Download Economics

Economics
Unit 3 Terms/Notes
Macroeconomics: Taxes, Spending,
and Economic Measurement
1. Public Good- G or S provided by the government.
Examples:
Education, Military, Police, Fire, Jails, S.S.,
Welfare, Agriculture Subsidies
2. Private Good- G or S provided by private
individuals or private companies.
Examples:
Shirt from Old Navy, Gas from ARCO, Car from
Sanderson Ford, Education from Brophy
2 Reasons for Public Goods
3. Non-exclusion rule- difficult to exclude(keep out)
individuals who are unwilling to pay.
Examples: Parks, Police/Military/Fire Protection, Roads,
Courts, Dams/ Flood Control
4.
Shared Consumption rule- everyone can share in
the use of a G or S. One person using a G or S
does not lessen the benefit another person gets
from it.
Examples: Education, Parks, Library, Street lights,
system of money, weights and measure.
5. Free Rider- someone who receives the benefits of
a good or service without having to contribute to its
costs.
Examples:
bumming a cigarette, copying homework,
borrowing yard tools
Dam example- 2 people (A & B)
living in a flood plain, both would
benefit from a dam, only A wants to
pay for it, B does not.
6. Taxes- Required payments of money to
governments that are used to provide public goods
and services.
7. Types of taxes
7A. Personal Income- on earnings, Federal and MOST states
7B. Corporate Income- on profits (approx. 35%)
7C. Excise- tax on specific items (tobacco, alcohol, gas,
tires, marijuana) $ per pack, oz., gallon
Colorado officials project $67 million a year from taxes on marijuana sales. These
consist of the existing 2.9 percent state sales tax (plus local taxes), an additional 10
percent state tax on retail marijuana sales, and a 15 percent excise tax on the "average
market rate" of wholesale marijuana. In Denver, that means a $30 eighth of pot (1/8 oz.)
will have about $8.59 in taxes tacked onto it, or about a 29 percent overall tax rate.
7C. Excise- tax on
specific items
(tobacco,
alcohol, gas,
tires, marijuana)
$ per pack, oz.,
gallon
7C. Excise- tax on
specific items
(tobacco,
alcohol, gas,
tires, marijuana)
$ per pack, oz.,
gallon
7C. Excise- tax on
specific items
(tobacco, alcohol,
gas, tires,
marijuana) $ per
pack, oz., gallon
7C. Excise- tax on specific items (tobacco, alcohol, gas, tires,
marijuana) $ per pack, oz., gallon
If you raise taxes like this too high relative to
nearby states or countries black market
smuggling will occur
Gas, Cigarette,
Alcohol, and
Marijuana taxes
are often called
“Sin” taxes. They
are put in place to
raise money but
ALSO to
discourage usage.
7D. Tariffs- tax on imports
7E. Inheritance/Estate- Estates worth >$5,340,000
in 2014 (tax rate 40% of income above that
level).
7F. Property- on land/ buildings (agricultural,
residential, commercial)
7G. Sales- on
purchases;
state AND
local (AZ
9.1%)
7H. Luxury- U.S.
formerly had
excise tax on
expensive jewelry,
planes, boats, cars,
china, crystal ;
meant to tax
products that are
purchased
primarily by the
wealthy.
7I. Payroll (Social Security/Medicare)- on
wages/salaries/tips (15.3% for most); Federal Insurance
Contributions Act (FICA) taxes on your paycheck
You only pay SS tax on the 1st $117,000 of income; above
$117,000 you pay no more SS tax.
7J. Licenses and Fees- Driver’s, hunting, business
(Cosmetology, Contracting, Medical, Taxi), toll
road/bridge
8. Federal Spending
Federal Taxes/ Revenue
1. Social Security
1. Personal Income
2. Medicare,
Medicaid, and
other health
2. Social Security
3. Defense
4. Net interest
3. Borrowing
4. Corporate Income
SS, Medicare and Medicaid, Veteran’s are entitlements- By law people
are entitled to these benefits because they meet some criteria, e.g,
income level, age, unemployment, service; govt. HAS TO spend $$$
on these. 60.2 goes to the top 2 areas; 82.8% goes to the top 4 areas.
