Chapter 2: National-Income Accounting: Gross
Domestic Product and the Price Level
Chapter Summary:
The chapter introduces the system of National Income Accounts with
particular attention paid to the concept of GDP. The 3 conceptual approaches to
GDP measurement (production, expenditure, and income) are described. Since
goods produced are ultimately purchased, providing income to the seller, the 3
methods should yield similar results. The 4 categories of expenditure
Chapter Outline:
I. Nominal and Real GDP
A. Calculation of Real GDP
B. Real GDP as a measure of Welfare
II. Alternative Views of GDP
A. Expenditure Approach
III. Prices
Teaching Tips:
1. The National Bureau of Economic Research is a wonderful resource for
2. Be sure to help students understand what GDP really measures by
providing clear examples of what is not included: transfer payments,
4
3. It is important for students to understand the strengths and weaknesses
4. The “Back to Reality” sections are an important feature of the textbook,
5. Students should be encouraged to use price indices to make valid
comparisons for data series other than GDP. For example, having students
compare the evolution of the nominal federal minimum wage is an eye-opener.
Answers to review questions, pg. 32
1. Nominal GDP is the market value of final goods and services produced within
2. The implicit price deflator is a price index which is based on the weighted
average price of all final goods and services produced; in the base year it is
3. The 3 approaches to measuring GDP discussed in the chapter yield the same
results because they are looking at the same transaction from different
perspectives. The expenditure approach looks at the various types of spending
Answers to Problems for discussion, pg. 33
4. Official estimates of GDP do not measure welfare exactly, although higher
GDP is highly correlated with widely accepted measures of welfare such as
literacy, life expectancy, infant mortality rates and so forth. One of the reasons
why GDP may underestimate the true change in welfare is because it fails to take
5. As one of many possible examples, consider the following data for
Ireland, 2005 (€ million):
Gross Domestic Product (GDP) at current market prices 161,163
plus Net factor income from the rest of the world -25,248
Gross National Product (GNP) at current market prices 135,914
