1. Measures of Output and Income
National income accounting measures the output of an entire economy as well as flows between sectors.

Teaching Strategy: Be sure to emphasize the uses of the national income accounts by policymakers and economists.

1. Gross Domestic Product (GDP) includes market value, a measure of final goods and services, and the value of output produced in a year.
   
   

• GDP as output: GDP is a measure of all the final goods and services an economy produces in a year within a countrys borders.
  
  
• GDP as expenditures: GDP also shows what each sector pays for the goods and services it receives.
  
  
• GDP as income: The total value of output can be computed by adding up the income of all sectors.
  
  

Teaching Strategy: It is useful to go back to the circular flow model to show how GDP flows, income, and expenditure flows are related.

1. Other measures of output and income
   
   

• The Gross National Product (GNP) is the GDP plus receipts of factor income from the rest of the world minus payments of factor income to the rest of the world.
  
  
• The Net National Product (NNP) equals GNP minus capital consumption allowance.
  
  
• National Income (NI) equals NNP minus indirect business taxes.
  
  
• Personal Income (PI) is NI adjusted for transfer payments and certain other things.
  
  
• Disposable Personal Income (DPI) equals personal income minus personal taxes.
  
  

2. Nominal and Real Measures
Teaching Strategy: Emphasize the economists interest in real rather than nominal values. This will be useful when you present the long-run aggregate supply curve later.

1. Nominal GDP measures output in terms of its current dollar value. Real GDP is adjusted for changing price levels.
   
   Teaching Strategy: To show the difference between nominal and real GDP, try holding an auction in class. Bring a couple of cans of soda or candy bars to class and give your students fake money to bid with. Auction off the first can and then increase the amount of fake money each student has and auction off the second. The real values in this example are the candy bars or sodas, but the nominal values, which should have increased, are the values that the students bid in the auctions.
   
   
2. Price indexes measure the average level of prices in an economy and show how they have changed.
   
   

• The base year is the year against which other years are measured. The old constant-dollar real GDP was calculated by using base-year prices to measure output in all years.
  
  
• Types of price indexes
  
  

Teaching Strategy: Using Figure 4, ask the students why the price indexes behave differently over time.


3. Flows of Income and Expenditures
Total expenditures equal total income.


4. The Foreign Exchange Market
The foreign exchange market is a global market in which people trade one currency for another.

Teaching Strategy: Note that foreign exchange markets are not located in any particular place. Rather, they are made up of decentralized currency traders linked by telecommunications equipment and computer networks.

1. The exchange rate is the price of one countrys money in terms of another countrys money.
   
   Teaching Strategy: Provide the students with a list of ten foreign exchange rates and their corresponding countries. Tell them that the currencies do not directly match with the countries. Then, divide the class into several groups and ask each group to match each currency with its own country. Go over the results. Then distribute a copy of past and current foreign exchange rate quotations from a recent Wall Street Journal. Ask the students to provide you with the U.S. dollar values of these currencies. You can also ask the students which currencies have appreciated or depreciated over time and by how much relative to the U.S. dollar. Finally, you can explain how these exchange rates are determined in general. Ask your students to think of the foreign exchange market in terms of the supply of and demand for foreign exchange. Then, ask them to consider what factors (especially interest rate differentials and price differentials, and news) might cause exchange rates to change.
   
   
2. Exchange rate changes and international trade: Changes in exchange rates affect the demand for and supply of goods traded internationally.
   
   Teaching Strategy: Select two countries and present a simple graph indicating the changes in the exchange rate and the trade between these two countries. Ask the students to comment on the link, if any, between the movements of the two variables.
   
   

5. The Balance of Payments
The balance of payments is a record of a countrys trade in goods, services, and financial assets with the rest of the world.

1. Balance of payments accounts use the current account, net exports, and unilateral transfers to classify transactions.
   
   
2. The current account and the financial account: The current account reflects the movement of goods and services; the financial account reflects the flow of financial assets.
   
   Teaching Strategy: Use the current U.S. trade deficits and financial account surpluses to illustrate how the two accounts balance. Make sure that you follow an international transaction through the balance of payments accounts to show how the accounts balance.
   
   Teaching Strategy: Ask the students whether, if they were given a choice, they would prefer current account surpluses over financial account surpluses, or vice versa. Make sure they support their position carefully.