Chapter 2The Measurement and Structure of the National Economy

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GDP and its components

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Calculate GDP using

the Expenditure

approach.

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Table 2.2 Income Approach to Measuring

GDP in the United States, 2011National Income: total

income received by

domestic resource

owners (whether here or

abroad), plus taxes paid

to the government

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Table 2.2 Income Approach to Measuring

GDP in the United States, 2011Net National Product (NNP):

the market value of goods

produced by domestic factors

that are available for

consumption and additions to

capital.

Depreciation (consumption of

fixed capital): the value of

capital that wears out or

becomes obsolete.

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Table 2.2 Income Approach to Measuring

GDP in the United States, 2011Net Factor Payments from

abroad (NFP): income paid to

domestic factors of production

abroad minus income paid to

foreign factors domestically.

GNP (Gross national Product):

the market value of goods and

services newly produced by

domestic factors of production

(regardless of where the factors

are used)

GDP = GNP - NFP

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Private Sector and Government Sector Income

Private disposable income: the amount of income that the private sector has available to spend.

Private disposable income = Y + NFP + TR (transfers) + INT (interest payments on gov debt) T (taxes)

Net government income = T TR INT

private disposable income + net government income = Y + NFP = GNP

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Nominal vs. Real variables

Nominal variables are measured in terms of current market values.

Nominal GDP: current-dollar GDP; the dollar value of an economys final output measured at current market prices

Real variables are measured by the prices of a base year.

Real GDP: constant-dollar GDP; the physical volume of an economys final production using the prices of a base year

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Table 2.3 Production and Price Data

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Table 2.4 Calculation of Real Output with Alternative Base Years

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Price Indexes

Price index: a measure of the average level of prices for some specified set of goods and services, relative to the prices in a specified base year.

GDP deflator: a price index that measures the overall level of prices of goods and services included in GDP

Real GDP = 100*(nominal GDP)/(GDP deflator)

GDP deflator = 100*(nominal GDP)/(real GDP)

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Price Indexes

Consumer price index (CPI): measures the prices of consumer goods

CPI (in a given year) = 100*(price of market basket in specific year) / (price of same market basket in base year)

Biased upwards?

Inflation rate: the percentage rate of increase in the price index per period

Inflation rate between t and t+1: t+1 = (Pt+1 Pt)/Pt = Pt+1/Pt

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Figure 2.3 Overall PCE inflation rate and core

PCE inflation rate, 1960-2011

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Interest Rates

Interest rate: the rate of return promised by a borrower or lender

Most interest rates tend to move up and down together, so we can speak of simply the interest rate.

Expected real interest rate = nominal interest rate expected inflation rate

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