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Dr. Rania Ramadan
MACROECONOMICS
CHAPTER 2
The
Measurement
and Structure
of the
National
Economy
Chapter
Outline
National Income Accounting:
The Measurement of
Production, Income, and
Expenditure
Gross Domestic Product
Saving and Wealth
Real GDP
National Income
Accounting
National income accounts: an
accounting framework used in
measuring current economic activity
Three alternative approaches give the
same measurements
Product approach: the amount of
output produced
Income approach: the incomes
generated by production
Expenditure approach: the amount
of spending by purchasers
National Income
Accounting
Important concept in product
approach:
value added = value of output
minus value of inputs purchased from
other producers
National Income Accounting
Why are the three approaches equivalent?
They must be, by definition
Any output produced (product approach) is purchased by
someone (expenditure approach) and results in income to
someone (income approach)
The fundamental identity of national income accounting:
total production = total income = total expenditure (2.1)
Gross
Domestic
Product: The
product
approach to
measuring
GDP
GDP (gross domestic
product) is the market
value of final goods
and services newly
produced within a
nation during a fixed
period of time
Gross Domestic Product (market value)
Market value: allows adding together unlike items by valuing
them at their market prices
Problem: misses nonmarket items such as homemaking, the
value of environmental quality, and natural resource depletion
There is some adjustment to reflect the underground
economy
Government services (that aren’t sold in markets) are valued
at their cost of production
Gross Domestic Product
(newly produced)
Newly produced: counts
only things produced in
the given period;
excludes things
produced earlier.
GrossDomesticProduct:Finalgoodsandservices
Final goods and services
Don’t count intermediate goods and services
(those used up in the production of other
goods and services in the same period that
they themselves were produced)
Final goods & services are those that are not
intermediate
Capital goods (goods used to produce other
goods) are final goods since they aren’t used
up in the same period that they are produced
Gross Domestic Product:
Final goods and services
Final goods and services
Inventory investment (the amount
that inventories of unsold finished
goods) is also treated as a final
good
Adding up value added works well,
since it automatically excludes
intermediate goods
Value added method
Example 1:calculate national income according to the
following data
Methodsofmeasuringnationalincome:Productmethod
Product Value of
product
Value of
intermediate
product
Value added
wheat 20 zero ‫؟‬
flour 25 ‫؟‬ ‫؟‬
bread 35 ‫؟‬ ‫؟‬
National income using value added
method
‫؟‬
Value added method
Sol of Example 1:
Methodsofmeasuringnationalincome
A-Productmethod
Product Value of
product
Value of
intermediate
product
Value added
wheat 20 zero 20
flour 25 20 5
bread 35 25 10
National income using value added method 35
Example 2:if national income for country x is 1670 million $.
Complete the following data to calculate the value added for each
project.
Methodsofmeasuringnationalincome:Productmethod
Product Value of product Value of intermediate
product
Value added
Apple farm 600 ‫؟‬ 600
Cheese factory ‫؟‬ 200 550
Cars factory 500 ‫؟‬ ‫؟‬
Ceramic factory 270 100 ‫؟‬
National income using value added method 1670
Example 2:
Methodsofmeasuringnationalincome:Productmethod
Product Value of product Value of intermediate
product
Value added
Apple farm 600 zero 600
Cheese factory 750 200 550
Cars factory 500 150 350
Ceramic factory 270 100 170
National income using value added method 1670
Gross
Domestic
Product:
GNP vs. GDP
GNP (gross national
product) = output
produced by domestically
owned factors of
production (nationals;
citizens)
GDP = output produced
within a nation
Gross Domestic Product:
GNPvs.GDP
Example: Engineering
revenues for a road built
by a U.S. company in
Saudi Arabia is part of
U.S. GNP (built by a U.S.
