© the mcgraw-hill companies, inc., 1998 irwin/mcgraw-hill national income accounting chapter 8
TRANSCRIPT
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National Income National Income AccountingAccounting
Chapter 8
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Laugher CurveLaugher Curve
Three econometricians went out hunting, and came across a large deer.
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Laugher CurveLaugher Curve
Three econometricians went out hunting, and came across a large deer.
The first econometrician fired, but missed, by a yard to the left.
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Laugher CurveLaugher Curve
The second econometrician fired, but also missed, by a yard to the right.
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Laugher CurveLaugher Curve
The second econometrician fired, but also missed, by a yard to the right.
The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"
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Chapter ObjectivesChapter Objectives
State why national income accounting is important.
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Chapter ObjectivesChapter Objectives
State why national income accounting is important.
Define GDP, GNP, and NI.
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Chapter ObjectivesChapter Objectives
State why national income accounting is important.
Define GDP, GNP, and NI. Calculate GDP in a simple example,
avoiding double counting.
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Chapter ObjectivesChapter Objectives
Explain why GDP = C + 1 + G + (X - M).
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Chapter ObjectivesChapter Objectives
Explain why GDP = C + 1 + G + (X - M). Distinguish between real and nominal
values.
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Chapter ObjectivesChapter Objectives
Explain why GDP = C + 1 + G + (X - M). Distinguish between real and nominal
values. State some limitations of national
income accounting.
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National Income National Income AccountingAccounting In the 1930s it was impossible to talk
intelligently about macroeconomics since the discussion lacked rigorous terminology.
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National Income National Income AccountingAccounting In the mid-1930s, Keynesians Simon
Kuznets and Richard Stone began to develop this terminology.
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National Income National Income AccountingAccounting They developed national income
accounting—a set of rules and definitions for measuring economic activity in the aggregate economy—that is, in the economy as a whole.
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National Income National Income AccountingAccounting Measuring Total Economic Output of
Goods and Services
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National Income National Income AccountingAccounting Measuring Total Economic Output of
Goods and Services Gross Domestic Product (GDP) is the
total value of all final goods and services produced in an economy in a one-year period.
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National Income National Income AccountingAccounting Measuring Total Economic Output of
Goods and Services Gross Domestic Product (GDP) is the
total value of all final goods and services produced in an economy in a one-year period.
It is the single most-used economic measure.
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National Income National Income AccountingAccounting Measuring Total Economic Output of
Goods and Services Gross National Product (GNP) is the
aggregate final output of citizens and businesses of an economy in one year.
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National Income National Income AccountingAccounting Measuring Total Economic Output of
Goods and Services GDP measures the economic activity
that occurs within a country.
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National Income National Income AccountingAccounting Measuring Total Economic Output of
Goods and Services GDP measures the economic activity
that occurs within a country. GNP measures the economic activity
of the citizens and businesses of a country.
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National Income National Income AccountingAccounting Moving from GDP to GNP
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National Income National Income AccountingAccounting Moving from GDP to GNP
To move from GDP to GNP, net foreign factor income is added to GDP.
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National Income National Income AccountingAccounting Moving from GDP to GNP
Net foreign factor income is the income from foreign domestic factor sources minus foreign factor incomes earned domestically.
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National Income National Income AccountingAccounting Moving from GDP to GNP
One must add the foreign income of one's citizens and subtract the income of residents who are not citizens.
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Calculating GDPCalculating GDP
All goods and services produced by an economy must be weighted, that is, each good and service must be multiplied by its price.
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Calculating GDPCalculating GDP
Once quantities of a particular good or service are multiplied by its price, we arrive at a value measure of the good or service.
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Calculating GDPCalculating GDP
Finally, all the value measures are added to arrive at GDP.
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Calculating GDPCalculating GDP
GDP is a flow concept.
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Calculating GDPCalculating GDP
The store of wealth is a stock concept.
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Calculating GDPCalculating GDP
The stock equivalent to National Income Accounts is the Wealth Accounts—a balance sheet of an economy’s stocks of assets and liabilities.
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GDP Measures Final GDP Measures Final OutputOutput When one firm sells products to another
firm for use in production of yet another good, the first firm’s products are not considered final output but intermediate products.
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GDP Measures Final GDP Measures Final OutputOutput When one firm sells products to another
firm for use in production of yet another good, the first firm’s products are not considered final output but intermediate products. Intermediate products are used as
input in the production of some other product.
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GDP Measures Final GDP Measures Final OutputOutput Not accounting for intermediate
products would result in double and triple counting.
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GDP Measures Final GDP Measures Final OutputOutput Not accounting for intermediate
products would result in double and triple counting. If we did not eliminate intermediate
goods, a change in organization—say, a merger—would look like a change in output
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Two Ways of Two Ways of Eliminating Eliminating Intermediate GoodsIntermediate Goods The first is to calculate only final output.