Discretionary Spending is spending that Congress and Prez have to
agree on every year. They can spend more, less or NOTHING. It is at
their discretion (freedom to decide).
US spends more on defense than the next 15 nations combined. (2012)
U.S. is
actually a
“low tax”
country when
compared to
other
developed
countries.
9. State & Local Spending State & Local Taxes
1. Education
1. Sales
2. Health/ Welfare
2. Property
3. Public Safety
4. Transportation
3. Excise
4. Federal Grants
10. Progressive tax- a tax that takes a larger percentage of
higher incomes than of lower incomes.
Examples:
Income, Inheritance, Luxury, Property
% of
Income
50%
20%
10%
0
$1,000
$10,000
$100,000
Income ($)
Tax Rates for unmarried individuals (other than
surviving spouses and heads of households (2013)
If Taxable Income Is:
The Tax Is:
Not over $8,925
10% of the taxable income
Over $8,925 but not over $36,250
$850 plus 15% of the amount over
$8,925
Over $36,250but not over $87,850
$4,750 plus 25% of the amountover
$34,500
Over $87,850 but not over $183,250
$17,025 plus 28% of the amount over
$83,600
Over $183,250 but not over $398,350
$42,449 plus 33% of the amount over
$174,400
Over $398,350 but not over $400,000
$110,016.50 plus 35% of the amount
over $398,350
Over $400,000
$111,666.50 plus 39.6% of the amount
over $400,000
Effective Rate- Average rates AFTER you
take tax deductions and tax credits and
because not all income is taxed at top rate
11. Regressive tax- A tax that takes a larger percentage of
lower incomes than of higher incomes.
Examples:
Sales, Licenses and Fees, Excise, Social Security
% of
Income
40%
20%
5%
0
$1,000
$10,000
$100,000
Income ($)
12. Proportional Tax- A tax that takes the same percentage
of income from all workers.
Examples:
Flat tax proposal for the income tax
% of
Income
20%
0
$1,000
$10,000
$100,000
Income ($)
Who should pay a tax?
13. Benefits Received Principle- The people who
pay the tax are the ones who directly receive the
benefits.
Examples: Licenses and Fees, Most Excise Taxes,
Social Security
Who should pay a tax?
14.
Ability to Pay Principle- The amount of tax a person
pays is based on how much they can afford to pay.
Two types:
1. Based on Wealth- Value of your assets(what you
own).
Examples: Property, Inheritance
2. Based on Income- How much money you earn now.
Examples: Personal Income, Luxury
Economics
Unit 4 Notes and Terms
Taxes, Spending, and Economic Measurement
15. Gross Domestic Product (GDP)- total value ($) of all
final goods and services (G&S) produced within a
country in one year.
GDP = Consumer Spending (C) + Business Investment (I)
+ Government Spending (G) + Net Exports (x - m or Nx)
C + I + G + Nx = GDP
16. What is Included in GDP?
Money is exchanged for g and s.
Consumer Spending (C)- Spending by consumers
on goods and services
Business Investment (I)- Tools, Equipment and
Machinery; New Houses and Inventory too
Government Spending (G)- Purchase of g and s.
Net Exports (x - m or NX)- Exports ↑ NX ($ flows into
U.S.), Imports ↓NX ($ flows out of U.S.),
17. What is Excluded from GDP?
Reason #1
Money is not exchanged
Non-Market Activities- G or S is produced
but no $ is exchanged. Unpaid work or
labor; housewife, volunteer, work you
perform for yourself;
18. What is Excluded from GDP?
Reason #2
A Good or Service is not exchanged
Financial Transaction/ Transfer PaymentsMoney is exchanged or transferred from
one person to another but no G or S is
produced.
Ex: Depositing or withdrawing money
from a bank, buying/ selling stock,
receiving a loan, Social Security, Food
Stamps, student loans.
19. What is Excluded from GDP?
Reason #3
To avoid counting something twice
Used Products – Not counted because they were counted
when they were new.
Intermediate Goods- Parts or raw materials that are
produced to be used to produce another product.
