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ECON102: Principles of Macroeconomics

Unit 2: Measuring Aggregate Output   *One of the major focuses of macroeconomics is the total output generated by an economy by looking at Gross Domestic Product (GDP), or the total value of all final goods and services produced within a nation’s borders, even if produced by foreign companies.  It also examines Gross National Product (GNP), which measures all the final goods and services produced by a country’s citizens, even if produced in other countries.  Over time, two important instruments have been developed to calculate GDP and GNP: expenditure and income.  We will examine both of these in this unit.

Macroeconomics also focuses on the difference between nominal GDP (i.e.  GDP calculated according to today’s prices, and ignoring inflation) and real GDP (i.e.  GDP calculated in actual purchasing power).  This is an important distinction, because an economy might be growing in nominal terms while its real GDP (what people can actually purchase domestically or in imports) is declining because of inflation.  In this unit, we will discuss these scenarios and participate in the debate over whether the GDP is an accurate measure of well-being.*

Unit 2 Time Advisory
This unit should take approximately 10.5 hours to complete.

☐    Subunit 2.1: 2.25 hours

☐    Subunit 2.2: 1 hour

☐    Subunit 2.3: 1.25 hours

☐    Subunit 2.4: 0.5 hours

☐    Subunit 2.5: 0.5 hours

☐    Subunit 2.6: 3 hours

☐    Assessment: 2 hours

Unit2 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Describe the measurement of GDP using the expenditure approach and the income approach. - Explain the other measures of output and income and learn their distinction from one another. - Distinguish between the real and nominal values. - Analyze the problems associated with using GDP as a measure of well-being.

2.1 National Income Accounting   - Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “National Income Accounting” Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on *Principles of Macroeconomics*: “National Income Accounting” (HTML)

 Instructions: Read these lecture notes in their entirety for a
summary of how aggregate output is measured using the Gross Domestic
Product (GDP) and other related macroeconomic variables.  Note that
national income accounting is the process of counting a country’s
expenditures versus its income.  

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2.2 Measuring Total Ouput   - Reading: Principles of Macroeconomics: “Chapter 6, Section 1: Measuring Total Output” Link: Principles of Macroeconomics: “Chapter 6, Section 1: Measuring Total Output” (PDF)

 Instructions: This section describes the Gross Domestic Product
(GDP) as a measure of final goods and services using expenditure. 
It also distinguishes the GDP from the Gross National Product (GNP).
 Note that total output (also referred to as aggregate output) is
the amount of production that the economy has generated in a given
period of time.  

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2.3 Gross Domestic Product (GDP)   - Reading: Principles of Macroeconomics: “Chapter 6: Measuring Total Output and Income”

Link: *Principles of Macroeconomics*: [“Chapter 6: Measuring Total
Output and
Income”](http://www.saylor.org/site/textbooks/Principles%20of%20Macroeconomics.pdf) (PDF)  

 Instructions: Read this chapter, which is about measuring total
output and income.  This material concentrates on the purpose and
function of GDP.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

2.4 Final Goods and Services   - Reading: Principles of Macroeconomics: “Chapter 6: Measuring Total Output and Income”

Link: *Principles of Macroeconomics:* [“Chapter 6: Measuring Total
Output and
Income”](http://www.saylor.org/site/textbooks/Principles%20of%20Macroeconomics.pdf) (PDF)  

 Instructions: Scroll down to and read the section entitled “Final
Goods and Value Added.”  Final goods and services are finished
products that are produced in a given year.  For example, a fully
manufactured automobile is a final good.  The products that are used
to manufacture final goods are called intermediate parts or inputs
and are not “counted”: all of the resources or inputs that are used
to manufacture an automobile are only counted as one completed
product.  If the intermediate parts are counted as well as the final
good, it is known as “double counting”; this can diminish the
accuracy of the GDP measurement.  
  

Terms of Use: This text was adapted by The Saylor Foundation under a
[Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

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2.5 Gross Domestic Product (GDP) vs. Gross National Product (GNP)   - Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 5: National Income Accounting” Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 5: National Income Accounting” (PDF)

 Instructions: Scroll down to and read the information on Gross
National Product and Gross Domestic Product.  Gross Domestic Product
refers to production counted within a country’s borders, whereas
Gross National Product refers to production by domestic factors both
inside and outside of a country’s borders.  In modern times, the
Group of Seven (G7), Group of Eight (G8), and the Group of 20 (G20)
use the GDP formula in measuring GDP growth, so the global economy
uses the same formula to measure each country’s economic welfare or
well-being.  This ensures that countries are on the same accounting
page.  Note that some countries use GNP as a metric, but GDP is the
standard accounting system.  

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You can find the original version of this
article [here](http://www.peoi.org/Courses/Coursesen/mac/fram5.html).

