■ Government (G):Includes all government expenditures from social capital to welfare and social security payments.
■ Net exports (X):Includes the value of all money spent on exports minus imports.Other National Accounting Systems
Other accounting systems that economists use include the following:
■ Net Domestic Product (NDP):Economists derive NDP by taking GDP and subtracting the depreciation of capi-
tal equipment. In other words, NDP is GDP adjusted for depreciation.
■ National income:This allows us to calculate how much Americans earned for their contributions of land, labor,
and capital. To accomplish this, we must:
■ Subtract the income earned by foreigners in the United States.
■ Subtract indirect business taxes taken in by the government.
■ Personal income:This consists of all income earned or unearned. It includes transfer payments (social security,
welfare, and veterans payments) and wages earned.
■ Disposable income:This consists of personal income minus taxes.Nominal and Real GDP
We know that GDP is a measure of the monetary value of all final goods and services produced in a year on a nation’s
soil. This monetary value measurement presents a problem because dollar values change from year to year. Inflation and
deflationare two fluctuations in the economy that sometimes distort the value of GDP. How can we accurately compare
the value of GDP from year to year? We can minimize the effects of inflation or deflation by calculating nominal GDP
and real GDP.
Nominal GDPcalculates prices that prevailed when the output was produced; it is unadjusted for inflation. To adjust
GDP for inflation or deflation, we use nominal GDP to calculate real GDP. Real GDPis adjusted (inflated or deflated)
to reflect changes in the price level.
The Price Indexis the measurement of a specific amount of goods contained in a “market basket” in a given year com-
pared to an identical market basket in a reference year. A reference yearis known as a base year, and it is used as a
benchmark for prices of a certain time frame.
The formula for figuring real GDP is:
Real GDP = Nominal GDP (current year prices)
Price index (in hundredths)GDP Shortcomings
Using GDP as a monetary measure has some drawbacks. For example, economists cannot measure the following:
■ Nonmarket transactions: GDP cannot measure transactions that have no real paper trail, such as housework a
homeowner does for his or her own home, air pollution, and the labor that business owners perform for their own
businesses.
■ Mental or physical health: GDP cannot measure stress-relieving activities, such as vacations, exercise, and
laughter.
■ Underground economy: GDP cannot measure illegal or unreported activities.National Income Accounting