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Two Ways of Two Ways of Eliminating Eliminating Intermediate GoodsIntermediate Goods A second way is to follow the value
added approach. Value added is the increase in value
that a firm contributes to a product or service.
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Two Ways of Two Ways of Eliminating Eliminating Intermediate GoodsIntermediate Goods A second way is to follow the value
added approach. Value added is the increase in value
that a firm contributes to a product or service.
It is calculated by subtracting intermediate goods from the value of its sales.
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Value Added Approach Value Added Approach Eliminates Double Eliminates Double
CountingCountingParticipants Cost of
MaterialsValue of
SalesValue Added
Farmer $ 0 $ 100 $ 100Cone factoryand icecream-maker
100 250 150
Middleperson 250 400 150Vendor 400 500 100Totals
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Value Added Approach Value Added Approach Eliminates Double Eliminates Double
CountingCountingParticipants Cost of
MaterialsValue of
SalesValue Added
Farmer $ 0 $ 100 $ 100Cone factoryand icecream-maker
100 250 150
Middleperson 250 400 150Vendor 400 500 100Totals $ 750 $1,250 $500
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Value Added Approach Value Added Approach Eliminates Double Eliminates Double
CountingCountingParticipants Cost of
MaterialsValue of
SalesValue Added
Farmer $ 0 $ 100 $ 100Cone factoryand icecream-maker
100 250 150
Middleperson 250 400 150Vendor 400 500 100Totals $ 750 $1,250 $500
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples Selling your car to a neighbor does not
add to GDP.
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples Selling your car to a used car dealer
who sells your car to someone else for a higher price, does add to GDP.
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples Selling your car to a used car dealer
who sells your car to someone else for a higher price, does add to GDP. The value added is the dealer's
services.
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples Selling a stock or bond does not add to
GDP.
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples Selling a stock or bond does not add to
GDP. The stock broker's commission for the
sales does add to GDP.
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples Social security payments, welfare
payments, veterans' benefits, and other government transfer payments are not included in GDP.
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Calculating GDP: Some Calculating GDP: Some ExamplesExamples The work of unpaid housespouses does
not appear in GDP calculations.
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The Circular FlowThe Circular Flow
The national income accounting identity is the accounting equality of output and income.
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Household Firms (production
The Circular FlowThe Circular Flow
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Household Firms (production
Goods
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
Wages, rents, interest, profits(1)
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
Personal consumption(4)
Wages, rents, interest, profits(1)
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
Personal consumption(4)
Savings(3) Financial markets
Wages, rents, interest, profits(1)
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
Investment(3)
Personal consumption(4)
Savings(3) Financial markets
Wages, rents, interest, profits(1)
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
Investment(3)
Personal consumption(4)
Savings(3)
(2)GovernmentSpendingTaxes(2)
Government
Financial markets
Wages, rents, interest, profits(1)
The Circular FlowThe Circular Flow
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Household Firms (production
Factor services
Goods
Investment(3)
Personal consumption(4)
Savings(3)
Imports(5)Exports(5)
(2)GovernmentSpendingTaxes(2)
Government
Financial markets
Other countries
Wages, rents, interest, profits(1)
The Circular FlowThe Circular Flow
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
The income approach is shown on the top half of the circular flow.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
National income is the total income earned by citizens and businesses in a country in one year.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
Firms make payments to households for supplying their services as factors of production.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
These factors are broken up into employee compensation, rent, interest, and profits.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
These factors are broken up into employee compensation, rent, interest, and profits.
Employee compensation is payments for labor such as salaries and wages.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
These factors are broken up into employee compensation, rent, interest, and profits.
Rents are payments for use of land and buildings.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
These factors are broken up into employee compensation, rent, interest, and profits.
Interest includes payments for loans by households to firms.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Income Approach
These factors are broken up into employee compensation, rent, interest, and profits.
Profits are payments to the owners of firms.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
The expenditure approach is shown on the bottom half of the circular flow.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Specifically, GDP is equal to the sum of the four categories of expenditures.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Specifically, GDP is equal to the sum of the four categories of expenditures.
GDP = C + I + G + (X - M)
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Consumption
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Consumption When individuals receive income, they
can spend it on domestic goods, save it it, pay taxes, or buy foreign goods.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Consumption This is the largest and most important of
the flows.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Investment
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Investment The portion of their income that
individuals save leaves the income stream and goes into financial markets.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Investment Business spending on equipment,
structures, and inventories is counted as investment.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Government consumption and investment
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Government consumption and investment
When individuals pay taxes, those taxes are either spent by government on goods and services or are returned to individuals in the form of transfer payments.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Government consumption and investment
The connection drawn between the government and the financial markets is there because if the government runs a deficit, it must borrow from financial markets to make up the difference.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Net exports
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Net exports Spending on foreign goods escapes the
system and does not add to domestic production, thus spending on imports are subtracted from total expenditures.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Net exports Exports to foreign nations are added to
total expenditures.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP The Expenditure Approach
Net exports Exports to foreign nations are added to
total expenditures. These flows are usually combined into
net exports.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP Equality of Income and Expenditure
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP Equality of Income and Expenditure
Income and expenditures must be equal because of the rules of double-entry bookkeeping.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP Equality of Income and Expenditure
Income and expenditures must be equal because of the rules of double-entry bookkeeping.
