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Chapter 25 Measuring Domestic Output and National Income Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Assessing the Economy’s Performance • National Income Accounting measures economy’s overall performance • Bureau of Economic Analysis compiles National Income and Product Accounts • Assess health of economy • Track long run course • Formulate policy 25-2 LO1 Gross Domestic Product • Measure of aggregate output • Monetary measure • Avoid multiple counting • Market value final goods • Ignore intermediate goods • Count value added 25-3 LO1 Gross Domestic Product (1) Stage of Production (2) Sales Value Of Materials Or Product $ (3) Value Added 0 Firm A, sheep ranch 120 Firm B, wool producer 180 Firm C, coat manufacturer 220 Firm D, clothing manufacturer 270 Firm E, retail clothier 350 Total Sales Value Value Added (total income) ]--------$120 (= $120 - $ 0) ]-------- 60 (= 180 - 120) ]-------- 40 (= 220 - 180) ]-------- 50 (= 270- 220) ]-------- 80 (= 350 – 270) $1140 $350 25-4 LO1 Gross Domestic Product • Exclude financial transactions • Public transfer payments • Private transfer payments • Stock market transactions • Exclude second hand sales • Sell used car to a friend 25-5 LO1 Two Approaches to GDP • Income approach • Count income derived from production • Wages, rental income, interest income, profit • Expenditure approach • Count sum of money spent buying the final goods • Who buys the goods? 25-6 LO1 Two Approaches to GDP Expenditures or Output Approach Income or Allocations Approach Consumption by Households Wages Investment by Businesses Rents + + + Government Purchases Expenditures By Foreigners LO1 G =D= P + + + + Interest Profits Statistical Adjustments 25-7 Expenditures Approach • Personal consumption expenditures (C) • Durable goods • Nondurable goods • Consumer expenditures for services • Domestic plus foreign goods produced 25-8 LO2 Expenditures Approach • Gross private domestic investment (Ig) • Machinery, equipment, and tools • All construction • Positive and negative changes in inventories • Creation of new capital assets • Noninvestment transactions excluded 25-9 LO2 Expenditures Approach = Gross Investment Depreciation Net Investment Gross Investment Net Investment Depreciation Stock Stock of Capital January 1 LO2 Consumption, government expenditures, and net exports of Capital Year’s GDP December 31 25-10 Expenditures Approach LO2 • Government purchases (G) • Expenditures for goods and services • Expenditures for publicly owned capital • Excludes transfer payments • Net exports (Xn) • Add exported goods • Subtract imported goods • Xn= exports (X) – imports (M) • GDP = C + Ig + G + Xn 25-11 Accounting Statement for the U.S. Economy, 2012 (in Billions) LO2 25-12 Comparative GDP 25-13 LO2 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 LO3 25-14 The Income Approach • From national income to GDP • Subtract 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) LO3 25-15 U.S. Income Relationships 2012 25-16 LO4 Circular Flow Revisited 25-17 LO4 Nominal GDP vs. Real GDP • GDP is a dollar measure of production • Using dollar values creates problems • Nominal GDP • Based on prices that prevailed when output was produced • Real GDP • Reflect changes in the price level • Use base year price 25-18 LO5 GDP Price Index • Use price index to determine real GDP 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) 25-19 LO5 GDP Price Index • Calculating Real GDP (Base Year = Year 1) Year (1) Units of Output (2) Price of Pizza Per Unit (3) Price Index (Year 1 = 100) (4) Unadjusted, or Nominal, GDP (1) X (2) 1 5 $10 100 $ 50 $50 2 7 20 200 140 70 3 8 25 250 200 80 4 10 30 --- --- --- 5 11 28 --- --- --- (5) Adjusted, or Real, GDP 25-20 LO5 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 well-being 25-21 LO6 Underground Economy 25-22 LO6 Sources of BEA Data • Consumption • Census Bureau’s Retail Trade Survey • Census Bureau’s Survey of Manufacturers • Census Bureau’s Service Survey • Industry Trade Sources 25-23 Sources of BEA Data • Investment • All consumption data sources • Census Bureau’s Housing Starts Survey and Housing Sales Survey • Retail Trade Survey • Wholesale Trade Survey • Survey of Manufacturing 25-24 Sources of BEA Data • Government Purchases • Office of Personnel Management • Construction Surveys • Census Bureau’s Survey of Government Finance • Net Exports • U.S. Customs Service • BEA Surveys and Analysis 25-25