National Income Accounts 1.

Relevant Definitions: - Households: an economic unit that provides the economy with resources and uses the income received to purchase goods & services that satisfy economic wants - Firms: an organization that employs resources to produce a good or service for profit and owns and operates one or more plants - Circular Flow Model: The flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and households to firms - National Income: total income earned by resource suppliers for their contributions to gross domestic product; equal to the gross domestic product minus nonincome charges, minus net foreign factor income - Nation Income Accounting: the techniques used to measure the overall production of the economy and other related variable for the nation as a whole - Gross Domestic Product: the total market value of all final goods and services produced annually within the boundaries of the US, whether by US or foreign supplied resources - Nominal Gross Domestic Product: the GDP measured in terms of the price level and the time or measurement - Real Gross Domestic Product: Gross domestic Product adjusted for inflation. - Investment: Spending for the production and accumulation of capital and additions to inventories - Government Spending: expenditures by government for goods & services that government consumes in providing public capital. - Net Exports: Exports minus imports

2. The Circular Flow of Income - National income, output, and expenditure are generated by the activities of an economys households and firms, as they engage in mutually beneficial exchange - Households, or the household sector, supply domestic firms with the four factors of production (land, labor, capital, and entrepreneurship) o Has an inflow of disposable income o Has an outflow of consumption spending & saving - Firms, or the business sector, supply private goods & services to households o Has an inflow of funds for business investment o Has an outflow of investment expenditures - The government also plays a major role in the circular flow of income by collecting taxes and distributing public goods and services

Spending by foreigners on a countrys exports creates a foreign sector in the circular flow of income, injecting income into the economy Similarly, households will purchase foreign goods (imports), expelling income from the economy

US Domestic Circular Flow of Income & Expenditures

3. Gross Domestic Product - Gross Domestic Product (GDP) is the total market value of all finals goods and services provided in a given year. - GDP helps to o Assess the health of the economy o Track the long-run course of the economy to indicate whether it has grown, declined or remained constant o Formulate policies to safeguard and improve the economy - GDP includes only final goods (goods & services purchased for final use by the consumer, not for resale or further processing) - GDP does not account for the same good more than once because it is an accumulation of only the value added of a good at each stage

GDP excludes nonproduction transactions, i.e. public transfer payments, private transfer payments & stock market transactions GDP also excludes secondhand sales

4. Components of GDP - GDP can be calculate and analyzed in two different ways: viewing GDP as the sum of all money spent in buying it OR in terms of the income derived from producing it - Expenditures Approach (Output approach): o Consumption expenditures by households (C) + Durable goods Nondurable goods Consumer expenditures for services o Investment Expenditures by Businesses (Ig)+ All final purchases of machinery, equipment, tools by businesses All construction Changes in inventories o Government purchases of goods and services (G) + o Expenditures by foreigners (Xn) - Income Approach (earning approach): o Wages o Rents o Interest o Profits Corporate income taxes Dividends Undistributed corporate profits o Statisical Adjustments

5. Real vs. Nominal GDP - A GDP based on the prices that prevailed when the output was produced is called unadjusted GDP, or nominal GDP. - A GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP, or real GDP. - A nominal GDP is deflated by a GDP price index to obtain a real GDP when prices rise and is inflated by a GDP price index to obtain a real GDP when prices fall. o A GDP price index is a measure of the price of a specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year. - Real GDP = (nominal GDP/GDP price index)*100.