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Econ 100b

Created 4/30/1996
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Lecture Two

National Income and Product Accounts
(Economics 100b; Spring 1996)

Brad DeLong
Associate Professor of Economics, 601 Evans
University of California
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

January 22, 1996


Inflation (a topic left over from last Friday's lecture)
Circular Flow
Rules for Computing GDP
Anomalies and Imputations
Components of Expenditure
Related Measures
Real and Nominal GDP



The problem set associated with this week's lectures is going to be called Macroeconomic Measurement

Circular Flow

Let's begin with GDP--gross domestic product, with all the explication we did last time...

GDP is, at the same time:



How can it be all these three things at once? Because we define them that way, so that the only difference between total economy-wide incomeand total expenditure is the "statistical discrepancy".

Three parts of the "circular flow" diagram:

Windfall gains and losses on asset prices; increases in the value of your house; the "wealth" created by Netscape's IPO do not enter into this circular flow set of definitions at all.

Why make the definitions this way? So you can measure things a number of different ways. You can use accounting identities to check that things add up.


Rules for Computing GDP
"Investment" in inventories...
"Intermediate" goods and value added; take only value-added in each stage of production; not the total amount of sales.



Anomalies and Imputations


Conclusion: GDP is a most imperfect measure of economic activity, but its imperfections do not change much from quarter-to-quarter or year-to-year.


Components of Expenditure

Economists' peculiar definition of "investment": does not include capital gains (or losses) on property already existing. Focuses on tangible property.


Related Measures of Output and Income

Some numbers relating measures of output and income:


Out of National Income:




Real and Nominal GDP
We choose a base year for measuring real GDP

A price index with a fixed basket of goods: a "Laspeyres" index
A price index dual to a fixed-prices quantities index: a "Paasche" index

A "Laspeyres" index takes no account of people's ability to substitute to achieve the same utility when commodities become more expensive...

A "Paasche" price index (like the GDP implicit price deflator) does not take account of the utility lost as changing prices push you away from your original basket of consumption choices.


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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/