NATIONAL INCOME

ACCOUNTING
S&N Chs. 20-22
Mw Chs. 23-25
Macroeconomics
Role of
government
Monetary Policy
Fiscal policy
Measuring economic
activity
Real and Nominal
GDP
Real vs. Nominal
GDP
Year 1, Q = 1 0 0 0 tonnes, P = Rs 10,000 /
tonne
Nominal GDP 1 = Rs 10 million
Year 2, Q = 1 0 1 0 tonnes, P = Rs 20,000 /
tonne
Nominal GDP 2 = Rs20.2 million
% increase in nominal GDP
 = 100 × (GDP2 – GDP1)/GDP1
 = 100 × (20. 2 – 1 0)/1 0 = 1 02 %
Real vs. Nominal
GDP (cont.)
Real GDP = Nominal GDP / GDP deflator
Choose Year 1 as base year
Set the deflator to 1 for the base year
Deflator year 2 is (Price in year 2) / (Price in Y
1)
= 20,000 / 10,000 = 2
Real GDP in Year 1 = Rs 10 million / 1
Real GDP Y 2 = Rs 20.2 million / 2
 = Rs 10.1 million in Year 1 rupees
Measurement of GDP
P ro d u ctio n M e th o d
In co m e M e th o d
E x p e n d itu re
m e th o d
Circular Flow of
Income
Revenue=GDP Spending=GDP
Market for Commodities
Goods and Goods and
Services Services
Sold bought
Households

Firms

Production Labour, Land, = Flow of

Inputs Capital goods and
services
Markets for Factor Services = Flow of
Income=GDP money
Wages, Rents,
Profits=GDP
Aggregate supply
Aggregate
demand
Aggregate supply and
demand
Pr
ic AS
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in
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x
fo
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al
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co
mm
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ie AD
s

Real GDP