notes5spring2018wpd-2.pdf - MACROECONOMICS 201(Spring 2018...

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MACROECONOMICS 201 (Spring 2018) NOTES 5 NATIONAL INCOME ACCOUNTING Topics A. Methods of measuring national output B. Limitations of measures of national output Reading Assignment: Principles of Economics: Chapter 19.0, 19.1 The major goals of macroeconomic policy can be met by developing policies that assure a vigorous and growing production of real goods and services that is not distorted or disrupted by severe inflation or unemployment. Before discussing possible solutions to excessive inflation or unemployment, we need to learn the methods that are used to measure national output. Gross Domestic Product (GDP) Defined: Gross Domestic Product in the U.S. ( And other countries ) (never, ever forget this term ) is the market value of all goods and services produced in the U.S. in a given time period , (almost always one calendar year). This is one of the most frequently used terms in macroeconomics, and the one that is most frequently cited in newspapers, magazines, journals, and other media. An advance estimate of Gross Domestic Product in the U.S. was 19.739 trillion dollars in nominal terms in 2017. GDP can be measured in four ways. It may drive you nutty keeping these variations in your mind. Important : The following procedures measure the monetary value of GDP during a single year. It is not the real GDP that was used in our graph of AD and AS, which refers to the real economy, i.e., the actual physical amounts of goods and services produced as described in notes 1. 1. Measuring Gross Domestic Product (GDP) from the output/production side? The most obvious method, and and probably the most definitive, is simply to sum the market value of all goods and services produced during the course of a year. We need to emphasize that it does not matter whether the production is carried out by companies chartered in the U.S. or by facilities that are chartered by some other country. For example, Nissan trucks produced in the U.S. are counted as GDP for the U.S., but General Motors products produced in Europe, or Canada, or Mexico are not. Nor does it matter whether the production was carried out by an incorporated or unincorporated enterprise. Note the focus on final values . The value of a newly produced car is measured by its selling price, or if not sold, by its additional value in inventory . GDP includes the value of automobiles, sheets, food, dental care, haircuts, government work, construction, computers and any other domestically produced goods or services. In our circular flow of resources (The one shown here is slightly revised and expanded from our earlier version ), this approach to measuring GDP is shown by the value of all output produced by firms and government organizations (right side of graph). It does not, incidently, include pension or other income support or health care payments (say through Medicare) since these do not originate in the creation of a good or service. These payments are called transfer
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2 payments, i.e., they are money taken from one segment of society and given to another. The
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