Download Ch 6 NIA [AP & Reg](p)

[16th Ed.]
National Income Accounting
[GDP and its four cousins]
C
+
Ig + G + Xn [X-M] =
[“Replacement
capital”]
GDP–Depreciation=
[what is for sale]
NDP +NFFIEUS–Indirect Business Taxes =
NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP=
[PI is what you can spend, save, or pay in taxes]
PI – Personal Income Taxes =
[DI is what you can spend
or save
]
Gross Domestic Product – market value of all final
legal output produced in a country in one year.
Nominal (money) GDP
=$6.00
Year one
$2.00
$2.00
$2.00
The base year is the benchmark year
to which other years are compared.
Nominal GDP measures
current output valued at
current prices.
Nominal (money) GDP
=$6.10
Year Two
[Recession - decrease in real output]
$3.05
$3.05
Real GDP – measures only output.
[measures current output at base-year
prices ($4), not current prices ($6.10)].
GNP – Ownership
All goods/services produced
legally for pay by citizens of a country.
[Citizenship mattered, not geography]
GDP - Location
All goods/services produced
legally for pay in a country’s borders.
[Geography matters, not citizenship]
China
Plano, TX
Provo,UT
BMW in Waco
Europe
Nike in
Indonesia
in Chicago
Honda in Ohio
The difference between GDP & GNP is about 2/10 of 1%.
[U.S.A. Profits Overseas]
Rest of World
$220 bil.
Foreign Profits in
U.S.A.
$209 billion
N.F.F.I. = $11 billion
If U.S. Profits in the ROW are greater [$220] than
foreign profits in the U.S. [$209], add the difference.
[U.S.A. Profits Overseas]
Rest of World
$200 bil.
Foreign Profits in
U.S.A.
$209 bill.
N.F.F.I.E.U.S. = -$9 billion
If foreign profits in the U.S. [$209] are greater than
U.S. profits in the ROW [$200], subtract the difference.
Yes, if there is Full Employment.
The speed limit for GDP growth is 4%.
But, if the economy is in recession,
There is no speed limit for GDP growth.
Economy’s Speed Limit at Full Employment is 4%, instead of 2.5%.
Can sustain a much greater increase in AD if the AS curve is
also shifting to the right, due to increasing productivity.
In the early 90’s, at FE, 2.5%
was the speed limit. AS shifted
slowly due to low productivity.
AD1 AD2 AS1 AS
2
PL2
PL3
PL1
So, at FE, the “goldilocks
economy” has expanded.
Increasing productivity
of the late 90’s allowed
more growth at FE GDP.
0
Real GDP
under 4% Y*1 Y2 Y3
Real GDP
17 increases
4%
“Goldilocks Economy”
[not too fast or slow]
<10 years without a recession>
*Represents “GDP Speed Limit” at full employment
Billions of
1996 Dollars
$10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
1970
1975
1980
1985
1990
1995
2000
GDP = C(66%) + Ig(18%) + G(17%) + Xn
Personal Consumption Expenditure ( C )
•Durable Consumer
G
oods[12%]
Maytag produced here
Ferrari produced here
Spending by HH on all g/s
except for new housing.
•Nondurables[29%][soup & soap]
•Consumer Expenditures for Services[59%]
COMPOSITION OF CONSUMER Spending, 2005
Total of $8,746 billion
Services
$5,155 billion
(59%)
Durable Goods
$1,027 billion
(12%)
Nondurable Goods
$2,564 billion
(29%)
Personal Consumption Expenditure ( C )
Let’s say this Porsche is
produced by a foreign co.
in Plano, Texas.
Gross Private Domestic Investment
(IG)
3 Subcategories [*spending on output not consumed]
A. Business spending on real capital - tools, machinery, & plants
B. New construction investment – construction of new
houses and apartments [can rent for financial return].
C. Unsold inventory investment – change in inventories
[A net increase in inventories is investment; a net
decrease in inventories is negative investment or
disinvestment (disinvestment represents
sale of output produced in a previous year)
U.S. capital stock is over $30 trillion.
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases (G)
[state, local & federal]
[“G” purchases of goods/svcs produced
(not transfer payments)
3 Subcategories of Government
A. Federal government [40%]
B. 50 State governments
C. 88,000 local governments [60% for state and local]
Personal Consumption Expenditure (C)
Gross Private Domestic Investment (Ig)
Government Purchases ( G )
Net Exports( Xn)
Net Exports (Xn)=Exports (X)–Imports (M)
[M represents production outside a country]
Government Purchases
18%
Net Exports
Investment
-3
%
16%
Consumption
69%
5
Capital and
Investment
[Ig(3)>D(2)]
4
3
Pos. Net
Investment
Initial
Capital
Initial
Capital
5
2
Initial
capital
less
deprec.
