macro_l_2 - The Measurement and Structure of the National...

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The Measurement and Structure of the National Economy Measuring the Price Level and Inflation Dr hab. Katarzyna Śledziewska
Outline lecture 2 ° GDP, three approaches ° GDP & GNP ° GDP, income approach ° Saving and Wealth ° Price Indexes ° Inflation ° Adjusting for Inflation ° Interest rates ° The Costs of Inflation
GDP in 2012
GDP per capita in 2012
National Income Accounting ° National income accounts: an accounting framework used in measuring current economic activity ° the best measure of how well the economy is performing ° Three alternative approaches give the same measurements ° Product approach: the amount of output produced ° Income approach: the incomes generated by production ° Expenditure approach: the amount of spending by purchasers
National Income Accounting ° Why are the three approaches equivalent? ° They must be, by definition ° Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach) ° The fundamental identity of national income accounting: total production = total income = total expenditure
The Circular Flow
Outline lecture 2 ° GDP, three approaches ° GDP & GNP ° GDP, income approach ° Saving and Wealth ° Price Indexes ° Inflation ° Adjusting for Inflation ° Interest rates ° The Costs of Inflation
GNP vs. GDP ° GNP (gross national product) = output produced by domestically owned factors of production ° An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land ° GDP = output produced within a country ° An estimated value of the total worth of a country’s production and services, within its boundary, by its nationals and foreigners, ° GDP = GNP – NFP ° NFP = net factor payments from abroad = payments to domestically owned factors located abroad minus payments to foreign factors located domestically
GNP vs. GDP ° Example: Engineering revenues for a road built by a U.S. company in Saudi Arabia is part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP, and is part of Saudi GDP (built in Saudi Arabia), not Saudi GNP ° Difference between GNP and GDP is small for the United States, about 0.2%, but higher for countries that have many citizens working abroad
Outline lecture 2 ° GDP, three approaches ° GDP & GNP ° GDP, income approach ° Saving and Wealth ° Price Indexes ° Inflation ° Adjusting for Inflation ° Interest rates ° The Costs of Inflation
The circular flow through the economy
The income approach to measuring GDP ° Adds up income generated by production (including profits and taxes paid to the government) ° National income = compensation of employees (including benefits) + proprietors’ income + rental income of persons + corporate profits + net interest + taxes on production and imports + business current transfer payments + current surplus of government enterprises
The income approach to measuring GDP ° Adds up income generated by production (including profits and taxes paid to the government) °

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