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National Income Accounting

National Income Accounting. The overall input and output of a nation’s economy You can’t know where you’re going if you don’t know where you are and where you’ve been. National Income Accounting. Aggregate = sum total

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National Income Accounting

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  1. National Income Accounting • The overall input and output of a nation’s economy • You can’t know where you’re going if you don’t know where you are and where you’ve been

  2. National Income Accounting • Aggregate = sum total • Gross Domestic Product [GDP] = the aggregate of all final goods & services “people” (consumers & business) are able to purchase (ready to use). • Broadest and most important measurement

  3. National Income Accounting • GDP = goods and services “domestically” whether American or foreign. • GNP = goods and services produced by Americans worldwide • DON’T CONFUSE THEM • Which is the more important number?

  4. GDP – Explained This video from Youtube encompasses many terms you should understand by the time we finish Chapter 14

  5. GDP – Explained Components Consumer Spending 65% Business Investment 15% Government Spending 20% “NET” Exports* 0% 100% * U.S. frequently runs a trade deficit

  6. Top 5 GDPs *European Union $14,882 1 United States $14,660 2 China $10,090 3 Japan $ 4,310 4 India $ 4,060 5 Germany $ 2,940 * In Billions – Estimated 2010 ** Source: CIA Fact Book

  7. GDP – Explained • GDP is expanding > Companies produce more > Jobs are created = Inflation “worries” • GDP is contracting > Companies produce less = No new jobs and potential layoffs (high unemployment) • Definition of Recession = Two consecutive quarters (6 months) of contracting GDP

  8. GDP - Explained • If GDP is growing too fast (inflation) – Government policy will attempt to slow it • If GDP is growing too slowly (or contracting) – Government policy will attempt to stimulate it • Two types of Government Action: Fiscal Policy & Monetary Policy (future lessons)

  9. GDP – Break Down GDP– Depreciation = NDP NDP– Indirect Taxes = NI NI– Direct Taxes + Transfer Payments = PI PI – Personal Taxes (Income) = DI

  10. GDP – Break Down GDP (minus) Depreciation (decrease in value do to “wear & tear”) = NDP – Net Domestic Product

  11. GDP – Break Down NDP (minus) “Indirect” Taxes (sales, property tax, licensing fees) = NI – National Income (wages, salaries, self-employed income, rentals, corporate profits, interest earned on investments) • NOT“Transfer Payments – welfare, Social Security, Medicare

  12. GDP – Break Down NI – National Income (minus) corporate taxes, reinvested profits, employer social security contributions + Transfer Payments = PI – Personal Income (minus) personal income taxes = DI – Disposable Income

  13. Income Approach To Calculating GDP • The approach we just viewed is called the “expense” method (money spent) • The other approach is the “income” method (money earned)

  14. Income Approach To Calculating GDP Wages (all forms of labor income) + Interest (received by households) + Rents (received from properties) + Profits (earned by businesses) = GDP (comes out about the same as the expense method)

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