1
0
Deprec- Gross
iation Investment
1/1/07
Initial
capital
less
deprec.
During 2007
12/31/07
Cal’s CD’s has a capital stock[5 machines] at the end of 2004
that equals its capital stock at the beginning of the year[4] +
its net investment[+1]. Net investment is equal to Ig[3]-D[2].
Cal’s Ig is the 3 new machines bought during the year, and its
depreciation is the 2 machines that Cal scrapped during the year.
Capital – plant, equipment, buildings, & inventories of raw materials
& semi-finished goods that are used to produce other goods/services.
Investment-increases the capital stock (purchases of capital).
Depreciation-decreases the capital stock(worn out/obsolete).
Net Investment-change in a nation’s capital stock in one year.
Investment[Ig(3)>depreciation(2)]; Disinvestment[Depreciation(2)>Ig(1)].
Capital and Disinvestment [D(2)>Ig(1)]
4
Initial
3 Capital
[D(2)>Ig(1)]
Gross
Investment
2
Initial
capital
less
deprec.
1
0
Neg. Net
Investment
Depreciation
1/1/07
Initial
capital
less
deprec.
During 2007
Initial
Capital
3
12/31/07
Cal’s CD’s has a capital stock[5 machines] at the end of 2004
that equals its capital stock at the beginning of the year[4] +
its net investment[+1]. Net investment is equal to Ig[3]-D[2].
Cal’s Ig is the 3 new machines bought during the year, and its
depreciation is the 2 machines that Cal scrapped during the year.
Capital – plant, equipment, buildings, & inventories of raw materials
& semi-finished goods that are used to produce other goods/services.
Investment-increases the capital stock (purchases of capital).
Depreciation-decreases the capital stock(worn out/obsolete).
Net Investment-change in a nation’s capital stock in one year.
Investment[Ig(3)>depreciation(2)]; Disinvestment[Depreciation(2)>Ig(1)].
Consumption
9,429,300
[70%]
Investment
Government
purchases
Export
$2,186
$2,570
[16%]
Spending
[19%]
$1.210
-5%
Import
Spending
$2.238
5%
The key is to keep the economy growing. At 2.5% growth, the U.S.
economy will expand to $23 trillion in 25 years. But – at 3%, it would reach
$26 trillion, which is like another Germany, with Saudi Arabia thrown in.
4.5%
3.5
3.8%
4%
3.3%
3.2%
3%
2.8% 2.7%
2.6%
Long
Term
Growth
2%
1% 0.8%
0
1929
To
1940
1940
To
1950
1950
To
1960
1960
To
1970
1970
To
1980
1980
To
1990
1990
To
2000
1929
To
2000
1900
To
2007
Comparative GDPs in Trillions, 2007
U.S.
Japan
Germany
China
U.K.
France
Italy
Canada
Spain
Brazil
S. Korea
India
Mexico
Russia
Australia
0
1
2
3
4
4.5
2.8
2.7
2.2
2.2
1.7
1.1
1.1
795
790
780
770
763
708
5
6
7
8
9
10 11 12
13 14
13.8
Comparative GDPs in Trillions, 2006
U.S.
Japan
Germany
China
U.K.
France
Italy
Canada
Spain
Brazil
S. Korea
India
Mexico
Russia
Australia
0
1
2
3
4
4.5
2.8
2.7
2.2
2.2
Calif. 1.7
TX1.1
1.1
1.1
795
.790
780
770
763
708
5
6
7
8
9
10 11 12
13
13.8
14
[Selected Countries]
Country
Per Capita
Luxembourg 80,800
Qatar
75,900
Bermuda
60,000
Norway
55,600
Kuwait
55,300
U.A.E.
55,200
U.S.
$46,000
Ireland
45,600
Hong Kong 42,000
Switzerland 39,800
Iceland
39,400
Canada
38,200
Australia
37,500
Denmark
37,400
Country
Sweden
U.K.
Germany
France
Japan
Italy
Australia
Russia
Mexico
China
Swaziland
Liberia
Zimbabwe
Congo, Rep of
Per Capita
36,900
35,300
34,400
33,800
33,800
31,000
24,000
14,600
12,500
5,300
4,800
500
500
300
China and India are still poorer than he U.S. was in 1900.