Profit is the balancing item.
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Two Approaches to Two Approaches to Calculating GDPCalculating GDP Equality of Income and Expenditure
The national income accounting identity allows GDP to be calculated either by adding up all values of final output or by adding up the values of all earnings or income.
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Using GDP FiguresUsing GDP Figures
Comparing GDP Among Countries
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Using GDP FiguresUsing GDP Figures
Comparing GDP Among Countries GDP is important since we can
compare one country with another and one year's production with another year's.
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Using GDP FiguresUsing GDP Figures
Comparing GDP Among Countries Per capita GDP is another measure
often used to compare nations' GDP.
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Using GDP FiguresUsing GDP Figures
Comparing GDP Among Countries Per capita GDP is another measure
often used to compare nations' GDP. Per capita can be a poor measure of the
various living standards in various nations.
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Using GDP FiguresUsing GDP Figures
Comparing GDP Among Countries Per capita GDP is another measure
often used to compare nations' GDP. To get around the problems of per capita
GDP, economists use purchasing power parity, which adjusts for different relative prices among nations before making comparisons.
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Using GDP FiguresUsing GDP Figures
Economic Welfare Over Time
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Using GDP FiguresUsing GDP Figures
Economic Welfare Over Time Comparing output over time is best
done with real output which is nominal output adjusted for inflation.
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Using GDP FiguresUsing GDP Figures
Real and Nominal GDP
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Using GDP FiguresUsing GDP Figures
Real and Nominal GDP Nominal GDP is GDP calculated at
existing prices.
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Using GDP FiguresUsing GDP Figures
Real and Nominal GDP Real GDP is nominal GDP adjusted for
inflation.
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Using GDP FiguresUsing GDP Figures
Real and Nominal GDP Real GDP is nominal GDP adjusted for
inflation. Real GDP is important to society because
it measures what is really produced.
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Using GDP FiguresUsing GDP Figures
Real and Nominal GDP Real GDP is nominal GDP adjusted for
inflation. By dividing nominal GDP by the GDP
deflator, we arrive at real GDP.
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Using GDP FiguresUsing GDP Figures
Real and Nominal GDP Real GDP is nominal GDP adjusted for
inflation. By dividing nominal GDP by the GDP
deflator, we arrive at real GDP.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting GDP measures market activity, not
welfare.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting GDP measures market activity, not
welfare. GDP does not measure happiness, nor
does it measure economic welfare.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting GDP measures market activity, not
welfare. Welfare is a complicated idea, very
difficult to measure.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
GDP figures do not measure all market economic activity.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
GDP figures do not measure the following market activities:
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
GDP figures do not measure the following market activities:
Illegal drug sales. Under-the-counter sales of goods to avoid
income and sales taxes. Work performed and paid for in cash.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
GDP figures do not measure the following market activities:
Unreported sales. Prostitution, loan sharking, extortion, and
other illegal activities.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
Estimates of the size of the underground economy range from1.5 to 20 percent of GDP.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
A second type of measurement error occurs in adjusting GDP for inflation.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
A second type of measurement error occurs in adjusting GDP for inflation.
If the price and the quality of a product go up together, has the price really gone up?
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Measurement Errors
A second type of measurement error occurs in adjusting GDP for inflation.
Is it possible to measure the value of quality increases?
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
For example, the line between investment and consumption is often fuzzy.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
For example, the line between investment and consumption is often fuzzy.
Buying a steam iron would be consumption, and if it is used to iron team T-shirts sold by a home business, it would still be counted as consumption.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
For example, the line between investment and consumption is often fuzzy.
Investment includes private housing units, but they do not usually add to our stock of productive tools.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
For example, the line between investment and consumption is often fuzzy.
Investment includes private housing units, but they do not usually add to our stock of productive tools.
The garages and spare bedrooms might if they are used in an income-producing capacity.
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
Some social scientists have developed alternatives to GDP such as the Gross Process Indicator (GPI).
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Some Limitations of Some Limitations of National Income National Income AccountingAccounting Misinterpretation of Subcategories
Some social scientists have developed alternatives to GDP such as the Gross Process Indicator (GPI).
The GPI tries to measure pollution, education, health concerns, as well as GDP.
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GDP Is Worth Using GDP Is Worth Using Despite Its LimitationsDespite Its Limitations National income accounting should be
used with sophistication.
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GDP Is Worth Using GDP Is Worth Using Despite Its LimitationsDespite Its Limitations It is a powerful economic tool that
informs average citizens about the direction the economy is moving.
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National Income National Income AccountingAccounting
End of Chapter 8