chap07lecturenotes - CHAPTER SEVEN MEASURING DOMESTIC...

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CHAPTER SEVEN MEASURING DOMESTIC OUTPUT, NATIONAL INCOME, AND THE PRICE LEVEL INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. State the purposes of national income accounting. 2. List the components of GDP in the output (expenditures) approach and in the income approach. 3. Compute GDP using either the expenditure or income approach when given national income data. 4. Differentiate between gross and net investment. 5. Explain why changes in inventories are investments. 6. Discuss the relationship between net investment and economic growth. 7. Compute NDP, NI, PI, and DI when given relevant data. 8. Describe the system represented by the circular flow in this chapter when given a copy of the diagram. 9. Calculate a GDP price index using simple hypothetical data. 10. Find real GDP by adjusting nominal GDP with use of a price index. 11. List seven reasons why GDP is not a perfect index of social welfare. 12. Explain what is covered in the underground economy and state its approximate size in the U.S. and how that compares to other nations. 13. Give an estimate of actual U.S. GDP in trillions of dollars and be able to compare that to GDP in other countries in terms of rank. 14. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Macroeconomic Measurement A. National income accounting is a method of measuring the flows of income and expenditures in the economy over a period of time. B. National income accounts serve the same purpose for the economy as a whole as does the income statement of a business firm. C. Careful definition of terms and consistent measurement techniques, make the national accounts useful in comparing economic conditions over time. D. The national income accounts provide a basis for the formulation and application of appropriate public policies to improve economic performance. E. 86
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Measuring Domestic Output, National Income, and the Price Level II. Gross Domestic Product—Definition A. The total market value of all final goods and services produced within a country in one year. 1. Nominal or current dollar GDP allows the summing of apples and oranges; money acts as the common denominator. 2. GDP includes only final products (purchased for final use, no additional processing) and services; it avoids double or multiple counting, by eliminating any intermediate goods (needs further processing). 3. GDP sums the dollar value of what has been produced in the economy over the year, not what was actually sold. Farmer Example: Sales Value Added Value Idle Land 0 0 Cotton Farmer 100 100 Cotton Gin 150 50 Fabric Factory 250 100 Apparel Manufacturer 300 50 Retail Clothier 400 100 Totals 1200 400 Value Added Market value of a firm output LESS the value of inputs, which have been purchased from others 4. Gross Domestic Product measures the value of output of a geographic area.
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