75% of Africans live on less than $2 a day & it is getting worse.
13 tril.
13.8 tril.
12 tril.
10 tril.
9 tril.
8 tril.
Per
Capita
[If GDP increases, per capita income increases] $46,000
7 tril.
6 tril.
5 tril.
4 tril.
4,152
3 tril.
3,187
2,416
2 tril.
1,665
1 tril.
709
0
1929
773
1,204
1940
1950
1960
1970
1980
1990
2007
$46,000
There are 6.6 billion people on our planet; 5 billion are in the Third
World. 2.5 billion live on less than $2 a day. The direst poverty
is in Africa, home of the world’s 10 poorest countries. Over ½
the people of Sub-Sahara Africa live on less than $2 a day.
8 million people die each year because they are too poor to stay alive.
The Poorest Nations
Nation
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Per Capita
Congo, Rep. of
$300
Zimbabwe
$500
Liberia
$500
Somalia
$600
Ethiopia
$700
Niger
$700
Cen. African Rep. $700
Gambia, The
$800
Sierra Leone
$800
Malawi
$800
Djibouti
$1,000
½ of the world’s
population have
yet to make their
$25,989
first phone call.
GDP Per Capita
[in 1992 dollars]
$15,931
$6,538
1929
1967
1996
2007
GDP – measures legal production in U.S.
in one year.
GDP measures all final goods/services
produced by workers and capital located
in the U.S., regardless of ownership.
[Domestically located resources]
Final goods are goods ready for consumption.
1. Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.
B. KFC buys chickens to eventually sell to customers.
Only Final Sales($20) Count [to prevent “multiple counting”($38)]
Value Added – increase in the
market value at each stage
$20 “Wife-beater”
Final Good
Shirt from Kohls
Retail Shirt
$20
$8
8
Wholesale
Shirt
$7
$12
$7
7
Cloth
$5
$1
0
$4
$4
$4
Cotton
$1
Cotton
Sum = $38 Farmer
$1
Textile
Mill
$1
Shirt
Manufacturer
$1
Retail
Store
Value Added ($)
Value of Output($)
Intermediate Good
4
1
$20 = sum
So, to avoid “multiple counting”, we count the $20 final price, not $38.
2. 2nd Hand Sales
– no current production.
A. 1957 Chevy bought in 2007
Salesman
57 Chevy
[It has not been produced again in 1963 & would not count.]
The salesman is doing productive work. His commission would count.
B. Boots produced in 1980 are bought in a Thrift Store in 07.
They also have not been produced again.
Salesman’s commission would count.
You are buying his services.
Shoe salesman
3. Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
Ex: If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm.
I’m not buying a Dell computer
but part ownership of Dell.
Exchanging one financial asset for another
4. Transfer Payments –welfare, unemployment, social security.
[There is no contribution to final production]
“Now that I’ve gotten my
welfare check, I can get an
iPhone”
Unreported “legal” business activity does not count.
This is two-thirds of the “underground economy.”
Before LASIK Surgery
Then he has LASIK but the
surgeon doesn’t report
$500 of his $3,400 bill?
And what if this
waitress doesn’t
report all tips?
And what if the
dentist doesn’t
report $400 for
teeth whitening?
Illegal business activity, because it goes unreported, also does
not count. Making up 1/3 of the “underground economy,” it
includes murder for hire, gambling, drugs, and prostitution.
“I’m getting $1,000 to kill
you, Ziggy, but at least it
will not count in GDP.”
And, what about
“Jane Ho”?
Illegal
Legal
$300 B
$600 B
Wages and
Salaries $185
What doesn’t get reported
is the “Underground”
What gets reported is
the “Above Ground”
Underground Economy [compared to “above ground”]
Unreported exchanges that take place - legal and
Illegal [Hidden – “off the books”]
Total illegal activities - $300 billion
Total legal activities - $600 billion
Total legal and illegal - $900 billion
Underground Economy
1. Illegal business activities (1/3) – gambling,
narcotics trade, prostitution, loan sharking, etc.
2. Unreported legal business activities (2/3)
a. waitresses not reporting all of her tips
b. Cabdriver not reporting all of his income
c. Self employed cheat the most. Off-the-books cash transactions
d. $300 billion
$300 B
*IRS estimates that about $300 billion in income taxes from
the underground economy escapes federal taxes each year.
