Eco 13/1

Macroeconomics:The Nation’s Economy

National Income Accounting

To determine the health of the US economy, economists calculate the national income accounting- overall economy’s output (production) and its income.

Natonal Income Accounting

5 major statistics measure the national economy:

1. Gross domestic product2. Net domestic product3. National income4. Personal income5. Disposable personal income

Measuring Gross Domestic Product (GDP)

Broadest measure of the economy’s size.

GDP- total value of all final goods and services produced in the US in a single year.

Tells the amount of goods & services produced within the US borders and made available for purchase that yr.

Measuring Value (GDP)

GDP measures value of all that’s produced, not just the amount of items that are produced.

Measuring Final Goods and Services (GDP)

Economists count only final goods and services to avoid double-counting.

Ex: GDP doesn’t add the price of motherboards and memory chips that are installed for computers for sale. Final price to the buyer already includes them.

Measuring Final Goods and Services (GDP)

Only new goods are counted in GDP.Used cars or refrigerators are not

counted. They’re just transfers of an existing

product from one person to another.New Battery place in a used car is

counted

Computing GDP

Economists add expenditures in 4 categories:

1. Consumer sector (C)2. Investment sector (I)- business

purchases.

Computing GDP

3. Government sector (G)- all purchases by gov’ts.

4. Net exports (X)- difference between what we sell to other countries (exports) and what we buy from other countries (imports).

Weaknesses of GDP

Some workers are paid in fuel, food, housing. GDP can only estimate the value of those goods and services.

Net Domestic Product (NDP) NDP: accounts for the fact that some

production is only due to depreciation.

Depreciation- the loss of value because of wear and tear to durable goods and capital goods

Durable goods- manufactured goods with a lifespan longer than 3 years.

(Cars, refrigerators, etc.)

Net Domestic Product (NDP)

NDP takes GDP and subtracts the total loss in value of capital goods caused by depreciation.

NDP= GDP – value of depreciation

Measurements of Income

Three types:1. National income2. Personal income3. Disposable income

National Income (NI)

The total amount of income earned by everyone in the US.

National Income (NI) NI= the sum of all the income

resulting from 5 different areas of the economy.

1. Wages and salaries2. Income of the self-employed 3. Rental income4. Corporate profits5. Interest on savings and other

investments

Personal Income (PI)

The total income that individuals receive before personal taxes are paid.

PI is derived from NI through 2 steps:1. Subtract corporate income tax2. Subtract profits that business

reinvests to grow. 3. Social security contributions

employers make.

Personal Income (PI We subtract these monies because

they’re not available for people to spend.

Transfer payments are added to National Income (NI)

Transfer payments are welfare payments, unemployment compensation, Social Security, Medicaid.

Disposable Personal Income (DI)

Income left over after taxes, including Social Security contributions

DI= PI – personal taxes Measures the actual amount of

money people have to save and spend.