National-income accounting refers to the
measurement of aggregate economic activity,
particularly national income and its
Gross domestic product (GDP) is the total
market value of final goods and services
produced within a nation’s borders in a given
time period. (Usually a year)
Total Market Value means the dollar value of
every one of the good or service produced
during the period of time.
Final goods and service means that
production is only counted in the final stage.
This is to keep things such as a car’s engine
from being counted twice.
Gross National Product (GNP) refers to output
produced by American-owned factors
regardless of location.
GDP refers to output produced within
GDP is geographically focused, including all
output produced within a nation’s borders
regardless of whose factors of production are
used to produce it.
Japanese companies producing in America
count, but not American companies abroad.
GDP per capita is total GDP divided by total
GDP per capita is commonly used as a
measure of a country’s standard of living.
However, it is not always an accurate
There are three major exceptions when
◦ Non-Market Activities
◦ Unreported Incomes
◦ Intermediate Goods
GDP measures exclude most goods and
services produced that are not sold in the
◦ A homemaker who cleans, washes, gardens, shops
and cooks produces goods of value.
◦ Because they are not exchanged in the market they
are not included in GDP.
The GDP statistics fail to capture market
activities that are not reported to tax or
The underground economy is motivated by
tax avoidance or to conceal illegal activities.
Intermediate goods are goods or services
purchased for use as input in the production
of final goods or services.
For example, the engine or chassis of a car
are not counted, so as to keep them from
being counted twice.
Value added is the increase in the market
value of a product that takes place at each
stage of the production process.
Stages of Production Value of Value Added
1. Farmer grows wheat, sells it
2. Miller converts wheat to
flour, sells it to baker
3. Baker bakes bagel, sells it to
4. Bagel store sells bagel to
Total $1.75 $0.75
Compute the value of the final output.
Count only the value added at each stage of
Nominal GDP is the value of final output
produced in a given period, measured in the
prices of that period.
Real GDP is the value of final output
produced in a given period, adjusted for
The base period is the time period used for
From this base year, we find the GDP deflator
for other years.
The GDP deflator is a measure of price
changes over time.
The general formula for computing real GDP
nominal GDP in year t
Real GDP in year t =
Real GDP in 2000 = $9,767 billion
GDP (billions of dollars per year)
1980 1985 1990 1995 1996 2000
Changes in real GDP tell us how much the
economy’s output is growing.
Growth is at the expense of future output
unless factors of production are replaced.
Depreciation is the consumption of capital in
the production process — the wearing out of
plant and equipment.
Net domestic product is the amount of output
we could consume without reducing our
stock of capital.
NDP = GDP – depreciation
Investment is spending on (production of)
new plant, equipment, and structures (capital)
in a given time period, plus changes in
The distinction between GDP and NDP is
mirrored in the difference between gross
investment and net investment.
Gross investment is total investment
expenditure in a given time period.
Net investment is gross investment less
The stock of capital — the total collection of
plant and equipment — will not grow unless
gross investment exceeds depreciation.
The GDP accounts also tell us what mix of
output has been selected, that is, society’s
answer to the core issue of WHAT to produce.
The major uses of total output conform to the
four sets of market participants: consumers,
business firms, government, and foreigners.
Goods and services used by households are
called consumption goods.
Consumer spending claims nearly two-thirds
of our annual output.
Investment goods are the plant, machinery,
and equipment that we produce.
Also includes net inventory changes and new
Resources purchased by the government
sector are unavailable for consumption or
Exports are goods and services sold to
Imports are goods and services purchased
from foreign sources.
Exports are added to GDP and imports are
Net Exports are the value of exports
minus the value of imports.
The value of GDP can be
computed by adding up
expenditures of market
GDP = C + I + G + (X – IM)
C = Consumption expenditure X = exports
I = investment expenditure IM = imports
G = government expenditure
GDP accounts have two sides.
◦ One side focuses on expenditure – the demand
◦ The other side focuses on income – the supply side.
VALUE OF OUTPUT VALUE OF INCOME
Investment spending Profits
market market Interest
By charting the flow of income through the
economy, we see FOR WHOM the output is
Depreciation charges reduce GDP to the level
of NDP (Net Domestic Product) before any
income is available to current factors of
NDP = GDP – depreciation
Wages, interest, and profits paid to foreigners
are not part of U.S. income.
They need to be subtracted from the income
Incomes earned by U.S. citizens in other
nations represents an inflow of income to U.S.
households and are added.
Once depreciation charges and indirect
business taxes are subtracted from GDP and
net foreign income is added, we have national
National income (NI) is total income earned
by current factors of production.
NI = NDP – indirect business taxes +
net foreign factor income
Personal income (PI) is the income received by
households before payment of personal taxes.
Personal income = National income –
(corporate taxes + retained earnings +
Social Security taxes)
+ (transfer payments + net interest)
Disposable income (DI) is the after-tax
income of households.
It is personal income less personal taxes.
Disposable income = personal income –
Saving is that part of disposable income not
spent on current consumption –disposable
income less consumption.
All disposable income is either consumed or
Disposable income = Consumption +
Income flow Income flow
(in billions) (in billions)
Gross domestic product $9,963 National income (NI) 8,002
Less depreciation (1,257) Less corporate taxes (284)
Net domestic product 8,706 Less retained earnings (244)
Less indirect business (770) Less Social Security (827)
National income (NI) 8,002 Plus transfer payments 1,068
Plus net interest 567
Personal income (PI) 8,282
Less personal taxes (1,292)
Disposable income 6,990
To households, in the form of disposable
To businesses, in the form of retained
earnings and depreciation allowances.
To government, in the form of taxes.