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Chapter 5 - Gross Domestic Product

What is national income accounting?

BEA, Commerce department

What is gross domestic product?

GDP is the market value of all final
goods and services produced in a
nation during a period of time,
usually a year.

Difference between final good and

intermediate goods

Difference between GNP and GDP

Exclusions intermediate goods, second

hands sales, financial transactions,
stocks, bonds, gifts, transfer payments

(social security, unemployment, Pell

grants etc.)
What is an advantage of using GDP? Its
a dollar measure and consistency across

Simon Kuznet

What is a circular flow model? (Simple

versus complex)
A model that shows us how all the
pieces of the GDP puzzle fit together

Two ways to measure GDP

Expenditure (Output) approach and

income approach

What is the expenditure approach?

The national income accounting
method that measures GDP by adding

all the spending for final goods and

Consumption + Investment
+Government + Foreign (X - M) =

Xn can be positive or negative

X> M = + Xn and is added to the GDP
X<M = - Xn and is deducted from the

What is the income approach?

The method that measures GDP by
adding all incomes

Checkpoint: "How Much Does Mario Add

to GDP?"(P139)

Mario works Part-time at Pizza Hut and earns

an annual wage plus tips of $15,000. He sold
4,000 pizzas during the year. He was
unemployed part of the year, so he received
unemployment compensation of $3,000.
During the past year, Mario bought a used car
for $5,000. Using the expenditure approach,
how much has Mario contributed to GDP?
GDP may be understated or overstated

Shortcomings of GDP
Nonmarket transactions
Distribution, kind, and quality of
Neglect of leisure time
Underground economy
Economic bads
Other measures
National Income
Personal Income

Disposable Personal Income

Nominal and Real GDP
GDP Chain Price Index

Nominal GDP, Real GDP, Chain Price

Index (The GDP deflator) and examples

Base year = 100

What is a flow?

A rate of change in a quantity during

a given time period
What is a stock?
A quantity measured at one point in

Chapter 5A
A Four-Sector Circular Flow Model
Households save part of their income
and place these savings in financial
markets (including banks).
The financial markets loan these funds
to businesses (as well as other

Most funds are loaned to businesses

that invest these funds in capital (plant
and equipment).
Government taxes money away from
households and businesses and spends
these tax revenues for the provision of
public goods and services.
Money that flows out of the country
when imports are purchased returns to
the nation when products are exported
to foreigners.
Leakages - Savings, taxes and imports
Out of the spending stream in a nation.
Injections - Investment, government
spending and exports
When the leakages equal the injections
then total spending equals GDP and the
macro economy is in equilibrium.
When the leakages exceed the injections
then total spending is less than GDP and

the macro economy contracts (we get a

When the leakages are less than the
injections then total spending exceeds
GDP and the macro economy expands
(and may cause inflation).