CHAPTER SUMMARY

1. The national income accounts are an accounting framework used in measuring current economic activity. The national income accounts measure activ­ity in three ways: the product approach, the expendi­ture approach, and the income approach.

2. Gross domestic product (GDP) is the broadest mea­sure of aggregate economic activity occurring during a specified period of time. The product approach mea­sures GDP by adding the market values of final goods and services newly produced in an economy; this approach sums the value added by all producers. The expenditure approach measures GDP by adding the four categories of spending: consumption, invest­ment, government purchases, and net exports. The income approach measures GDP by adding all the incomes, including taxes and profits, generated by economic activity.

3. The income of the private sector (domestic households and businesses) is called private disposable income. Private disposable income equals income received from private-sector activities (GDP plus net factor payments from abroad, or GNP) plus payments received from the government (transfers and interest on govern­ment debt) minus taxes paid to the government. The net income of the government sector equals taxes collected minus transfer payments and interest paid on govern­ment debt. Private disposable income and net government income sum to GNP.

4. Saving is the portion of an economic unit's current income that it doesn't spend to meet current needs. Saving by the private sector, called private saving, equals private disposable income minus consump­tion. Government saving, which is the same as the government budget surplus, equals the government's net income minus its purchases of goods and services (assuming that government purchases are devoted solely to government consumption rather than par­tially to government investment).

5. The uses-of-saving identity states that private saving equals the sum of investment, the government budget deficit, and the current account balance. Equivalently, national saving equals the sum of invest­ment and the current account balance.

6. The national wealth of a country equals its physical assets, such as capital, plus its net foreign assets. National wealth increases in two ways: through changes in the value of existing assets and through national saving. National saving adds to national wealth because national saving is used either for investment, thus adding to physical capital, or for lending to foreigners an amount that equals the cur­rent account balance, which increases the country's net foreign assets.

7. Nominal GDP is the value of an economy's final out­put measured at current market prices. Real GDP is a measure of the economy's final output valued in terms of prices in a base year. Real GDP equals nomi­nal GDP divided by the GDP deflator/100.

8. A price index is a measure of the current price level relative to a base year. The GDP deflator measures the overall price level of goods and services included in GDP. The consumer price index (CPI) measures the price level of a basket of consumer goods. The rate of inflation is the percentage rate of change of the price level, as measured by percentage rate of change of a price index such as the GDP deflator or the CPI.

9. An interest rate is a rate of return promised by a bor­rower to a lender. The nominal interest rate is the rate at which the nominal value of an interest-bearing asset increases over time. The real interest rate, or the nominal interest rate minus the rate of inflation, is the rate at which the value of an asset grows in real, or purchasing-power, terms. Borrowing and lending decisions are based on the expected real interest rate, which is the nominal interest rate less the expected rate of inflation.

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