Chapter 02

The Measurement and Structure of the National Economy

The National Income Accounts states that economic activity can be measured in three different ways:
• The Product Approach: measures economic activity as the amount of output produced, excluding intermediate stages of production.
• The Income Approach: measures economic activity by the total amount of income received by the producers of the output.
• The Expenditure Approach: measures economic activity by the total amount of spending by the ultimate purchasers of output.

Example
• Orange Inc. Transactions

• Juice Inc. Transactions

Wages paid to employees 15,000
Taxes paid to government 5,000
Revenue from sales of oranges
Sales to the public
10,000
Sales to Juice Inc.
25,000

Wages paid to employees 10,000
Taxes paid to government 2,000
Oranges purchased from
Orange Inc.
25,000
Revenue from sales of Juice
Sales to the public
40,000

Example
Paul and John live in an island. Paul grows coconuts and catches fish. Last year, he harvested 1000 coconuts and caught 500 fish. He values one fish as worth two coconuts.
Paul gave 200 coconuts to John in exchange for help in the harvest, and he gave John 100 fish in exchange for collecting worms for use in fishing. Paul stored 100 of his coconuts in his hut for consumption at some future time.
He also used 100 fish as fertilizer for the coconut trees, as he must every year to keep the trees producing. John consumed all of his coconuts and fish.
In terms of fish, what is the output of the island? What are consumption and investment? What are the incomes of
Paul and John?

Product Approach
GDP (Gross Domestic Product) is defined as the market value of final goods and services newly produced within a nation during a fixed period of time.

1. Market Value: Goods and services are counted at the prices they are sold. This makes it possible to add the production of different goods and services.
2. Newly produced goods and services: We only look at goods and services generated in the current period.
3. Final Goods and Services: Only final goods and services are considered. Intermediate goods and services are not counted.

What is the difference between GDP and GNP
(Gross National Product)?
GDP + NFP = GNP
NFP (Net Factor Payments from abroad) is equal to the Income paid to domestic factors of production by the rest of the world minus the income paid to foreign factors of production by the domestic economy.

Expenditure Approach
• The expenditure approach measures GDP as total spending on final goods and services produced within a nation during a specified period of time.
• We have the Income- Expenditure Identity:
Y = C + I + G + NX
Y = GDP. C = Consumption. I = Investment.
G = Government purchases of goods and services.
NX = net exports of goods and services.

Consumption
•

It usually accounts for 2/3 of the GDP in the US and is divided in three categories:
1. Consumer durables: long-lived consumer items (cars, TV, furniture);
2. Non-durable goods: shorter-lived items such as food and clothing.
3. Services: such as education, health care, financial services and transportation.

2012-07-01

2012-01-01

2011-07-01

2011-01-01

2010-07-01

2010-01-01

2009-07-01

2009-01-01

2008-07-01

2008-01-01

2007-07-01

2007-01-01

2006-07-01

2006-01-01

2005-07-01

2005-01-01

2004-07-01

2004-01-01

2003-07-01

2003-01-01

2002-07-01

2002-01-01

2001-07-01

2001-01-01

2000-07-01

2000-01-01

1999-07-01

1999-01-01

1998-07-01

1998-01-01

1997-07-01

1997-01-01

1996-07-01

1996-01-01

1995-07-01

1995-01-01

2500.0

2000.0

1500.0

1000.0

Durables

500.0
Non-Durables

0.0

Investment
1. Fixed Investment: spending for new capital goods, inlcuding:
- Business Fixed Investment: spending on structures and equipment.
- Residential