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Chapter 5 Measuring a Nation’s Production and Income Note pg. 97! Circular Flow Model with Production and Income! GDP = C+I+G+X-M WHICH MAKES THE MAJORITY OF GDP? Consumption Investment Govt. spending Exports Imports There are 2 Types of GDP REAL GDP: measure that adjusts for changes in price. NOMINAL GDP: The value of GDP in current dollars REAL GDP If 10 computers are produced in the economy for $1,000 ($10,000) THAT becomes the base year or the “chained” year that we compare to. Real GDP If in year 2, there are $12,000 dollars in sales of computers – then REAL GDP in year 2 is greater than REAL GDP for year one by a factor of 1.2. Real GDP Construct a measure using the SAME prices for both years and taking price changes into account. Eliminates inflation / deflation. Constant prices Nominal GDP Using current prices for GDP. GDP will grow for one of only TWO reasons. Production of goods has increased. Prices for the goods have increased. IMPORTANT! Face value of money or income doesn’t matter to people. What matters to people is the “real” value of the money or the PURCHASING POWER. GDP Definitions for the advanced person! CONSUMPTION: Purchases by consumers Doesn’t matter if imports or domestic. Consumption: What kind of goods do we buy? Durable Last for a long time (well, hopefully!) Nondurable Goods that don’t last. Cars, appliances, etc. Food Services People do the delivery of service. Medical, dental, travel agents, hair cuts Investment: Private Investment Expenditures Purchases by firms! Three Forms of Private Investment Expenditures Spending on new plants / equipment during the year. Newly produced housing is investment spending. Companies that increase their inventories. Definitions of Investment: Gross Investment: Actual investment purchases. Total of new investment expenditures. Definitions of Investment: Depreciation: The wear and tear of capital as it is used in production. (Note: Apply this notion to Econ teachers at your own peril!) Net Investment: Simple equation Gross Investment – depreciation = net investment Investing has two meanings to Economists. Investment in the GDP means purchases of NEW final goods and services. Counted in the GDP! Investing has two meanings to Economists You might talk about Investment like buying stock. Buying EXISTING financial assets. NOT counted in the GDP. Government Purchases Purchases of newly produced goods and services by all levels of government. Copy machine paper, copy machines, weapons, cars, chairs, etc. Government Spending: TRANSFER PAYMENTS: Payments to individuals from governments that do not correspond to the production of goods and services. Social Security, Military Benefits Medicare Interest on the debt ETC Government Spending Transfer Payments are NOT included in GDP. They have a BIG impact on incomes of individuals and their consumption and savings behavior! Transfer Payments = Mandatory Spending for Government Big impact on the growing deficit / debt! US Federal Budget Deficit Projection: Congressional Budget Office Net Exports Equation! Exports – Imports = NET EXPORTS Exports > Imports = Trade Surplus Exports < Imports = Trade Deficit The US Trade Deficit: Consequences? We give up more dollars than we bring in when we export. American money in the hands of foreigners. Look at it this way: College Students need money: Sell your assets (property) Sell your future prospects. Plans for a $$$ career, you will be able to pay back later with interest. US Trade Deficit THAT is the same for the US! We can sell our assets. Real Estate, Stocks, Corporate Bonds We can sell our debt with the expectations that we will continue to be a growing economy. US Savings Bonds to fund the debt Who Gets the Income? MORE definitions! National Income: The income that flows into the private sector. GNP: GDP plus net income earned from abroad. NNP: Net National Product: GNP – depreciation Indirect Taxing: Sales and Excise Taxes MORE Definitions Value Added: Sum of all income Wages, interest, profits, rent, etc. generated by an organization. SEE PAGE 106 for example! And Finally! Personal Income: Income (including transfer payments) received by households. Personal Disposable Income: Personal income after taxes. INTERESTING STATISTIC! Families don’t have the same buying power Average family income has dropped 2.3% between 2001 – 2004. Federal Reserve Survey of Consumer Finances So, Why don’t we notice that we have less purchasing power? CHEAP imports! Two Sides to GDP Who buys the output that is produced? Who gets the income that is created by production? Who buys the output that is produced? 67% of GDP is from consumer spending! Who is getting the income from production? 70% of national income is paid in wages and benefits. GDP Deflator An index that measures how the prices of goods included in GDP change over time. SEE PAGE 108 for an explanation! GDP is NOT a perfect measurement! Does not count transactions in “underground economies” Leisure time is not counted. Some growth might be from women in the workforce More need for services since women are working. Makes GDP look bigger? Does not count externalities like pollution
