GDP: National Output
is the part of economics
that deals with the economy as a whole
measures of output,
income, prices, and employment.
Gross domestic product
(GDP) is the
dollar value of all final goods, services,
and structures produced within a country’s
national borders during a one
What is the National Income and Product
How is GDP calculated? (Figure 12.1)
Total Revenue = Price X Quantity
Goods, Services and Structures
What are structures?
What are scientific sampling
GDP measures the
included in GDP.
are not included in
included in GDP.
Transactions from the
are not counted in GDP.
Real GDP vs. Nominal GDP
is calculated in today’s
prices and is not adjusted for inflation.
Your textbook calls this
is adjusted for inflation. A
serves as a point of
comparison for other years.
Pros and Cons of GDP
GDP per Capita
adjusts GDP for
population and can be expressed in real or
What are the limitations of GDP?
GDP does not tell us anything about
the composition of output. What
goods, services and structures are
actually being produced?
GDP does not take into consideration
quality of life issues. What are the
opportunity costs of increased
GDP does not take into consideration
whether or not the economic activity
is positive or negative. Many people
in the social services believe they are
successful if the work themselves out
of a job, but this actually decreases
How does GDP relate to the standard of
GDP is the most prominent indicator
of economic health.
Increases in real GDP means that jobs
are plentiful and incomes are rising.
GNP (National Income)
Gross national product
(GNP) is the total
dollar value of all final goods, services, and
structures produced in one year with labor
and property supplied by the country’s
residents, regardless of where the production
When business activity creates output, it
generates jobs and income for somebody.
This income is GNP.
To find GNP, economists start with GDP.
They add in all of the payments received from
outside the USA and then subtract all of the
payments made to foreign owned business
within the USA.
net national product
(NNP) is GNP
minus depreciation or capital consumption
allowances. This accounts for the wear and
tear on capital equipment.
(NI) is NNP minus all
indirect business taxes. These are all taxes
except for corporate profit taxes. Some
examples are indirect business taxes are excise
taxes, property taxes, licensing fees, custom
duties, and general sales taxes.
(PI) is the total amount of
income going to the consumer sector before
individual income taxes are paid. Some
adjustments are made. For example,
payments into Social Security do not count,
but payments received from Social Security do
Disposable personal income
personal income minus individual income
taxes. This is the actual amount of money
consumers are able to spend.
Circular Flow (Revisited)
Remember the simple circular flow diagram from the
introduction to this course?
Yes, that was too good to be true. Reality looks more
like the one from this chapter.
demand by the consumer, investment, government
and foreign sectors.
GDP = C + I + G + (X
is the basic unit of the consumer
sector consisting of all persons who occupy a
house, apartment, or separate living quarters.
Consumers receive their income in the form of
disposable personal income, and they account
for the largest sector in the economy.
This is the business sector and includes all firms
that are responsible for producing the nation’s
output. The investment sector receives its
income through profits.
This includes local, state and federal
governments that receive their income through
net exports of goods and services
the total exports minus the total imports. (X
This sector includes all consumers and producers
outside of the country. The number might
appear small despite thriving trade.
Population and Economic Growth
The Constitution requires a
, or official count of
all people living in the United States, every 10 years.
The census data is organized in different ways. For
example, data can be divided into
Population continues to grow in the United States, but
the rate of growth is declining. The current rate of
growth is less than 1%. The size of the average
household is also declining.
The census can also help to show regional changes in
population. Since 1970, Americans have been moving
to the western and southern parts of the United States.
center of population
is the point where the
country would be balanced if it could be laid flat and
everyone weighed the same.
rates for economic indicators,
economists can make meaningful comparisons
What are some projected population trends?
The baby boomers represent the historically high
birthrate years in the United States after WWII from
1946 to 1964. They can be seen as the pinnacle on the
The dependency ratio shows the number of children
and elderly people in the population for every 100
persons in the 18 to 64 working
age bracket. It is
growing at a high rate and is projected to reach 78% by
Demographers study growth, density, and other
characteristics of populations. For example, they use
data about fertility rates, life expectancies and
immigrations rates to predict changes in population.
Although the population rate for the United States is
expected to continue to decline, increases in
productivity will most likely offset the negative effects
of declining population growth.
Because we will be dealing with an increasingly elderly
population, there will most likely be a shift in our
economy to meet this demand.
Poverty and Income Distribution
A portion of the US population lives in
poverty, and the gap in the distribution of
income is widening every year.
is the annual dollar
income used to determine the number of
people in poverty. It does not take into
consideration supplements such as food
stamps, subsidized housing and Medicaid.
Poverty is a relative measure that depends
on prices, the standard of living, and the
incomes that others earn. What seems like
poverty to one man may be richness to
are used by the
government to determine eligibility for
certain federal programs.
Economists also determine how income is
distributed among households. They do
this by raking all households from highest
to lowest and then dividing them into
shows how the actual
distribution of income differs from equal
Reasons for Income Inequality