factor of production), not
U.S. GDP, and is part of
Saudi GDP (built in Saudi
Arabia), not Saudi GNP
Difference between
GNP and GDP is
higher for countries
that have many
citizens working
abroad
NFP
NFP = net
factor
payments
from abroad
NFP = payments to
domestically owned factors
located abroad( payments to
nationals abroad) minus
payments to foreign factors
located domestically (payments
to foreigners inside the
country)
GDP and GNP
GDP of Egypt= value of output produced by Egyptians
inside Egypt + value of output produced by foreigners
inside Egypt (a)
GNP OF EGYPT= value of output produced by Egyptians
inside Egypt + value of output produced by Egyptians
abroad (b)
So GDP= GNP –(b) +(a)
GDP= GNP –(b-a)
GDP= GNP- NFP
GrossDomesticProduct:TheexpenditureapproachtomeasuringGDP
Measures total spending on final goods and
services produced within a nation during a
specified period of time
Four main categories of spending:
consumption (C), investment (I), government
purchases of goods and services (G), and net
exports (NX)
Y = C + I + G + NX (2.3)
the income-expenditure identity
The expenditure approach to measuring GDP
Consumption: spending by domestic households on
final goods and services (including those produced
abroad)
Three categories
 Consumer durables (examples: cars, TV sets, furniture,
major appliances)
 Nondurable goods (examples: food, clothing, fuel)
 Services (examples: education, health care, financial
services, transportation)
The expenditure approach to measuring GDP
Investment: spending for new capital goods
(fixed investment) plus inventory investment
 Business (or nonresidential) fixed investment:
spending by businesses on structures and equipment
and software
 Residential fixed investment: spending on the
construction of houses and apartment buildings
 Inventory investment: increases in firms’ inventory
holdings
The expenditure approach to measuring GDP
Government purchases of goods and services:
spending by the government on goods or services
 Not all government expenditures are purchases of goods and
services. Some are payments that are not made in exchange
for current goods and services
- One type is transfers, including Social Security payments,
welfare, and unemployment benefits
- Another type is interest payments on the government
debt
 Some government spending is for capital goods that add to
the nation’s capital stock, such as highways, airports,
bridges, and water and sewer systems
The expenditure approach to measuring GDP
Net exports: exports minus imports
 Exports: goods produced in the country that
are purchased by foreigners
 Imports: goods produced abroad that are
purchased by residents in the country
 Imports are subtracted from GDP, as they
represent goods produced abroad, and were
included in consumption, investment, and
government purchases
GrossDomesticProduct:TheincomeapproachtomeasuringGDP
Adds up income generated by production (including
profits and taxes paid to the government)
 National income = compensation of employees (including
benefits) + proprietors’ income + rental income of persons +
corporate profits + net interest + taxes on production and
imports + business current transfer payments + current
surplus of government enterprises
GrossDomesticProduct:TheincomeapproachtomeasuringGDP
 National income + statistical discrepancy = net national
product (meaning that national income almost equal net
national product)
 Net national product = gross national product (GNP) -
depreciation (the value of capital that wears out in the period)
 GNP – net factor payments (NFP) = GDP
Gross Domestic Product: The income
approach to measuring GDP
– Net National Income (NNI): This is GDP minus
depreciation.
Depreciation is the wear and tear on capital
equipment and buildings.
The formula for NNI:
NNI = GDP – Depreciation
– National Income (NI): This is NNI minus
indirect taxes plus subsidies.
Indirect taxes are taxes on the sale of services
and goods. Subsidies are payments made by the
government to producers.
Gross Domestic Product: The income
approach to measuring GDP
– Personal Income (PI): This is NI minus
corporate income taxes plus transfer payments.
Transfer payments are payments made by the
government to individuals that do not require the
recipient to provide any good or service in return.
The formula for PI:
PI = GDP – NIT
(where NIT=net indirect taxes).
– Disposable Income (DI): This is PI minus
personal income taxes.
Gross Domestic Product: The income
approach to measuring GDP
National income is usually measured in terms of
GDP because it is the most comprehensive
measure of economic activity. However, there are
times when it is more useful to measure national
income in terms of GNP.
