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© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Gross Domestic Product
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National Income
and Product Accounts
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Final Goods and Services
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Value Added
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Value Added
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Exclusions of Used Goods
and Paper Transactions
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Exclusion of Output Produced Abroad
by Domestically Owned Factors of Production
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Calculating GDP
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The Expenditure Approach
Expenditure categories:
• Personal consumption
expenditures (C)—household
spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.
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© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 10 of 38
The Expenditure Approach
Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
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The Expenditure Approach
G D = CP + I + G + ( E X− I M )
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Components of GDP, 1999:
The Expenditure Approach
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Gross Private Domestic Investment
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Gross Private Domestic Investment
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Gross Private Domestic Investment
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Gross Investment
versus Net Investment
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Government Consumption
and Gross Investment
• Government
consumption and gross
investment (G) counts
expenditures by federal,
state, and local
governments for final
goods and services.
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Net Exports
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The Income Approach
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The Income Approach
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From GDP to Disposable Personal Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
DOLLARS
(BILLIONS)
GDP 10,205.6
Plus: receipts of factor income from the rest of the world + 342.1
Less: payments of factor income to the rest of the world − 353.2
Equals: GNP 10,194.5
Less: depreciation − 1,351.3
Equals: net national product (NNP) 8,843.2
Less: indirect taxes minus subsidies plus other − 643.3
Equals: national income 8,199.9
Less: corporate profits minus dividends − 332.6
Less: social insurance payments − 731.2
Plus: personal interest income received from the government and consumers + 439.1
Plus: transfer payments to persons +1,148.7
Equals: personal income 8,723.9
Less: personal taxes − 1,306.2
Equals: disposable personal income 7,417.7
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© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 23 of 38
From GDP to Disposable Personal Income
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Disposable Personal
Income and Personal Saving
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Disposable Personal Income and
Personal Saving
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Nominal Versus Real GDP
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Calculating Real GDP
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Calculating Real GDP
A Three-Good Economy
(1) (2) (3) (4) (5) (6) (7) (8)
GDP IN GDP IN GDP IN GDP IN
YEAR 1 YEAR 2 YEAR 1 YEAR 2
IN IN IN IN
PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2
YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES
Q1 Q2 P1 P2 P 1 x Q1 P 1 x Q2 P2 x Q1 P2 X Q 2
Good A 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40
Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00
Good C 10 12 .70 .90 7.00 8.40 9.00 10.80
Total $12.10 $15.10 $18.40 $19.20
Nominal GDP Nominal GDP
in year 1 in year 2
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Calculating the GDP Deflator
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The Problems of Fixed Weights
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GDP and Social Welfare
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GDP and Social Welfare
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The Underground Economy
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Gross National Income per Capita
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Gross National Income per Capita
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Review Terms and Concepts
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