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The way I wrote the national income identity above is not the usual way it is written. The Krugman and Obstfeld book uses the concept of GNP, and so that is the concept of aggregate output that we will use in the course. So, the GDP of Chicago s business district is much larger than its GNP. For example, many of the workers in the business district in Chicago commute in from outlying areas. This is obviously true for regions within countries. There are countries where the difference between GDP and GNP is large. The US switched to GDP simply to be compatible with most countries in the rest of the world, which use GDP. In practice the two concepts of output do not differ very much in the US. Thus, the income of an American who earns rent on an apartment building in Tokyo is counted in US GNP, but in Japanese GDP. GDP is different from GNP in that it measures output produced on US soil. Similarly, the production of a foreigner in the US is not counted as part of US GNP. Earnings generated by firms that are on foreign soil, but owned by US residents, is counted as US GNP. The production of US residents while living abroad (as measured by their earnings) is counted as US GNP. GNP measures output as the amount produced by domestic factors of production, regardless of their geographic location. switched from emphasizing Gross National Product(GNP) as the basic measure of total output, to Gross Domestic Product (GDP). A firm s value-added is its sales, minus whatever purchases it made from other firms. See KO, page 282 for discussion.ΔΆ other firms. The value-added of a firm is just what it sounds like: it s the value that the firm adds to whatever goods it buys from 1 There is a small distinction between GNP and National Income, which we ignore here.
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For example, if you add the bread sold by the baker plus the wheat sold by the farmer, you are in effect counting the farmer s wheat twice, since a large component of the bread sold by the baker is the wheat. The reason for value-added is that if you simply add up all the goods each firm sells, you massively double count total output. In particular, it adds up the value-added of manufacturing firms firms in agriculture, forestry, fishing, and hunting mining firms construction firms utilities firms and firms in wholesale and retail trade. 1 The value-added approach measures GNP by adding up all the value-added of different types of firms. The income approach to GNP measures GNPsimplybyaddingupeveryone sincome. Because the expenditure approach is emphasized extensively in economic analysis, the above equation is given a special name, the national income identity. Then, GNP is just the sum of these: Y = GNP = C d + I d + G d + EX This equation shows how GNP can be measured according to the expenditure approach, by adding across what different categories of economic agents bought. Consider first the expenditure view, which divides up GNP according to who bought it, domestic households (consumption), government consumption, investment and foreigners: C d - household consumption of domestically produced goods and services I d - investment purchases by firms of domestically produced goods and services G d - government purchases of domestically produced goods and services EX - foreign purchases of domestically produced goods and services. That is, GNP can be measured from the expenditure view or the income view. Gross National Product is the value of goods and services produced by the factors of production of a particular country (i.e., workers and owners of productive factors like factories, taxi-cabs, etc.) Since GNP measures things sold in a market, there is a buyer and seller for each transactions.
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We will build on that to develop the basic accounting identities relevant to the open economy. 1 Christiano Econ 362, Winter 2006 Lecture #1: Rough Notes on National Income Accounting and the Balance of Payments You should be somewhat familiar with national income accounting in the closed economy context, from Econ 311.