The income approach to measuring GDP:
Private sector and government sector income
• Private disposable income = income of the private
sector
= private sector income earned at home (Y or GDP) and
abroad (NFP) + payments from the government sector
(transfers, TR, and interest on government debt, INT) –
taxes paid to government (T)
= Y + NFP + TR + INT – T (2.4)
• Government’s net income
= taxes – transfers – interest payments
= T – TR – INT (2.5)
The income approach to measuring GDP:
Private sector and government sector income
• Private disposable income + government’s net
income = GDP + NFP = GNP
GDP 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchases of goods and services 1100
Unemployment insurance payment provided by gov. 70
Government budget surplus 100
Example
Find the following:
NDP
Net exports
Government taxes
Disposable private income
SOLUTION
1. NDP= GDP – DEPRECIATION
Depreciation= gross investment – net investment
=800 – 200 = 600
NDP = 6000 – 600 =9200
2. Net exports =?
GDP = C+ I+G+NX
NX = GDP- (C+ I+G) = 100
SOLUTION
3. Gov. taxes =?
Gov. surplus = gov. revenues – gov. spending = taxes –
transfers –interest payments- G
Taxes= Gov. surplus + G+ transfers + interest payments
= 100 + 1100 +70 +0= 1270
4. private disposable income = GDP – taxes + transfers
= 6000 – 1120 +70 = 4950
Exercise
GDP 10000
Gross investment 1000
Net investment 200
Consumption 7000
Government purchases of goods and services 1200
Government transfers to residents 80
Government net income 100
Find the following:
NDP
Net exports
Government taxes
Disposable personal income
SOLUTION
1. NDP= GDP – DEPRECIATION
Depreciation= gross investment – net investment
=1000 – 200 = 800
NDP = 10000 – 800 =9200
2. Net exports =?
GDP = C+ I+G+NX
NX = GDP- (C+ I+G) = 800
SOLUTION
3. Gov. taxes =?
Gov. net income = taxes – transfers –interest payments
Taxes= Gov. net income+ transfers + interest payments
= 100 + 80 +0= 180
4. disposable income = GDP – taxes + transfers
= 10000 – 180 +80 = 9900

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macro lecture 2.pptx....................

  • 1. Dr. Rania Ramadan MACROECONOMICS CHAPTER 2 The Measurement and Structure of the National Economy
  • 2. Chapter Outline National Income Accounting: The Measurement of Production, Income, and Expenditure Gross Domestic Product Saving and Wealth Real GDP
  • 3. National Income Accounting National income accounts: an accounting framework used in measuring current economic activity Three alternative approaches give the same measurements Product approach: the amount of output produced Income approach: the incomes generated by production Expenditure approach: the amount of spending by purchasers
  • 4. National Income Accounting Important concept in product approach: value added = value of output minus value of inputs purchased from other producers
  • 5. National Income Accounting Why are the three approaches equivalent? They must be, by definition Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach) The fundamental identity of national income accounting: total production = total income = total expenditure (2.1)
  • 6. Gross Domestic Product: The product approach to measuring GDP GDP (gross domestic product) is the market value of final goods and services newly produced within a nation during a fixed period of time
  • 7. Gross Domestic Product (market value) Market value: allows adding together unlike items by valuing them at their market prices Problem: misses nonmarket items such as homemaking, the value of environmental quality, and natural resource depletion There is some adjustment to reflect the underground economy Government services (that aren’t sold in markets) are valued at their cost of production
  • 8. Gross Domestic Product (newly produced) Newly produced: counts only things produced in the given period; excludes things produced earlier.
