Module 10-11

National Accounts

National accounts are responsible for keeping track of the flow of money among different sectors of the economy.

Also known as the national income and product accounts.

The Circular-Flow Diagram

Visualizes the key concepts of national accounts.

Three Basic Economic Goals

1. Sustained long run economic growth over time.

• Measured by GDP - Gross Domestic Product

  • Nominal GDP
    

    The value of all final goods and services given a year, using the prices in the year in which the output was produced.

    
    

  • Real GDP

    The value of all final goods and services given a year, using the prices of a selected base year.

    
    

  • Why Check GDP? <- Test Question

    • Compare our growth to other countries.
    • Check if our economic policies are working.

    
    

  • GDP is made up of 4 components:
    

    1. C: Consumer spending accounts for ~70% of GDP, accumulation of all consumer spending.
    2. I: Investment spending = spending by firms and companies on capital goods.
    3. G: Government spending on goods and services.
       • Only when the government gets something in return.
    4. Xn: Net exports. Difference between our exports and imports.
       • Net import = negative number.
       • Net export = positive number.

    
    

  • Expenditure Approach:
    

    • Add up all the expenditures to calculate GDP.

    
    

  • Included in GDP:
    

    • Consumption of all final goods and services.
    • Investment spending --- Any new constructions. This is an economic indicator!
    • Government spending --- Something they get something in return.
    • Net exports/imports = Export - import.

    
    

• Excluded in GDP:

  • Intermediate goods <- Test Question 
  • Good that is completely used up in the production of something else.
    • Ex. Components in a computer, tires on a car, etc.
  • Financial assets.
  • Inputs that are used up fully.
  • Any foreign produced goods.
  • Any used or second hand goods.
  • Black market operations.
  • Non-market activities.

• Accounting for Variations

  • A country can have a higher GDP by simply having a higher population.
  • Thus, we can use GDP per capita.
    • A measure of average GDP per person.
  • GDP does NOT represent quality of life.

A measure of the overall value of goods and services produced.

The dollar value of all goods and services that are produced in US in one year. They must be made in the USA.

Final assembly determines where the product is made.

2. Low unemployment.

• Full employment: When the unemployment rate ~4%.
• Below 4% can reduce GDP growth (as you need a work force pool to pull from).
• Frictional and structural will always exist in an economy.
• Cyclical unemployment will only occur in a recession.
  
• Full employment = NRU, Natural rate of unemployment = Low unemployment.
  • When there is no cyclical unemployment, only structural and frictional.

3. Keep prices stable --- keep inflation under control.

• Inflation: When prices on average increases.
• Target: 2-3% per year.
• National income and product accounts/national accounts.
  • Keeps track of the flows of money amount different sectors of the economy.