National Income and Product Accounts (NIPA)

Accounting system for the U.S. to measure aggregate economic activity

www.bea.gov

United Nations System of National Accounts

International standard system of national accountsunstats.un.org

Gross Domestic Product (GDP)

Market value of final goods and services newly produced within a nation during a fixed period of time

– Market value– Newly produced final goods and services– Fixed period of time

GDP per capita is an economy’s GDP divided by its population

U.S. GDPChained 2005 Dollars

www.economagic.com

per-capita real GDP

real GDP

The Income-Expenditure Identity

Y = C+I+G+NX

– Y = GDP (Income)

– C = consumption

– I = investment

– G = government purchases

– NX = net exports

What is produced is spent somewhere

The Income-Expenditure Identity

Expenditures in 1996 Billions of dollars Percent of GDP

Personal Consumption Expenditures (C) 5151 68.0Gross private domestic investment (I) 1117 14.7Government purchases of goods and services (G) 1406 18.6Net exports (NX) -99 -1.3 Exports 855 11.3 Imports 954 12.6

Total (equals GDP) (Y) 7576 100.0

GDP is same as National Income

GDP = National Income + Indirect taxes +Depreciation - Net Factor Payments (NFP)

The income approach says that what is produced is income to someone

National Income

Income in 1996 Billions of dollars Percent of GDP

Compensation of employees 4449 58.7

Proprietors' income 518 6.8

Rental income of persons 127 1.7

Corporate profits 654 8.6

Net interest 403 5.3

Total (equals National Income) 6151 81.2

National SavingS = Y+NFP-(C+G)

Savings rate is savings as a percent of GDP

Current Account

CA = NX+NFP = S-I

Budget Deficit

Sg = (T-TR-INT)-G

• T = Tax Receipts

• TR = Transfers to private sector

• INT = interest on national debt

• G = Government purchases

• Sg=Budget (surplus if positive, deficit if negative)

U.S. Budget Deficit

Some Fundamental Prices

The General Price Level

Y = nominal GDP

Y = P * y

• P = GDP deflator or simply market price• y = real GDP or quantity of goods produced

The General Price Level

• Price growth = inflation:

• Real GDP growth:

100111

t

tt P

P

100111

t

tt y

yg

Consumer Price Inflation

research.stlouisfed.org/fred2

Nominal Interest Rate

• The (short-term) interest rate is the risk-free rate of return that can be earned in the market.

• R = Dollar interest rate

• Invest $1 today at the rate R

• Receive $(1+R) in one period (day, week, month, year, etc.).

• The (ex post) real interest rate, r, is the rate of return in units of goods.

r = R -

• (Ex post) real interest rate is nominal interest rate minus (realized) inflation.

Ex Post Real Interest Rate

• The inflation rate is typically not known

• Expected (ex ante) real interest rate = nominal interest rate - expected inflation

re = R - e

• The expected real interest rate is the nominal interest rate less expected inflation – the Fisher equation

Ex Ante Real Interest Rate:The Fisher Equation

Inflation and Nominal Interest Rate in the United States

R

Inflation

Nominal Interest Rate

Interest Rate

Inflation

Glossary of TermsGDP Gross Domestic Product (also Y)NFP Net Factor PaymentsGNP Gross National Product = GDP + NFPC National ConsumptionI National InvestmentG Government ExpenditureX ExportsM ImportsNX Net exports = X - MS National Saving = Spvt + Sgovt

T Total taxesTR Transfer paymentsINT Interest payments InflationPt General price level at time tR Nominal interest rater Real interest rate (ex post)