  • 9. GrossDomesticProduct:Finalgoodsandservices Final goods and services Don’t count intermediate goods and services (those used up in the production of other goods and services in the same period that they themselves were produced) Final goods & services are those that are not intermediate Capital goods (goods used to produce other goods) are final goods since they aren’t used up in the same period that they are produced
  • 10. Gross Domestic Product: Final goods and services Final goods and services Inventory investment (the amount that inventories of unsold finished goods) is also treated as a final good Adding up value added works well, since it automatically excludes intermediate goods
  • 11. Value added method Example 1:calculate national income according to the following data Methodsofmeasuringnationalincome:Productmethod Product Value of product Value of intermediate product Value added wheat 20 zero ‫؟‬ flour 25 ‫؟‬ ‫؟‬ bread 35 ‫؟‬ ‫؟‬ National income using value added method ‫؟‬
  • 12. Value added method Sol of Example 1: Methodsofmeasuringnationalincome A-Productmethod Product Value of product Value of intermediate product Value added wheat 20 zero 20 flour 25 20 5 bread 35 25 10 National income using value added method 35
  • 13. Example 2:if national income for country x is 1670 million $. Complete the following data to calculate the value added for each project. Methodsofmeasuringnationalincome:Productmethod Product Value of product Value of intermediate product Value added Apple farm 600 ‫؟‬ 600 Cheese factory ‫؟‬ 200 550 Cars factory 500 ‫؟‬ ‫؟‬ Ceramic factory 270 100 ‫؟‬ National income using value added method 1670
  • 14. Example 2: Methodsofmeasuringnationalincome:Productmethod Product Value of product Value of intermediate product Value added Apple farm 600 zero 600 Cheese factory 750 200 550 Cars factory 500 150 350 Ceramic factory 270 100 170 National income using value added method 1670
  • 15. Gross Domestic Product: GNP vs. GDP GNP (gross national product) = output produced by domestically owned factors of production (nationals; citizens) GDP = output produced within a nation
  • 16. Gross Domestic Product: GNPvs.GDP Example: Engineering revenues for a road built by a U.S. company in Saudi Arabia is part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP, and is part of Saudi GDP (built in Saudi Arabia), not Saudi GNP Difference between GNP and GDP is higher for countries that have many citizens working abroad
  • 17. NFP NFP = net factor payments from abroad NFP = payments to domestically owned factors located abroad( payments to nationals abroad) minus payments to foreign factors located domestically (payments to foreigners inside the country)
  • 18. GDP and GNP GDP of Egypt= value of output produced by Egyptians inside Egypt + value of output produced by foreigners inside Egypt (a) GNP OF EGYPT= value of output produced by Egyptians inside Egypt + value of output produced by Egyptians abroad (b) So GDP= GNP –(b) +(a) GDP= GNP –(b-a) GDP= GNP- NFP
  • 19. GrossDomesticProduct:TheexpenditureapproachtomeasuringGDP Measures total spending on final goods and services produced within a nation during a specified period of time Four main categories of spending: consumption (C), investment (I), government purchases of goods and services (G), and net exports (NX) Y = C + I + G + NX (2.3) the income-expenditure identity
  • 20. The expenditure approach to measuring GDP Consumption: spending by domestic households on final goods and services (including those produced abroad) Three categories  Consumer durables (examples: cars, TV sets, furniture, major appliances)  Nondurable goods (examples: food, clothing, fuel)  Services (examples: education, health care, financial services, transportation)
  • 21. The expenditure approach to measuring GDP Investment: spending for new capital goods (fixed investment) plus inventory investment  Business (or nonresidential) fixed investment: spending by businesses on structures and equipment and software  Residential fixed investment: spending on the construction of houses and apartment buildings  Inventory investment: increases in firms’ inventory holdings
  • 22. The expenditure approach to measuring GDP Government purchases of goods and services: spending by the government on goods or services  Not all government expenditures are purchases of goods and services. Some are payments that are not made in exchange for current goods and services - One type is transfers, including Social Security payments, welfare, and unemployment benefits - Another type is interest payments on the government debt  Some government spending is for capital goods that add to the nation’s capital stock, such as highways, airports, bridges, and water and sewer systems
  • 23. The expenditure approach to measuring GDP Net exports: exports minus imports  Exports: goods produced in the country that are purchased by foreigners  Imports: goods produced abroad that are purchased by residents in the country  Imports are subtracted from GDP, as they represent goods produced abroad, and were included in consumption, investment, and government purchases
  • 24. GrossDomesticProduct:TheincomeapproachtomeasuringGDP Adds up income generated by production (including profits and taxes paid to the government)  National income = compensation of employees (including benefits) + proprietors’ income + rental income of persons + corporate profits + net interest + taxes on production and imports + business current transfer payments + current surplus of government enterprises
  • 25. GrossDomesticProduct:TheincomeapproachtomeasuringGDP  National income + statistical discrepancy = net national product (meaning that national income almost equal net national product)  Net national product = gross national product (GNP) - depreciation (the value of capital that wears out in the period)  GNP – net factor payments (NFP) = GDP
  • 26. Gross Domestic Product: The income approach to measuring GDP – Net National Income (NNI): This is GDP minus depreciation. Depreciation is the wear and tear on capital equipment and buildings. The formula for NNI: NNI = GDP – Depreciation – National Income (NI): This is NNI minus indirect taxes plus subsidies. Indirect taxes are taxes on the sale of services and goods. Subsidies are payments made by the government to producers.
