7 4 a national income accounting measures the

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A. National income accounting measures the economy’s performance by measuring the flows of
income and expenditures over a period of time.
G. National income accounts serve a similar purpose for the economy, as do income statements for
business firms.
H. Consistent definition of terms and measurement techniques allows us to use the national accounts
in comparing conditions over time and across countries.
I. The national income accounts provide a basis for of appropriate public policies to improve
economic performance.
III. Gross Domestic Product
A. GDP is the monetary measure of the total market value of all final goods and services produced
within a country in one year.
1. Money valuation allows the summing of apples and oranges; money acts as the common
denominator (see Table 7.1).
2. GDP includes only final products and services; it avoids double or multiple counting by
eliminating any intermediate goods used in production of these final goods or services. (Table
7.2 illustrates how including sales of intermediate goods would overstate GDP.)
3. GDP is the value of what has been produced in the economy over the year, not what was
actually sold.
J. GDP Excludes Nonproduction Transactions
1. GDP is designed to measure what is produced or created over the current time period.
Existing assets or property that sold or transferred, including used items, are not counted.
2. Purely financial transactions are excluded.
a. Public transfer payments, like social security or cash welfare benefits
b. Private transfer payments, like student allowances or alimony payments
c. The sale of stocks and bonds, which represent a transfer of existing assets (however,
the brokers’ fees are included for services rendered)
3. Secondhand sales are excluded; they do not represent current output. (However, any value
added between purchase and resale is included, e.g., used car dealers.)
A. Two Ways to Look at GDP: Spending and Income
4. What is spent on a product is income to those who helped to produce and sell it.
5. This is an important identity and the foundation of the national accounting process.
K. Expenditures Approach (see Figure 7.1 and Table 7.3)
1. GDP is divided into the categories of buyers in the market: household consumers, businesses,
government, and foreign buyers.
2. Personal Consumption Expenditures (C) includes: durable goods (lasting three years or
more), nondurable goods, and services.
3. Gross Private Domestic Investment (I
g
) includes:
a. All final purchases of machinery, equipment, and tools by businesses.
b. All construction (including residential).
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c. Changes in business inventory.
i. If total output exceeds current sales, inventories build up.
ii. If businesses are able to sell more than they currently produce, this entry will be a
negative number.
d. Noninvestment transactions: Despite how the term “investment” is used by the
general public, investment does not include transfers of ownership of paper assets
(stocks and bonds) or real assets (houses, jewelry, art). Only newly created capital is
counted as investment.