2.6 Calculating GDP   2.6.1 Expenditure   Note: This topic is covered in the reading for sub-subunit 2.6.2.

2.6.2 Income   - Reading: Principles of Macroeconomics: “Chapter 6, Section 2: Measuring Total Income”

Link: *Principles of Macroeconomics*: [“Chapter 6, Section 2:
Measuring Total
Income”](http://www.saylor.org/site/textbooks/Principles%20of%20Macroeconomics.pdf) (PDF)  

 Instructions: This section details the computational method for
calculating total output in the economy using income.  Please
attempt the “Try It” problems at the end of the chapter and review
the correct answers.  

 Income is the other side of the national income accounting process.
 For a country (or household) to be efficient, it must be able to
detail the sources of its income. The point of the national income
accounting system is to determine efficiency of a country, much like
one would do in one’s own household.  Economists seek data about
income as well as expenditure; ideally, the two should be in balance
(that is, they should be the same amount).  When income and
expenditure are balanced, the country (or the household) is said to
have a balanced budget.  
  

Terms of Use: This text was adapted by The Saylor Foundation under a
[Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

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2.6.3 Calculating Nominal GDP vs. Real GDP   - Web Media: Thinkwell: Steven Tomlinson’s Macroeconomics: “The New BEA Procedure for Calculating Real GDP” Link: Thinkwell: Steven Tomlinson’s Macroeconomics: “The New BEA Procedure for Calculating Real GDP” (Flash)

 Instructions: Click on “Sample Video Lessons” on the right side,
which will display links to four video lectures.  Click on the third
video clip, entitled “The New BEA Procedure for Calculating Real
GDP,” to watch this video.  

 Watching this video should take approximately 8 minutes.  

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  • Reading: Professor Robert Schenk’s CyberEconomics: “Gross Domestic Product” Link: Professor Robert Schenk’s CyberEconomics: “Gross Domestic Product” (PDF)

    Instructions: Read this chapter to review the distinction between real GDP and nominal GDP.  Click on the “Review” tab at the bottom of the page to test yourself on these concepts.  Finally, click on the “Explore” tab at the bottom of the page to deepen your understanding of these topics.  Complete the problems presented in this section, as well.

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  • Web Media: Khan Academy’s “GDP Deflator”

    Khan Academy’s “GDP Deflator” (YouTube)

    Instructions: Watch this video, which is about the GDP deflator.

    Watching this video should take approximately 7 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License.  It is attributed to the Khan Academy.

  • Web Media: Khan Academy’s “Example Calculating Real GDP with a Deflator” Khan Academy’s “Example Calculating Real GDP with a Deflator” (YouTube)

    Instructions: Watch this video, which is about calculating real GDP with a deflator.

    Watching this video should take approximately 6 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License.  It is attributed to the Khan Academy.

2.6.4 Problems Using GDP as a Measure of Well-being   - Reading: Principles of Macroeconomics: “Chapter 6, Section 3: GDP and Economic Well Being” Link: Principles of Macroeconomics: “Chapter 6, Section 3: GDP and Economic Well Being” (PDF)

 Instructions: Read this section to learn about the limitations of
the GDP statistics.  Since GDP exclusively measures the expenditures
and income of an country, the measurement of that country's economic
welfare does not always take into account all of the components of
the country’s well-being.  There are several criticisms regarding
using GDP as a measure of economic well-being.  Some of the
criticisms are that the GDP does not take into account non-market
activities, leisure time, product quality, the underground economy,
the environment, the composition and distribution of output, or any
non-economic sources of well-being.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

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  • Web Media: YouTube: Simpleshow: Morten Sondergaard’s “What Is Gross National Happiness?” Link: YouTube: Simpleshow: Morten Sondergaard’s “What Is Gross National Happiness?” (YouTube)

    Instructions: Watch this video, which explains GPI (Genuine Progress Index) and GNH (Gross National Happiness).

    When watching the video, keep in mind that within the framework of the economy, GPI and GNH are generally thought of as a holistic tool that governments and communities use to measure the real costs and benefits of economic activity.  The GPI and GNH count beneficial activities as positive and harmful activities as negative, and provide us with a means to combine economic issues with environmental and social concerns.  The GPI and GNH are synonymous terms.  Economics has loaded terminology; there are a number of different terms that have identical meanings.  GPI and GNH are also referred to as Measurements of Economic Welfare (MEW).

    Watching this video should take approximately 4 minutes.

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Unit 2 Review   - Reading: Massachusetts Institute of Technology’s OpenCourseWare: Principles of Macroeconomics Lecture Notes: “L2 (Measuring macroeconomic variables)” and “L3-L4 (Production and the labor market)” Link: Massachusetts Institute of Technology’s OpenCourseWare: Principles of Macroeconomics Lecture Notes: “L2 (Measuring macroeconomic variables)” and “L3-L4 (Production and the labor market)” (PDF)

 Instructions: This is an optional reading.  Read through the notes
in these links for a review of the material covered in units 1 and
2.  

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