Ex: Glass, Rubber, Steel, Aluminum, Plastic all used to
make a Car (the final product). We do NOT want to
count them twice, once when they are first produced
and then AGAIN when they are added to the car. Valueadded approach is used. We only count the value they
add to the final product, the car.
Value-added approach is used with intermediate goods to
avoid double counting
Comparative GDPs
GLOBAL PERSPECTIVE
Select Nations GDPs - 2005
GDP in Trillions of Dollars
0
United States
Japan
Germany
China
United Kingdom
France
Italy
Spain
Canada
Brazil
Korea, Rep.
India
Mexico
Russian Fed.
Australia
1
2
3
4
5
6
7
8
9
10
12
$12.4
$4.5
$2.8
$2.2
$2.2
$2.1
$1.7
$1.1
$1.1
$.79
$.79
$.78
$.77
$.76
$.70
Source: World Bank
Shortcomings of GDP
•
•
•
•
•
•
Nonmarket Activities
Leisure
Improved Product Quality
The Underground Economy
GDP and the Environment
Composition and Distribution of
the Output
• Noneconomic Sources of WellBeing
Households as Income Receivers
Personal Distribution of Income-2004
Income Group (Households)
0
Lowest
20%
Second
20%
Middle
20%
Fourth
20%
Highest
20%
Personal Income Received (Percent)
10
20
30
40
50
60
3.4%
8.7%
14.7%
23.2%
50.1%
Source: Bureau of the Census
Shortcomings of GDP
GLOBAL PERSPECTIVE
Underground Economy as a Percentage
of GDP - Select Nations
Percentage of GDP
0
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United Kingdom
Japan
United States
Switzerland
5
10
15
20
25
30
Source: Journal of Economic Literature
Income Inequality
• Average Household Income $60,258 in 2004 Among the Highest in the World
Distribution of U.S. Income by Households, 2004
(1)
Personal
Income Category
Under $10,000
$10,000 - $14,999
$15,000 - $24,999
$25,000 - $34,999
$35,000 - $49,999
$50,000 - $74,999
$75,000 - $99,999
$100,000 and Above
(2)
Percentage of All
Households in this Category
8.7
6.7
12.9
11.9
14.8
18.3
11.0
15.7
100.0
Source: Bureau of the Census
• Division Into 5 Equal Groups
Distribution by Quintiles, 2004
(1)
Quintile
(2)
Percentage of
Total Income
(3)
Upper
Income Limit
Lowest 20%
3.4
$18,500
Second 20%
8.7
34,738
Third 20%
14.7
55,331
Fourth 20%
22.2
88,029
Highest 20%
50.1
No Limit
Total
100.0
Source: Bureau of the Census
Income Mobility:
The Time Dimension
Causes of Income Inequality
Percentage of Total Income Received by the Top
One-Tenth of Income Receivers, Selected Nations
GLOBAL PERSPECTIVE
0
Guatemala
Brazil
South Africa
Mexico
United States
Italy
Sweden
Germany
10
20
30
40
50
48.3
46.9
44.7
43.1
29.9
26.8
22.2
22.1
Source: World Bank, World Development Indicators, 2005
Economics
Unit 3 Notes
Taxes, Spending, and Economic Measurement
20. Business Cycle- A periodic change in the GDP; includes
recessions, expansions, peaks, troughs.
GDP Growth Rate (%)
Peak
Peak
Peak
Trough
Trough
Trough
Time in Quarters (3 months)
Selected Growth Rates
GLOBAL PERSPECTIVE
Percentage Change (annual rate)
6
U.S.
4
2
0
France
Germany
U.K.
Italy
Japan
-2
-4
1997
1999
2001
2003
2005
Source: Economic Report of the President, 2006
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
21. Recession/ Contraction- A phase of the
business cycle where GDP declines.
22. Expansion/ Recovery- A phase of the business
cycle where GDP increases.
23. Trough- A turnaround point; economy starts to
grow again.
Economic Statistics Rules of Thumb
aka “The Economic Sweet Spot”
Good  1-3% Inflation Bad
Bad  3-4% Growth (RGDP) Good
Good  4-6% Unemployment Bad
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
24. Peak/ Prosperity/ Boom- A turnaround point;
economy may be here for a long time before the
economy starts to shrink into recession.
