etc valueofallthegoodsandservicesthataneconomyproducesduringaspecifiedperiod suchasayear ThenominalGDPisaflowconcept 3 NominalandRealGDP Formostgoodsandservices pencils automobiles haircuts andsoon thedollarvalueisdeterminedbythepriceatwhichtheseitemssellinthemarketplace Somegoodsandservices notablythoseproducedbygovernments arenotexchangedonmarkets TheseitemsenterintonominalGDPattheirnominal dollar costofproduction 4 NominalandRealGDP Anotherimportantitem owner occupiedhousing entersintoGDPinaccordancewithanestimateofwhatthishousingwouldfetchonthemarketiftheownerrentedthepropertytoanotherperson Imputedrentalincome 5 NominalandRealGDP GDPincludesthevalueofthegoodsandservicesproducedduringaspecifiedtimeinterval suchasayear Thatis GDPmeasurescurrentproduction 6 NominalandRealGDP ThenominalGDPcanbemisleadingbecauseitdependsontheoveralllevelofprices aswellasonthephysicalquantityofoutput 7 NominalandRealGDP 8 CalculatingRealGDP ThemostcommonwaytocomputerealGDPwastomultiplyeachyear squantityofoutputofeachgoodbythepriceofthegoodinabaseyear suchas2000 Thenallofthesemultipleswereaddedtogettheeconomy saggregaterealGDP 9 CalculatingRealGDP TheresultingaggregateiscalledGDPin2000dollars if2000isthebaseyear Or sometimes theresultiscalledGDPinconstantdollars ThenominalGDPissometimescalledGDPincurrentdollars 10 CalculatingRealGDP Ashortcomingofthisapproachisthatitweightstheoutputsofthevariousgoodsbytheirpricesinthebaseyear 2000 Theseweightsbecomelessrelevantovertimeasrelativepricesofgoodschange 11 CalculatingRealGDP ChainweightedrealGDP 12 CalculatingRealGDP 13 CalculatingRealGDP Implicitpricelevelthatweareusingtoconvertadollarvalue nominalGDP implicitpricelevel realGDP implicitpricelevel nominalGDP realGDP 14 CalculatingRealGDP For2006incaseainTable2 1 wehaveimplicitpricelevel 550 468 5 1 17 For2006incaseb wehaveimplicitpricelevel 550 639 0 0 86 15 CalculatingRealGDP Thinkofapriceindexthattakesonthevalue100forthebaseyear whichis2005inourexample Whencomparedtothisbase thepricelevelfor2006incaseais1 17 100 117 whereasthatincasebis0 86 100 86 TheusualnameforthesepriceindexesistheimplicitGDPdeflator ona2005base 16 RealGDPasaMeasureofWelfare TheaggregaterealGDPdoesnotconsiderchangesinthedistributionofincome ThecalculatedrealGDPexcludesmostnon marketgoods RealGDPassignsnovaluetoleisuretime MeasuredrealGDPdoesnotconsiderchangesinairandwaterquality thatis pollution 17 AlternativeViewsofGDP Expenditure Income andProduction 1 Expendituresondomesticallyproducedgoodsandservicesbyvariousgroups households businesses government andforeigners 2 Incomesearneddomesticallyintheproductionofgoodsandservices compensationofemployees rentalincome corporateprofits andsoon 18 AlternativeViewsofGDP Expenditure Income andProduction 3 Domesticproductionofgoodsandservicesbyvariousindustries agriculture manufacturing wholesaleandretailtrade andsoon AllthreeapproacheswillendupwiththesametotalsfornominalandrealGDP 19 MeasuringGDPbyExpenditure 1 Households 2 Businesses 3 Alllevelsofgovernment 4 Foreigners 20 MeasuringGDPbyExpenditure 21 MeasuringGDPbyExpenditure Aclosedeconomy whichhasnotradelinkagestotherestoftheworld Anopeneconomyislinkedthroughtradetotherestoftheworld 22 MeasuringGDPbyExpenditure Somereasonsforusingaclosedeconomymodel Itsimplifiestheanalysis AtleastfortheUnitedStates exportsandimportshavebeensmallcomparedtoGDP sothatlittleerrorarisesfromignoringinternationaltrade Theworldasawholereallyisaclosedeconomy sowehavetocarryoutaclosed economyanalysistoassesstheworldeconomy 23 MeasuringGDPbyIncome Nationalincome Asimpleclosedeconomythathasonlytwobusinesses One amill usesonlylabortoproduceflour Thesecond abakery usesflourandlabortoproducebread Breadistheonlyfinalproduct Flouristheonlyintermediateproduct itisusedupentirelyintheproductionofthefinalgood bread 24 MeasuringGDPbyIncome 25 MeasuringGDPbyIncome 26 MeasuringGDPbyIncome Inpractice divergencesbetweenGDPandnationalincomereflecttwomainitems incomereceiptsandpaymentsinvolvingtherestoftheworldanddepreciationofcapitalstocks 27 MeasuringGDPbyIncome OnesourceofdivergencebetweenGDPandnationalincomeisthatresidentsoftheUnitedStatesreceiveincomefromtherestoftheworld Themainitemistheincomeoncapital assets ownedbyU S residentsbutlocatedabroad AsecondarypartislaborincomeofU S residentsworkingabroad 28 MeasuringGDPbyIncome DepreciationofthefixedcapitalstocklocatedintheUnitedStates 29 MeasuringGDPbyIncome 30 MeasuringGDPbyIncome Personalincome theincomethathouseholdsreceivedirectly Disposablepersonal personalincomeaftertaxes 31 MeasuringGDPbyProduction 32 SeasonalAdjustment Thenational accountsinformationreportedinthenewsmediaandusedformostmacroeconomicanalysescomeinthisseasonally adjustedform 33 Prices Consumerpriceindex CPI Producerpriceindex PPI wholesalepriceindex 34 ProblemswiththeConsumerPriceIndex ManyeconomiststhinkthatthereportedchangesintheCPIoverstateinflationGrowthrat