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National Income Accounting

Mr Kim's Global Economics
by

Daniel Kim

on 26 September 2014

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Transcript of National Income Accounting

How to Measure the Economy's Performance
National Income Accounting
Essential Question:
How do we measure the growth or health of our economy?
G D P
Now this is a Serious Question!
The Pew Research Center surveyed registered voters on what issues were most important when picking a presidential candidate
Why do you think the
Economy
was the most important issue for voters?
Like the voters, every country wants
Economic Growth
! A healthy economy that can keep up with global competition will create
positive effects
.
How do we measure this growth?
National Income Accounting
Now GDP is the
Most Important
concept in Macroeconomics. Now if we remember from our first unit of, "What is Economics," Macroeconomics deals with the actions of larger units like
governments
and
countries
Fun Fact: If California was its own country, it be the world's 9th biggest economy!
National Income Account is basically the measurement of an economy's performance through overall
output
and
income
Can be defined as an economy's total
production
, or goods and services created
can be defined as resources, typically money, earned through
wages, salaries, or profits
There are five major statistical categories used to measure the National Income Accounting:
Net Domestic Product or NDP
Gross Domestic Product or GDP
National Income
Personal Income
Disposable Personal Income
Ross
omestic
roduct
GDP is the total dollar
value
of all
final
goods and services produced
in the nation
during a single

year
Notice how we used 'value' in the definition. This is because GDP will always be expressed in dollar terms.
It wouldn't do us any good if we found out that the U.S. Economy produced 2 million Y.O.L.O. T-shirts.
We also use the word,
'final'
in the definition of GDP. What economists try to avoid is something called
double counting intermediate goods
.
Imagine we are car salesmen working at a Ford dealership and we want to figure out the dollar value of everything we've sold in a month.
If we sold 10 cars worth
$25,000 dollars
each, and two oil changes worth
$20 dollars
each it'd be safe to assume that our Gross Domestic Product for that month was....
(10 x 25,000) + (2 x 20) = $250,040
But wait Mr. Kim! You forgot to add the cost of everything
inside the car!
The seats, tires, engine, mirrors, and electronics. Don't they cost money too?
It would do us a whole lot better if we said we created
$20 Million dollars worth
of Y.O.L.O. Shirts....
If we also add every part of the car, we would be
double counting
. The initial $25,000 used to value the car
INCLUDED
all small parts inside. All of those small parts would be considered intermediate goods
GDP can be calculated using the following formula:
C + I + G + Xn
There are only four groups that can buy stuff in our country and add the the GDP:
Consumers (People or you and me)
c
Investment (Companies and Businesses)
I
Government
G
Other Countries
Xn
Here are three things that are NOT included in calculating GDP
1. Intermediate Goods
3. Non-Market Activities
2. Non-Production Transactions
Intermediate goods are any goods that are involved in the production of
final goods
If a product was not produced or made
within the specific year
you are calculating GDP, it does not count.
A great example of Non-Production Transactions would be the purchase of
used goods
Finally there are some transactions that do not occur within a traditional market.
Not all Non-Market Activities have to be illegal. Think about the plumbers wife.
By now you should understand how difficult it can be to calculate GDP, especially with a massive economy such as America's
It get harder
Calculating the DOLLAR value of GDP can be difficult because the dollar value changes. Prices for products eventually go up due to something we call
Inflation
Thus GDP is further split up into two parts
Nominal GDP
Real GDP
People will have jobs, purchase goods and services, and will generally have
happier lives
.
Full transcript