25. Depression- A very deep, long recession.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
Inflation Rate (percent)
26. Inflation- An increase in the level of
prices. Ex: The CPI (see below) last year
increased at an annual rate of 4%.
15
10
5
0
1960
1970
1980
1990
2000
Annual Inflation Rates in the United States,1960-2005
College
and
medical
care costs
are 2
categories
that have
gone up
much faster
than the
average
rate of
inflation.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
27. Disinflation- A decrease in the
rate of inflation. The CPI increased at
only a 2% annual rate instead of last
year's 5% rate.
Example: Increased competition from China,
India, and illegal immigration has put
downward pressure on wages. Wages are a
large cost for business so this has helped
keep prices down
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
Example: Technological change has helped push the
price of some products down which has helped keep
inflation relatively modest over the last 20 years
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
28. Deflation- A decrease in the level of prices. Ex: The CPI
decreased 2 % last year.
Deflation may sound great but the only time in the last 100
years that the U.S has had deflation was during the Great
Depression of the 1930’s.
Japan also had a bad recession in the late 1990’s and
experienced deflation.
If there is deflation why would people not wanted to buy
something today?
If they wait until tomorrow the price will be cheaper! But…
Then that puts downward pressure on prices because people are
not buying things!
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
Hyperinflation- When
inflation gets out of
control and increases at
very large rates.
Examples: Zimbabwe (2008)- 516 quintillion % – 516
followed by 18 zeros Zimbabwean prices are currently
doubling every 1.3 days
Hungary (post WWII)- 12,950,000,000,000,000 %, with
prices doubling every 15.6 hours.
Weimar Germany (1923)- distant fourth place, at 29,525 per
cent a month with prices doubling every 3.7 days.
Zimbabwe
$10,000,000
Bill
Hyperinflation- When inflation gets out of control
and increases at very large rates.
Sign in a Zimbabwe Toilet, 2008
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
29. Consumer Price Index (CPI ) -Most common measure
of the change in prices. Measured from some BASE
year which starts at 100. Economists check prices on a
many different products (a "market basket" of goods)
and then check those prices periodically and record the
change in price. Measures changes at the retail level.
30. Producer Price Index (PPI)- Measures the change in
the price of goods and services at the wholesale level.
Consumer Price Index 1940- August 2010; % change from 1 year ago
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
Aggregate Demand and Aggregate Supply Graph
PL = Price Level
PL
RGDP = Real Gross
Domestic Product
AS
AD = Aggregate/
Total Demand
PL0
AD
0
Y0
AS = Aggregate/
Total Supply
RGDP=Y
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
31. Types or Causes of Inflation
1. Demand-Pull- Consumers and private businesses
increase their spending faster than production(demand
increases). This pulls prices up.
PL
Aggregate/ Total Demand
(AD) ↑ from AD0 to AD1.
AS
PL ↑ from PL0 to PL1.
PL1
PL0
AD1
AD0
0
Y0
Y1
RGDP=Y
RGDP ↑ from Y0 to Y1.
U Rate ↓ because RGDP ↑.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
31. Types or Causes of Inflation
2. Cost-Push- The cost of productive resources
(Natural, Human, Capital, Entrepreneurship) increases
and this forces producers to push prices up.
AS1
PL
AS0
Aggregate/ Total Supply
(AS) ↓ from AS0 to AS1.
PL ↑ from PL0 to PL1.
PL1
RGDP ↓ from Y0 to Y1.
PL0
AD
0
Y1
Y0
RGDP=Y
U Rate ↑ because RGDP ↓.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
31. Types or Causes of Inflation
3. Wage-Price Spiral- High prices cause workers to
ask for raises but this increases costs for producers who then
raise prices on the products they sell. These higher prices
then force workers to ask for..... (very similar to cost-push
inflation)
4. Excessive Monetary Growth- The supply of money
increases at a rate that is greater than the increase in the
production (supply) of G & S. People have more
money and pull prices up. TOO MANY DOLLARS
CHASING TOO FEW GOODS. Very closely related to
demand-pull inflation.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
32. Who benefits and who is hurt by inflation
1. Borrowers- Helped; paying back loans in dollars
that are worth less than when they were
borrowed.
