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Unformatted text preview: Chapter 2 The Measurement and Structure of the National Economy Learning Objectives I. Goals of Chapter 2 A) National income accounts; relationships among key macroeconomic variables (Sec. 2.1) B) Gross domestic product—the main measure of output (Sec. 2.2) C) Saving and wealth—private and government (Sec. 2.3) D) Real GDP, price indexes, and inflation (Sec. 2.4) E) Interest rates (Sec. 2.5) II. Notes to Fourth Edition Users A) There is a new application on GDP data revisions and the 2001 recession B) The application on the uses of saving and the role of government budget deficits and surpluses has been deleted C) The discussion of the consumer price index now distinguishes between the reference base period and the expenditure base period Teaching Notes I. National Income Accounting: The Measurement of Production, Income, and Expenditure (Sec. 2.1) A) Three alternative approaches give the same measurements 1. Product approach: the amount of output produced 2. Income approach: the incomes generated by production 3. Expenditure approach: the amount of spending by purchasers B) Juice business example shows that all three approaches are equal 1. Important concept in product approach: value added = value of output minus value of intermediate inputs C) Why are the three approaches equivalent? 1. They must be, by definition 2. Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach) 3. The fundamental identity of national income accounting: total production = total income = total expenditure Chapter 2 The Measurement and Structure of the National Economy 11 II. Gross Domestic Product (Sec. 2.2) A) The product approach to measuring GDP 1. GDP is the market value of final goods and services newly produced within a nation during a fixed period of time Data Application The period referred to here is either a quarter or a year. You may want to show students what some of the tables from the National Income and Product Accounts look like, or send them to the library (or the Internet at www.bea.doc.gov) to find the accounts in the Survey of Current Business . Students are also interested in seeing what happens in the financial markets and to public opinion on the day a new GDP report comes out. 2. Market value: allows adding together unlike items by valuing them at their market prices a. Problem: misses nonmarket items such as homemaking, the value of environmental quality, and natural resource depletion Analytical Problems 1 and 3 both discuss difficulties in counting nonmarket items for GDP, including the important idea that GDP is not the same as welfare. b. There is some adjustment to reflect the underground economy c. Government services (that aren’t sold in markets) are valued at their cost of production 3. Newly produced: counts only things produced in the given period; excludes things produced earlier 4. Final goods and services a. Don’t count intermediate goods and services a....
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- Spring '09
- National Income