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©2023 Pearson Education, Ltd.Chapter 2 The Measurement and Structure of the National Economy ◼Learning Objectives I.Section Goals A.Differentiate among the three approaches to national income accounting (Sec. 2.1) B.Explain how GDP is measured (Sec. 2.2) C.Discuss the measurement of aggregate saving and its relation to wealth (Sec. 2.3) D.Explain the calculations of real GDP, price indexes, and inflation (Sec. 2.4) E.Define real and nominal interest rates (Sec. 2.5) II.Notes to Tenth Edition Users A.In Section 2.3, we show how national and private saving changed during the pandemic.Macroeconomics 11e (Global Edition) By Andrew Abel, Ben Bernanke, Dean Croushore (Instructor Manual All Chapters, 100% Original Verified, A+ Grade) No Solution Manual For Chapter 1 1 / 4

Chapter 2 The Measurement and Structure of the National Economy 17

©2023 Pearson Education, Ltd.◼ Teaching Notes

• National Income Accounting: The Measurement of Production, Income, and Expenditure

(Sec. 2.1)

• National income accounts: an accounting framework used in measuring current economic

activity

• Three alternative approaches give the same measurements

1. Product approach: the amount of output produced

2. Income approach: the incomes generated by production

3. Expenditure approach: the amount of spending by purchasers

• Juice business example shows that all three approaches yield equal values
• Important concept in product approach: value added = value of output minus value of inputs

purchased from other producers

• Why are the three approaches equivalent?
• They must be, by definition
• Any output produced (product approach) is purchased by someone (expenditure approach)

and results in income to someone (income approach)

3. The fundamental identity of national income accounting:

total production = total income = total expenditure (2.1) II. Gross Domestic Product (Sec. 2.2)

• The product approach to measuring GDP
• GDP (gross domestic product) is the market value of final goods and services newly

produced within a nation during a fixed period of time Data Application The period referred to here is either a quarter or a year. You may want to show students what some of the tables from the National Income and Product Accounts, most easily accessible on the Internet at www.bea.gov.Students are also interested in seeing what happens in the financial markets and to public opinion on the day a new GDP report comes out.

• Market value: allows adding together unlike items by valuing them at their market prices
• Problem: misses nonmarket items such as homemaking, the value of environmental

quality, and natural resource depletion Analytical Problems 1 and 3 both discuss difficulties in counting nonmarket items for GDP, including the important idea that GDP is not the same as welfare.

• There is some adjustment to reflect the underground economy
• Government services (that aren’t sold in markets) are valued at their cost of production
• Newly produced: counts only things produced in the given period; excludes things produced

earlier

• Final goods and services 2 / 4

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• Don’t count intermediate goods and services (those used up in the production of other

goods and services in the same period that they themselves were produced)

• Final goods & services are those that are not intermediate
• Capital goods (goods used to produce other goods) are final goods since they aren’t used

up in the same period that they are produced

• Inventory investment (the amount that inventories of unsold finished goods, goods

in process, and raw materials have changed during the period) is also treated as a final good

• Adding up value added works well, since it automatically excludes intermediate goods
• GNP vs. GDP
• GNP (gross national product) = output produced by domestically owned factors

of production GDP = output produced within a nation

• GDP = GNP − NFP (net factor payments from abroad) (2.2)
• NFP = payments to domestically owned factors located abroad minus payments

to foreign factors located domestically

Data Application Prior to December 1991, the United States used GNP as its main measure of production; after that, GDP became the main concept. The main reasons for the switch were that GDP is more relevant to production in an open economy (though GNP is more relevant for income), and GDP is more precise than GNP in the advance estimate, since net factor payments are difficult to measure quickly. See Survey of Current Business, November 1991, for a discussion of the switch.

• Example: Engineering revenues for a road built by a U.S. company in Saudi Arabia is

part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP, and is part of Saudi GDP (built in Saudi Arabia), not Saudi GNP

• Difference between GNP and GDP is small for the United States, about 0.2%, but higher

for countries that have many citizens working abroad Data Application

The timeline for national income and product account releases is generally:

Advance estimate Last week of month following end of quarter Second estimate Last week of second following month Third estimate Last week of third following month Revisions occur every July for the following three years. Each new release contains either additional new data that was not available before, or a change in seasonal factors, or a correction of errors made previously. Periodically, the annual revision in July contains significant changes in the method used to produce the data; these revisions can dramatically change the data going far back in time. [Note: This structure is different now than it was before: Prior to 2009, the first three releases were known as advance, preliminary, and final, and major changes in the methods used to create the data were saved up for a benchmark revision, which took place about every 5 years, instead of being incorporated into the annual release.] 3 / 4

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• The expenditure approach to measuring GDP
• Measures total spending on final goods and services produced within a nation during a

specified period of time

• Four main categories of spending: consumption (C), investment (I), government purchases

of goods and services (G), and net exports (NX)

• Y = C + I + G + NX, the income–expenditure identity (2.3)

4. Consumption: spending by domestic households on final goods and services

(including those produced abroad)

• About 2/3 of U.S. GDP
• Three categories

(1) Consumer durables (examples: cars, TV sets, furniture, and major appliances)

(2) Nondurable goods (examples: food, clothing, fuel)

(3) Services (examples: education, health care, financial services, and transportation) Data Application Note that the consumption category in the national income and product accounts does not correspond to economists’ concept of consumption, because it includes the full value of durable goods. When economists study consumption behavior, they must account for this; one way to do so is to assume that durable goods provide services that are proportional to their existing stock.Total consumption is this fraction of the stock of consumer durables, plus nondurables and services.

• Investment: spending for new capital goods (fixed investment) plus inventory investment
• Volatile, with fixed investment about 13% to 20% of U.S. GDP
• Business (or nonresidential) fixed investment: spending by businesses on structures,

equipment, and intellectual property products, such as software, research and development, or artistic originals

• Residential fixed investment: spending on the construction of houses and apartment

buildings

d. Inventory investment: increases in firms’ inventory holdings

Data Application A major change in the National Income and Product Accounts came in July 2013, when the accounts were changed to include intellectual property products, which are treated as capital. Until then, artwork, such as movies, was treated as adding to GDP only in the year it was created. But much artwork continues to have value long after it was created, so it makes sense to treat it as capital. As a result of this change, real GDP and investment were revised up significantly.

• Government purchases of goods and services: spending by the government on goods or

services

• About 1/6 of U.S. GDP
• Most by state and local governments, not federal government
• Not all government expenditures are purchases of goods and services

(1) Some are payments that are not made in exchange for current goods and services (2) One type is transfers, including Social Security payments, welfare, and unemployment benefits (3) Another type is interest payments on the government debt

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