[as a Percentage of GDP for 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
Work in your own household or volunteer work in
the community does not count because there was no
payment.
You need to do some of
this housework.
Work in your own household or volunteer work in
the community does not count because there was no
payment.
So, don’t marry your maid, gardener, or
fitness instructor, or you will hurt GDP.
GM in
France
Nike in
Indonesia
If U. S. corporations produce goods overseas,
it does not count in GDP, but would count in GNP.
Remember, we are measuring production inside
the U.S. Imports represent production outside of
the U.S.
1. Second Hand Sales[no production]
2. Public/Private Transfer Payments
3. Purely Financial Transactions
4. Intermediate Goods
5. U.S. Corporations producing overseas
6. Non-market transactions
[household or volunteer work]
Underground Economy
7. Illegal business activity
8. Unreported legal business activity
- When Outback buys potatoes for baked potatoes
- When a tattoo business buys
ink for tattoos
- When Tom Thumb buys
spam to sell it to you
- When the popsicle maker buys the sticks
- Dell buys a computer monitor frame
- Ice cream that
Braums buys for sundaes
- A bakery buys an apple
to put in its pies
- When Ford buys a windshield wiper
for a car
- When hooker, J-Lo Ho, is paid $200.00
On the next slide, read each sentence and determine,
“To Be or Not To Be Counted?” That is the question.
If “Yes”, put “Y” and tell if it is “C”, “Ig”, “G”, or “X”.
If “No”, put “N” and give the number from below on
why it is not counted in GDP.
GDP DOES NOT INCLUDE
1. Second hand sales [no current production] [but the salesman’s commission counts]
2. Public/Private transfer payments [no current production]
3. Purely financial transactions [no current production] [broker’s fees do count]
4. Intermediate goods [component of final good]
5. U.S. corporations producing overseas.
6. Non-market transactions [ household or volunteer work.
Underground Economy [not reported]
7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.]
8. Unreported legal business activity [“off the books”]
Example:
___
C ___
Y 1. New Toyota Tundra truck manufactured in San Antonio and
sold to your economics teacher the year it was produced.
___
1 ___
N 2. You buy a new Wii at GameStop in 2007. Does it
count if you resell it on eBay in March of 2008?
C ___
Y 1. You buy a purple “Tinky Winky” from Wal-Mart.
___
6 ___
N 2. You and your family paint your house. [labor involved]
___
N 3. You marry your housemaid. [“working-for-love”] [her services]
6 ___
___
3 ___
N 4. You buy 100 shares of Microsoft Corporation.
___
6 ___
N 5. You volunteer to babysit your little sister to help your parents while they work.
___
1 ___
N 6. Bob buys a 1965 ford Mustang convertible which is in mint condition.
___
C ___
Y 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2008.
___
6 ___
N 8. You and your friend volunteer to cook at the senior class picnic.
___
8 ___
N 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it.
___
Does the $500 the dentist keeps and doesn’t report count?
7 ___
N 10. You are given s suitcase full of $100 bills from the sale of smuggled drugs.
___
N 11. Your mother is teaching you to read [and not having much success].
6 ___
___
N 12. Your dad bakes you a home-baked loaf of bread. [his labor]
6 ___
___
C ___
Y 13. You buy a loaf of bread from Kroger’s Grocery Store.
___
G ___
Y 14. The U.S. government purchases 5 more B-2 Bombers for $2 billion each.
___
4 __N15. Ford buys a ton of sheet metal used in making car doors.
___
Y 16. You buy a new “iPod Video” from the Apple store,
C ___
___
C ___
Y 17. You send in a $90 check to your dentist for cleaning your teeth.
___
Ig ___
___
Y 18. Your family buys a new house which sits next to the mansion of Bill Gates.
G ___
Y 19. 100 additional teachers are hired by the Frisco ISD.
___
Ig ___
Y 20. GM invest in $500 million worth of robots to assemble their cars.
___
6 ___
N 21. You volunteer 10 hours a week of your time to work for senior citizens.
___
___
Ig ___
Y 22. Ford produces 25,000 new F150s which are not sold by the end of the year.
___
X ___
Y 23. Russia buys 3,000 Dell computers as they become Rusky Dell Dudes.
___
6 ___
N 24. A man’s wife does all his cooking and sewing, working for him 16 hours per day.
5 ___
N 25. Nike produces $10 million worth of Nike Air Jordan’s in Vietnam.