2. Lenders- Hurt; being paid in dollars that are
worth less than when they were loaned out.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
32. Who benefits and who is hurt by inflation
3. Fixed income- Hurt. Income stays the same while
everything gets more expensive. Income decreases in
real terms. Your purchasing power decreases.
4. Individuals with Cost-of-Living Adjustment(COLA) in
wage contract.- Helped or at least not affected. As
inflation increases so does your pay . Ex: If inflation
increases by 3% your hourly wage automatically
increases by 3%.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
32. Who benefits and who is hurt by
inflation
5. Employees- Hurt; get paychecks that
are worth less as inflation increases
6. Employers- Helped; give paychecks
that are worth less as inflation increases
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
33. Real vs. Nominal- Measurement in Nominal terms does
not take into account changes in price while Real does. Real
more accurately reflects the growth of GDP, changes in
people's wages, or when measuring the value of anything
over a period of time.
Real rate = Nominal rate - inflation rate.
Nominal rate = Real rate + inflation rate.
Is the top film of all time REALLY Avatar?
No! Adjusting for Inflation, Gone with the Wind is
the top film.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
33. Real vs. Nominal- Earning Interest
Nominal interest rate - inflation rate = Real interest rate
Real interest rate + inflation rate = Nominal interest rate
If you earn 1% in a bank savings account how much
do you make in real terms if the inflation rate is 3%?
Nominal Interest Rate = 1%
Inflation Rate = 3%
1% - 3% = -2% real rate
Inflation
Anticipated Inflation
Nominal Interest Rate
Real Interest Rate
Inflation Premium
6%
11%
=
+
5%
Nominal
Interest
Rate
Real
Interest
Rate
Inflation
Premium
O 7.2
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
33. Real vs. Nominal- Wage increase
Nominal raise - inflation rate = Real raise
Real raise + inflation rate = Nominal raise
If you get a 3% raise how much do you make in real
terms if the inflation rate is 3%?
Nominal Raise = 3%
Inflation Rate = 3%
3% - 3% = 0% real ∆ wage
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
33. Real vs. Nominal- GDP Growth
Nominal GDP Growth rate - inflation rate = Real GDP Growth rate
Real GDP Growth rate + inflation rate = Nominal GDP Growth rate
If the GDP grows by 4% in 2008 how much did it
grow in real terms if the inflation rate is 3%?
Nominal GDP Growth Rate = 4%
Inflation Rate = 3%
4% - 3% = 1% real GDP growth
Were gas prices during the
summer of 2008 at record
highs of ≈ $4.00/gallon?
Yes. In the summer of 2008 they
were. Previous high was 1980.
when they were $3.25 in current
dollars.
No, currently (2015) they are not.
Even though in nominal terms gasoline prices have
trended up, gasoline’s long term real trend has been
downward, but with dramatic short term increases.
Gasoline currently appears to be back to
“normal” in real terms.
Gasoline in real terms (2008 dollars) is near
it’s 15 year average of $2.00/ gallon.
Nominal Versus Real GDP
•
•
•
•
Nominal GDP
Real GDP
Price Index
GDP Price Index
W 6.2
O 6.1
Price
Index
In Given
Year
Real
GDP
=
=
Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year
x 100
Nominal GDP
Price Index (in hundredths)
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
34. Unemployment- Being 16 or older, looking for
work, and unable to find work .
35. Unemployment rate- # unemployed divided by
the total # of people in the labor force.
36. Employment Rate- # employed divided by
civilian population.
37. Labor force- # employed plus # unemployed.
Civilian Unemployment Rate 1948- September, 2015
This chart compares three different measures of unemployment. U3 is the official unemployment rate. U5
includes discouraged workers and all other marginally attached workers. U6 adds on those workers who are
part-time purely for economic reasons.
