- National income accounting provides systematic measures of aggregate economic activity.
- Gross domestic product (GDP) is the key overall measure of economic activity in an economy.
- Can be viewed as total expenditure, total income, or total production in an economy.
- The expenditure approach to GDP makes use of a fundamental national income identity:
Y = C + I + G + NX
which says that total spending is the sum of spending on consumption, investment, government purchases, and net exports.
- The income approach shows that labor’s share of GDP is relatively stable over time at about two-thirds.
- In the production approach, it is only the value of final production that counts.
- Equivalently, GDP is the sum of value added at each stage of production.
- Nominal GDP refers to the value of GDP measured in current prices in a given year.
- Real GDP involves computing GDP in two different years using the same set of prices.
- Think about real GDP as being adjusted for inflation.
- Changes in real GDP therefore reflect changes in actual production rather than changes in prices.
- Chain weighting allows us to compare changes in real GDP over time by gradually updating prices.
- By linking the chain of comparisons in this way, we construct a more accurate measure of real GDP.
- International comparisons of GDP involve two conversions.
- First, we need exchange rates to convert the measures into a common currency.
- Second, just as we need to use common prices to measure real GDP over time, we also need to use common prices to compare real GDP across countries.