CHAPTER 5
(MACRO CHAPTER 5)
National Income Accounting
FUNDAMENTAL QUESTIONS
1. How is the total output of an economy measured?
2. Who produces the nation’s goods and services?
OVERVIEW AND OBJECTIVES
The primary purpose of this chapter is to explain the principles of national income accounting. The
chapter shows how government statisticians account for the goods and services that are produced in
our economy.
The unique features of this chapter include the relationships between key measures of national income
and product. The chapter also includes a presentation of the major price indexes.
After reading and reviewing this chapter, the student should be able to:
1. Define national income accounting.
KEY TERM REVIEW
national income accounting
gross domestic product (GDP)
intermediate good
32 Chapter 5: National Income Accounting
indirect business tax
gross national product (GNP)
net national product (NNP)
nominal GDP
real GDP
price index
base year
LECTURE OUTLINE AND TEACHING STRATEGIES
I. Measures of Output and Income
National income accounting measures the output of an entire economy as well as flows between
sectors.
Teaching Strategy: Be sure to emphasize the uses of the national income accounts by
policymakers and economists for your students.
A. Gross domestic product: GDP is the market value of all final goods and services produced in
a year.
1. GDP as output: GDP is a measure of all the final goods and services an economy
produces in a year within a country’s borders.
Chapter 5: National Income Accounting 33
B. Other measures of output and income
1. Gross national product: The GNP is the GDP plus receipts of factor income from the
5. Disposable personal income: DPI equals personal income minus personal taxes.
II. Nominal and Real Measures
Teaching Strategy: Emphasize the economist’s interest in real rather than nominal values. This
will be useful when you present the long-run aggregate-supply curve later.
A. Nominal and real GDP: Nominal GDP measures output in terms of its current dollar value;
real GDP is adjusted for changing price levels.
B. Price indexes: These measure the average level of prices in an economy and show how they
have changed relative to a base year.
1. Base year: The year against which other years are measured. The constant-dollar real
OPPORTUNITIES FOR DISCUSSION
1. Name items that would not be counted in the current year’s GDP. Explain why each is not a part
of GDP.
2. Construct your own market basket of goods based on the purchases you make. How does your
market basket compare to that of your parents or of a senior citizen?
ANSWERS TO EXERCISES
1. The value-added approach to calculating GDP can be used to compute the value of the computer
2.
a. GDP plus net factor income from abroad equals gross national product.
34 Chapter 5: National Income Accounting
3.
a.
Real GDP for year 1 $3 100 $3 100 $600= + =
4. To understand this concept, recall the circular flow model. For business to produce output, it must
5. We cannot simply count the total number of goods and services produced each year because we
6. The CPI is not a useful measure of any particular person’s cost of living because the market
basket of goods and services used to calculate the CPI may not be an accurate representation of
that individual’s purchases. The CPI is meant to be a measure of prices for the typical or average
consumer, not for any particular individual consumer.
11.
Gross investment net investment capital consumption allowance $20 $20 $40= + = + =
12. If we do not add indirect business taxes and capital consumption allowance to the payments to
factors of production, then GDP as income will not equal GDP as output. However, indirect
Chapter 5: National Income Accounting 35
ANSWERS TO STUDY GUIDE HOMEWORK
1. GDP stands for gross domestic product, and measures the market value of all final goods and
services produced in a year in a country.
36 Chapter 5: National Income Accounting
ACTIVE LEARNING EXERCISE
This simple exercise will reinforce the definitions of the national income accounts. In addition, it will
give students an opportunity to deepen their comprehension of the connection of each of the income