June, 2015
Unemployment Rate
by County 2007-2014
Unemployment
Labor Force, Employment, and Unemployment, 2005
Under 16
And/or
Institutionalized
(70.5 Million)
Not in
Labor Force
(76.8 Million)
Total
Population
(296.6 Million)
Employed
(141.7 Million)
Unemployed
(7.6 Million)
Labor
Force
(149.3 Million)
Unemployment
• Unequal Burdens
–Occupation
–Age
–Race and Ethnicity
–Gender
–Education
–Duration
• Noneconomic Costs
Unemployment Rate
for Someone Like Me
2009
2009
38. Types of Unemployment
1. Structural- Changes in the structure of the
economy caused by changing technology or consumer
demands throw segments of workers out of work.
Workers lack the right skills.
Examples:
Changing Consumer Tastes- Japanese v. American
Cars
Technology- iPods instead of CD’s
Mergers- Smitty’sSmith’sKroger (Fry’s)
Instead of
Instead of
38. Types of Unemployment
2. Cyclical- Caused by swings in the business
cycle.
Examples: Housing, Cars, Appliances, Furniture,
Sit-Down Restaurants all lay off in a recession.
38. Types of Unemployment
3. Frictional- Caused by workers who are
"between jobs“ or are reentering the labor force.
Examples:
Quitting a job to look for a better one,
Homemakers, Students graduating, Leaving the
military
38. Types of Unemployment
4. Seasonal- Caused by changes in season or
weather.
Examples: Agriculture, Tourism, Sports
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
39. Natural Rate of Unemployment- The
unemployment rate when the economy is at full
employment, i.e. when the number of people
looking for jobs equals the job vacancies.
Defined as being between 4-6% unemployment
because of frictional and structural
unemployment, the 2 types of unemployment
we will always have and can’t (and don’t want
to) completely eliminate.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
40. Discouraged Workers- Workers who have given up
looking for work but would like to work. They are not
considered to be unemployed because they are not
actively seeking employment.
41. Underemployment- Occurs when workers are forced to
take jobs that they are overqualified for.
Example: Cleaning houses instead of managing an
office even though you have the education and
experience to manage the office
Unemployment
GLOBAL PERSPECTIVE
Unemployment Rates in Five Industrial Nations,
1995-2005
Unemployment Rate (percent)
15
France
10
Italy
Germany
U.S.
5
Japan
0
1995
2000
2005
20. Two ways to Count GDP
Expenditure Approach
Money is used to purchase/ buy goods and services in the
Product Market.
GDP= Consumer Spending (C) + Business Investment (I) +
Government Spending (G) + Net Exports (x - m or Nx)
C + I + G + Nx = GDP
21. Two ways to Count GDP
Income Approach
Productive resources are sold for money in the Resource
Market.
Human Resources = Wages, Salaries, Tips, and Commissions
Capital Resources = Interest
Natural Resources = Rent
Entrepreneurship resources = Profit (proprietor’s Income AND
corporate profits)
W + I + R + P = National Income (NI)
plus Indirect Taxes (sales taxes) and Depreciation = GDP
Two Approaches to GDP
Expenditure
Approach
Income
Approach
Consumption by
Households
Wages
Investment by
Businesses
Interest
+
+
Government
Purchases
+
Expenditures
By Foreigners
G
= D=
P
+
+
+
+
Rents
Profits
Statistical
Adjustments
Expenditure Approach
Personal Consumption Expenditures C
• Durable Consumer Goods
• Nondurable Consumer Goods
• Consumer Expenditures for Services
Gross Private Domestic Investment
Ig
• Machinery, Equipment, and Tools
• All Construction
• Changes in Inventories
• Noninvestment Transactions
Households as Spenders
Household Uses of Income-2005
Income Group (Households)
0
Household Income Expended (Percent)
10 20 30 40 50 60 70 80
Personal
Taxes
Personal
Saving
90
12%
0%
Personal
Consumption
88%
Consumption Divided Between…
Composition
of
Consumption
59%
29%
12%
Services
Nondurable
