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07
Measuring Domestic Output
and National Income
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Assessing the Economy’s Performance
• National Income Accounting measures
•
LO1
economy’s overall performance
Bureau of Economic Analysis compiles
National Income and Product Accounts
• Assess health of economy
• Track long-run growth & performance
• Formulate policy
7-2
Gross Domestic Product
• Measure of aggregate output
• Monetary measure
• Avoid multiple counting
• Market value of final goods
• Ignore intermediate goods
• Count only value added
LO1
7-4
Gross Domestic Product
(1)
Stage of Production
(2)
Sales Value
Of Materials
Or Product
$
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
$1140
Value Added (total income)
LO1
(3)
Value
Added
]--------$120 (= $120 - $ 0)
]-------- 60 (= 180 - 120)
]-------- 40 (= 220 - 180)
]-------- 50 (= 270- 220)
]-------- 80 (= 350 – 270)
$350
7-6
Gross Domestic Product
• Exclude financial transactions
• Public transfer payments
• Private transfer payments
• Stock (and bond) market transactions
• Exclude second hand sales
• Sell used car to a friend
LO1
7-7
Two Approaches to GDP
• Income approach
• Count income derived from production
• Wages, rental income, interest income,
•
LO2
profit
Expenditure approach
• Count sum of money spent buying the
final goods
• Who buys the goods?
7-8
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
LO2
G
= D=
P
+
+
+
+
Interest
Profits
Statistical
Adjustments
7-10
Expenditures Approach
• Personal consumption expenditures (C)
• Durable consumer goods
• Nondurable consumer goods
• Consumer expenditures for services
• Domestic plus foreign-produced
goods (both included in
expenditures)
LO2
7-11
Expenditures Approach
• Gross private domestic investment (Ig)
• Machinery, equipment, and tools
• All construction
• Changes in inventories
• Creation of new capital assets
LO2
7-12
Expenditures Approach
=
Gross Investment
Depreciation
Net Investment
Gross
Investment
Net
Investment
Depreciation
Increase
LO2
Stock of
Capital
Consumption
& Government
Spending
Stock of
Capital
January 1
Year’s GDP
December 31
7-14
Expenditures Approach
• 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 – imports
• GDP = C + Ig + G + Xn
LO2
7-15
U.S. Economy 2009
In Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C) $10,089
Compensation
$ 7792
Gross Private Domestic
Rents
268
788
Investment (Ig)
1628
Interest
Government Purchases (G)
2931
Proprietor’s Income
1041
Net Exports (Xn)
-392
Corporate Profits
1309
Taxes on Production and
Imports
National Income
1090
$12,288
Net Foreign Factor Income (-)
105
Statistical Discrepancy (+)
209
Consumption of Fixed
Capital (+)
Gross Domestic Product $ 14,256
LO2
Gross Domestic Product
1864
$ 14,256
7-16
Comparative GDP
LO2
7-17
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
LO2
7-18
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)
LO2
7-19
U.S. Income Relationships 2009
Gross Domestic Product (GDP)
Less: Consumption of Fixed Capital
Equals: Net Domestic Product (NDP)
Less: Statistical Discrepancy
Plus: Net Foreign Factor Income
Equals: National Income (NI)
Less: Taxes on Production and Imports
Less: Social Security Contributions
Less: Corporate Income Taxes
Less: Undistributed Corporate Profits
Plus: Transfer Payments
Equals: Personal Income (PI)
Less: Personal Taxes
Equals: Disposable Income (DI)
LO2
$ 14,256
1864
$ 12,392
209
105
$ 12,288
1090
967
315
418
2528
$ 12,026
1102
$ 10,924
7-20
The Circular Flow of Payments
LO2
7-21
Nominal vs. Real GDP
• GDP is a dollar measure of production
• Using dollar values creates problems
• Nominal GDP
• Use prevailing price
• Real GDP
• Reflect changes in price
• Use base year price
LO3
7-23
GDP Price Index
• Use price index to determine real GDP
Price
Index
In Given
Year
Real
GDP
LO3
=
=
Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year
x 100
Nominal GDP
Price Index (in hundredths)
7-24
GDP Price Index
• Calculating Real GDP (Base Year = Yr 1)
LO3
(5)
Adjusted,
or
Real,
GDP
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
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5
11
28
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--7-25
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
LO4
7-27
Underground Economy
LO4
7-28