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2-1
CHAPTER 2
NATIONAL INCOME ACCOUNTING
Chapter Outline
Real and nominal GDP
The composition of GDP
The value added
National income identities
Price indexes
Core inflation
The unemployment rate
Exchange rates
Real and nominal interest rates
Changes from the Previous Edition
All figures and tables in this chapter have been updated. Old Figure 2-8 has been eliminated and
two new figures have been added. Figure 2-8 now shows the U.S. unemployment rate from
1948-2010, Figure 2-9 now shows alternative ways to look at the unemployment rate, and all
subsequent figures have been renumbered. Section 2-6 now includes a discussion of whether the
official unemployment rate understates real unemployment and what alternative variables could
be used to measure the impact of an economic downturn. The Internet links for obtaining data in
Section 2-9 also have been revised.
Introduction to the Material
Chapter 2 examines the meaning of gross domestic product (GDP), the basic measure of a
nation's economic performance. The difference between gross domestic product (GDP) and gross
national product (GNP) arises since part of a country's output is produced by foreign-owned
factors of production. This difference is fairly small for the U.S., but it is important to stress this
distinction, since in some other countries, such as Ireland and Switzerland, the difference is
substantial. GNP is also sometimes called GNI, that is, gross national income.
Explaining GDP in terms of factor payments will help in the study of aggregate supply and
economic growth. The aggregate production function shows the factors of production (inputs,
such as labor and capital) that contribute to the production of final goods and services (output).
Dividing GDP into its four main spending components—consumption (C), investment (I),
government purchases (G) and net exports (NX)—will help in t