CH2 - 2 NATIONALINCOMEACCOUNTING FOCUSOFTHECHAPTER Under...

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2 N ATIONAL  I NCOME  A CCOUNTING FOCUS OF THE CHAPTER • Under  the heading  “national income accounting,” we consider  the different  ways in which  the   national economic pie can be sliced into its component  parts.     • This is more than  just simple accounting.  While we dissect GDP, we are actually learning  how   the many  sources of aggregate  demand  can be added  together  to determine  total national   income, and  just why  a nation’s income and  output  must  necessarily be the same. SECTION SUMMARIES 1. The Production of Output and Payments to Factors of Production Production  transforms  inputs  (factors of production), such as capital and  labor, into output.   This output  is then  used  to make  factor payments to pay labor ( N ) its wage ( w ) and  capital ( K its rate of interest ( i ).  Total payments  to labor equal the amount  of labor hired  multiplied  by the   wage paid  to each worker, and  turn  out to be about  ¾ of all factor payments.  Total payments  to  capital equal the amount  of capital hired  multiplied  by the interest rate. Anything  left over   (typically not very much) is kept  as profit.  These simple facts let us write an identity  equating   output  with  the sum  of its factor payments  and  of profit: Y = (w  x  N) + (i  x  K) + profit Of course, not all of the factors of production  that we use today  come from our own  country, and   not all domestically owned  factors of production  are employed  in our own  country.  This   problem  has led economists to develop  two different  measures  of output:  gross national  product   (GNP) , and   gross domestic product   (GDP) .   GNP includes  payments  made  to factors that are owned  domestically but employed  outside  the   country, and  excludes  payments  made  to factors that are owned  by foreigners, but domestically   employed.   GDP does just the opposite it counts  any output  produced  within  the borders  of a  9
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N ATIONAL  I NCOME  A CCOUNTING 10 country, regardless of who  owns  the factors of production, and  does not count  any output   produced  outside  of the country, even if it uses domestically owned  factors of production.  In   practice the difference between  these two measures  is negligible. We might  also want  to take  depreciation  into account  when  we measure  output.   It is a sad  fact  that capital wears out (depreciates) over time, and  must  be replaced.   Net domestic product   (NDP)   subtracts from total GDP the amount  of output  used  to replace worn  out capital.  We  could  then  subtract taxes to get 
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This note was uploaded on 12/02/2011 for the course ECON 209 taught by Professor Dr.martin during the Spring '09 term at Charleston.

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CH2 - 2 NATIONALINCOMEACCOUNTING FOCUSOFTHECHAPTER Under...

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