Chapter Overview
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Fundamental Questions 1. How is the total output of an economy measured? 2. Who produces the nation's goods and services? 3. Who purchases the goods and services produced? 4. Who receives the income from the production of goods and services? 5. What is the difference between nominal and real GDP? 6. What is a price index? Teaching Objectives The primary purpose of this chapter is to explain the principles of national income accounting. The chapter shows how government statisticians account for the goods and services that are produced in our economy. The unique features of this chapter include the relationships between key measures of national income and product. The chapter also includes a presentation of the major price indexes. It is important to emphasize for your students the relationship between output and income. You may wish to draw on Say's Law to help your students understand this relationship. Key Term Review national income accounting Lecture Outline and Teaching Strategies 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 for your students. 1.a. Gross domestic product: GDP includes market value, measure of final goods and services, and the value of output produced in a year. 1.a.1. GDP as output: GDP is a measure of all the final goods and services an economy produces in a year within a country's borders. 1.a.2. GDP as expenditures: GDP also shows what each sector pays for the goods and services it receives. 1.a.3. 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.b. Other measures of output and income 1.b.1. Gross national product: The 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. 1.b.2. Net national product: NNP equals GNP minus capital consumption allowance. 1.b.3. National income: NI equals NNP minus indirect business taxes. 1.b.4. Personal income: PI is NI adjusted for transfer payments and certain other things. 1.b.5. Disposable personal income: DPI equals personal income minus personal taxes. 2. Nominal and Real Measures Teaching Strategy: Emphasize the economist's interest in real rather than nominal values. This will be useful when you present the long-run aggregate-supply curve later. 2.a. Nominal and real GDP: Nominal GDP measures output in terms of its current dollar value; real GDP is adjusted for changing price levels. Teaching Strategy: To drive home 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.b. Price indexes: These measure the average level of prices in an economy and show how they have changed. 2.b.1. Base year: 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. Because constant dollar real GDP suffers from "substitution bias," chain-type indexes of real GDP have been used since 1995. Teaching Strategy: Go over Table 1 in the text to illustrate how chain-type GDP growth differs from constant dollar real GDP growth. 2.b.2. Types of price indexes 3. Flows of Income and Expenditures Total expenditures equal total income. |
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