  • 27. Gross Domestic Product: The income approach to measuring GDP – Personal Income (PI): This is NI minus corporate income taxes plus transfer payments. Transfer payments are payments made by the government to individuals that do not require the recipient to provide any good or service in return. The formula for PI: PI = GDP – NIT (where NIT=net indirect taxes). – Disposable Income (DI): This is PI minus personal income taxes.
  • 28. Gross Domestic Product: The income approach to measuring GDP National income is usually measured in terms of GDP because it is the most comprehensive measure of economic activity. However, there are times when it is more useful to measure national income in terms of GNP.
  • 29. The income approach to measuring GDP: Private sector and government sector income • Private disposable income = income of the private sector = private sector income earned at home (Y or GDP) and abroad (NFP) + payments from the government sector (transfers, TR, and interest on government debt, INT) – taxes paid to government (T) = Y + NFP + TR + INT – T (2.4) • Government’s net income = taxes – transfers – interest payments = T – TR – INT (2.5)
  • 30. The income approach to measuring GDP: Private sector and government sector income • Private disposable income + government’s net income = GDP + NFP = GNP
  • 31. GDP 6000 Gross investment 800 Net investment 200 Consumption 4000 Government purchases of goods and services 1100 Unemployment insurance payment provided by gov. 70 Government budget surplus 100 Example Find the following: NDP Net exports Government taxes Disposable private income
  • 32. SOLUTION 1. NDP= GDP – DEPRECIATION Depreciation= gross investment – net investment =800 – 200 = 600 NDP = 6000 – 600 =9200 2. Net exports =? GDP = C+ I+G+NX NX = GDP- (C+ I+G) = 100
  • 33. SOLUTION 3. Gov. taxes =? Gov. surplus = gov. revenues – gov. spending = taxes – transfers –interest payments- G Taxes= Gov. surplus + G+ transfers + interest payments = 100 + 1100 +70 +0= 1270 4. private disposable income = GDP – taxes + transfers = 6000 – 1120 +70 = 4950
  • 34. Exercise GDP 10000 Gross investment 1000 Net investment 200 Consumption 7000 Government purchases of goods and services 1200 Government transfers to residents 80 Government net income 100 Find the following: NDP Net exports Government taxes Disposable personal income
  • 35. SOLUTION 1. NDP= GDP – DEPRECIATION Depreciation= gross investment – net investment =1000 – 200 = 800 NDP = 10000 – 800 =9200 2. Net exports =? GDP = C+ I+G+NX NX = GDP- (C+ I+G) = 800
  • 36. SOLUTION 3. Gov. taxes =? Gov. net income = taxes – transfers –interest payments Taxes= Gov. net income+ transfers + interest payments = 100 + 80 +0= 180 4. disposable income = GDP – taxes + transfers = 10000 – 180 +80 = 9900