Goods
Durable
Goods
Source: Bureau of Economic Analysis
Expenditure Approach
Gross Investment
Depreciation
= Net Investment
-
Gross
Investment
Net
Investment
Depreciation
Increased
Stock of
Capital
Consumption
& Government
Spending
Stock of
Capital
January 1
Year’s GDP
December 31
Expenditure Approach
G
Government Purchases
• Expenditures for Goods and
Services
• Expenditures for Social Capital
Net Exports
Xn = Exports (X) – Imports (M) Xn
Putting It All Together:
GDP = C + I + G + Xn
GDP= $8,746 + 2,105 + 2,363 - 727 = $12,487
in 2005
GDP Approaches Compared
Accounting Statement for the U.S. Economy, 2005
in Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C) $ 8746 Compensation
Gross Private Domestic
Rents
$ 7125
73
Investment (Ig)
2105 Interest
498
Government Purchases (G)
2363 Proprietor’s Income
939
Net Exports (Xn)
-727 Corporate Profits
Taxes on Production and
1352
917
Imports
National Income
Net Foreign Factor Income
Statistical Discrepancy
$10,904
-34
43
Consumption of Fixed
Capital
Gross Domestic Product $ 12,487 Gross Domestic Product
1574
$ 12,487
The Income Approach
•
•
•
•
•
Compensation of Employees
Rents
Interest
Proprietor’s Income
Corporate Profits
– Corporate Income Taxes
– Dividends
– Undistributed Corporate Profits
– Taxes on Production and Imports
The Income Approach
• From National Income to GDP
– Net Foreign Factor Income
– Statistical Discrepancy
– Consumption of Fixed Capital
• Other National Accounts
– Net Domestic Product (NDP)
– National Income (NI)
– Personal Income (PI)
– Disposable Income (DI)
– DI = C + S
W 6.1
The Income Approach
Income Relationships – United States, 2005
Gross Domestic Product (GDP)
Consumption of Fixed Capital
Net Domestic Profit (NDP)
Statistical Discrepancy
Net Foreign Factor Income
National Income (NI)
Taxes on Production and Imports
Social Security Contributions
Corporate Income Taxes
Undistributed Corporate Profits
Transfer Payments
Personal Income (PI)
Personal Taxes
Disposable Income (DI)
$ 12,487
-1,574
$ 10,913
-43
34
$ 10,904
-917
-871
-378
-460
+1,970
$ 10,248
-1,210
$ 9,038
Legal Forms of Business
•Sole Proprietorship
•Partnership
•Corporation
Domestic Output by Business Type
20%
Corporations
8%
Partnerships
Corporations
84%
Partnerships
11%
72% Sole Proprietorships
Sole Proprietorships
Percentage of Firms
5%
Percentage of Sales
Source: U. S. Census Bureau
HOUSEHOLDS AS INCOME RECEIVERS
FUNCTIONAL DISTRIBUTION
WAGES
$5,977 Billion
72%
PROPRIETOR’S 757 Billion
INCOME
9%
CORPORATE
PROFITS
787 Billion
9%
INTEREST
684 Billion
8%
RENTS
142 Billion
2%
2002 DATA
Households as Income Receivers
Functional Distribution of Income-2005
Income By Function Performed
0
National Income Received (Percent)
10
20
30
40
50
60
Wages &
Salaries
71%
Rents
1%
Interest
Proprietor’s
Income
Corporate
Profits
70
5%
9%
14%
Source: Bureau of Economic Analysis
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
28. Gross National Product (GNP)- total value($)
of final goods and services(G&S) owned by the
residents of a country in one year.
29. Net Domestic Product (NDP) - GDP minus
that part of output needed to replace the capital
goods worn out in producing the output.
30. National Income (NI) - Total income earned by
resource (L, L, C, E) suppliers (households) for
their contribution to the production of the GDP.
Economics
Unit 3 Notes and Terms
Taxes, Spending, and Economic Measurement
31. Personal Income (PI) - The income available to
resource owners (households) before taxes.
32. Disposable Income (DI) - Personal income
minus taxes. The money you have available to
spend or save.
Inflation
W 7.4
•Who is Hurt by Inflation?
–Employees/ Fixed-Income
Receivers
–Savers
–Creditors/ Lenders
Inflation
•Who is Unaffected or
Helped by Inflation?
–Flexible-Income Receivers
•Cost-of-Living
Adjustments (COLAs)
–Debtors/ Borrowers
–Employers
W 7.4