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Understanding Gross Domestic Product (GDP) and National Income Accounting

Learn about GDP, national income accounting, and different measures of income, including real GDP and nominal GDP. Explore price indices and their role in measuring changes in prices over time.

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Understanding Gross Domestic Product (GDP) and National Income Accounting

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  1. Gross Domestic Product (GDP) The sum of the flow of all final economic goods and services produced by the domestic economy during a relevant period of time. GDP = PiQi

  2. National Income Accounting The set of rules and techniques used for measuring the total flow of output (goods and services) produced and the total flow of incomes generated by this production.

  3. Includes: Market Transactions: (wages, interest, rent, profits, ….); Non-market Transactions: (income-in-kind, ….); Imputations: (home consumption, rental value of owner occupied housing Excludes: Market Transactions: (illegal activities, used goods, stocks and bonds, underground economy, capital gains and losses, …); Non-market Transactions: (value of house persons) GDP

  4. National Product (Y) • Consumption Expenditures (C) • Investment Expenditures (I) • Government Purchases of Goods and Services (G) • Net Exports (NX) Y = C + I + G + NX

  5. National Income (NI) • Wages, Salaries and other Compensations of Employees; • Rental Income; • Net Interest; and • Profits • Unincorporated Income • Corporate Profits

  6. From NI to GDP GDP = National Income + Indirect Business Taxes + Capital Consumption Allowances + Miscellaneous Adjustments Business Transfer Payments Inventory Valuation Adjustments Statistical Discrepancies

  7. From NI to Disposable Personal Income (DPI) or (YD) DPI = National Income - Social Insurance: Employers’ Share - Corporate Retained Earnings - Corporate Taxes + Government Transfer Payments + Business Transfer Payments + Miscellaneous Payments to Individual - Personal Taxes

  8. Other Measures of Income Gross National Product (GNP): GNP = GDP + Factor Payments From Abroad - Factor Payments to Abroad Net National Product (NNP): NNP = GNP - Capital Consumption Allowances

  9. Real GDP Vs. Nominal GDP Real GDP = Nominal GDP / GDP Deflator Nominal GDP a.k.a. Current Dollar GDP Real DGP a.k.a. Constant Dollar GDP GDP Deflator is A Price Index

  10. Index of Prices An index or prices shows the average percentage change that has occurred in some group of prices over some period of time.

  11. Price Indices • Consumer Price Index (CPI) • measures changes in the prices of commodities commonly bought by households since some base period • Producer Price Index (PPI) • formerly known as the Wholesale Price Index, measures changes in the prices of commodities traded at the wholesale level

  12. Price Indices • Implicit Price Deflator for GDP • measures changes in the prices of the commodities produced by the domestic economy since some base period

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