CHAPTER 37
National Income Accounting
How to Map the Circulation of Money and Goods
LEARNING OBJECTIVES
Explain the flows of money and goods between businesses and households.
OUTLINE OF CHAPTER
I. Introduction
II. The Circular Flow of Gross Domestic Product
III. GDP from the Expenditure Side
KEY TERMS
circular flow
the supply of goods and services moves in one direction, while demand in the form of money
moves in the other direction
consumption
effective demand
demand based on spending of money by consumers and investors
employee compensation
wages, salaries, bonuses, commissions, and fringe benefits
expenditures
equipment
national income
the revenues received by all businesses and households
net exports
the difference between what is sold to other countries and what is purchased from other
consumption expenditures subtracted from personal disposable income
interest
which the individual or firm belongs
exports
trade surplus
exports are greater than imports
transfer payment
payments by the government to people for reasons other than current services to government
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Explain the flows of money and goods between businesses and households.
1. Explain how and why money goes from businesses to households and how and why
money goes from households to businesses.
2. Explain how demand and supply flows between businesses and households.
Demand by consumers and investors flows from households to businesses. The supply of
Discuss the relationships of GDP, expenditures, and national income.
3. How is GDP measured?
4. What is national income used for? How does this correspond to expenditures and GDP?
Describe the components of expenditures, GDP, and national income and explain how each
is calculated.
5. What are the components of expenditures? Describe each one in detail. What is the
difference between gross and net expenditures?
The components of expenditures include consumption, investment, government spending
6. What are the sources of income from production? What are other sources of income to
households?
APPENDIX 37.1
Detailed, Systematic Income Accounts
LEARNING OBJECTIVES FOR APPENDIX 37.1
Describe how official government agencies track aggregate economic activity in great
detail.
OUTLINE OF APPENDIX
ANSWERS TO APPENDIX 37.1 REVIEW QUESTIONS
Describe how official government agencies track aggregate economic activity in great
detail.
1. What agency tracks flows of dollars and production?
2. What are some measures listed under national income?
Explain the difference between GDP, GNP, and national income.
3. How is GDP calculated? How is GNP calculated?
The difference between GDP and GNP has to do with foreign direct investment. GNP
4. How is national income calculated from GNP?
APPENDIX 37.2
Net Economic Welfare
LEARNING OBJECTIVE FOR APPENDIX 37.2
Discuss why GDP is not necessarily a reflection of social and individual well-being.
OUTLINE OF APPENDIX 37.2
ANSWERS TO APPENDIX 37.2 REVIEW QUESTIONS
Discuss why GDP is not necessarily a reflection of social and individual well-being.
1.
2. What goods and services are not captured by GDP?