___
$7,304
[“C”]
-Depreciation
$1,393
Consumption
[66%]
$9,053
“U Can See Thunderducks”
+N.F.F.I.
$10
[Replacement -Indirect bus. Tax
$695
capital]
$8,018
-$141 Undis Cor Pro
-$213 Corp Inc Tax
-$748 Soc Sec Con
+$1,683 Trans Pay
$8,929
ROW[$220]
Gross Private
Domestic
Investment
$1,593
Government
Purchases
$1,973
Xn(X-M)
-$424
GDP
U.S. [$230]
NFFI = -$10
For NI
(Tax on the G/S,
Subtract
NI
[“indirect” tax]
[births-deaths]
“Available
for sale”
NDP
not on profits)
[sales, property,
excise, tariffs, &
license
fees]
= Indirect
N = NFFI
I
PI is what we
Y earned/not received
Y received/not earned
-Personnel
Taxes
-$1,113
$7,816
can spend, save,
or pay in taxes.
“Income
received by
business
“Income earned
taxes
by U.S.
resources”
households,
whether
earned or
unearned”
NI
PI
DI
is what we can
SPEND
or
SAVE.
DI
Depreciation, Investment & Disinvestment
Negative Net Investment
Depreciation exceeds Ig
Disinvestment
of $6 billion
Depreciation
1933
$7.6 billion
[in current dollars]
Declining
productive
capacity
Positive Net Investment
Ig exceeds Depreciation
Ig
Investment
of $531 bil. $2,105 Trillion
Expanding
Depreciation
productive
2005
capacity
$1,574 Trillion
Ig
$1.6 billion
Ig($1.6) - D($7.6) = (Disinv. of $6) Ig($2,105) - D($1,574) = (In of $531)
(Disinvest. of $6) + D($7.6)=($1.6) In($531) + D($1,574) = (Ig of $2,105)
Ig($1.6)–Disinv.($6)=(Depr. of $7.6) Ig($2,105)-In($531)=(Depr. of $1,574)
THE MIX OF OUTPUT IN 1900
Manufacturing 22%
Services 22%
THE MIX OF OUTPUT IN 2000
Construction and
Mining 9%
Government
18%
Construction and
Mining 6%
Farming 2%
Farming 37%
Manufacturing 20%
Services 54%
Government 10%
[U.S.A. Profits Overseas]
Rest of World
$220 bil.
Foreign Profits in
U.S.A.
$210 billion
N.F.F.I. = -$10 billion
If U.S. profits in the ROW [$220] are greater than
foreign profits in the U.S. [$210], add the difference.
[U.S.A. Profits Overseas]
Rest of World
$200 bil.
Foreign Profits in
U.S.A.
$212 bill.
N.F.F.I.E.U.S. = $12 billion
If foreign profits in the U.S. [$212] are greater than
U.S. profits in the ROW [$200], subtract the difference.
[GDP and its four cousins]
iPod Videos are imports
because they are
produced in China.
C
+
-
Ig + G + Xn[X-M] =
[“Replacement
capital”]
GDP–Depreciation=
[what is for sale]
NDP +NFFIEUS–Indirect Business Taxes =
NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP=
[PI is what you can spend, save, or pay in taxes]
PI – Personal Income Taxes =
[DI is what you can spend
or save
]
Elaborate Circular Flow Showing NIA
G
D
P
NDP
NI
PI
DI
16th Ed. NIA Practice – “How To Do It”
Personal taxes
403
Imports
362
+Transfer payments
283
-Corporate Income Taxes 88
Indirect business taxes
231
Exports
465
-Undistributed corp. profits
46
-Social Security contrib.
169
Personal consumption
2,316
Gross private domes invest.
503
Government purchases
673
Depreciation [Capital consumption] 307
I’m going through an
N.F.F.I.E. in the U.S.
12
academic recession.
C = $_______
2,316
______
Report Card
Ig = $_______
English
C
503
______
Accounting
C
G = $_______
673
______
American History
D
ROW
Economics
F
Xn = $_______
+103
______
Gross Domestic Product (GDP)
3,595
$_____
$
-307
-Consumption of fixed capital
______
3,288
Net Domestic Product (NDP)
$______
-12
______
-Net For. Factor Inc. Earn. U.S.
______
-231
-Indirect business taxes
3,045
$_____
National Income (NI)
-46
______
-Undistributed Corporate Profits
______
-88 -303 NFFI = $12
-Corporate income taxes
______
-Social Security Contributions
-169
+283
+Transfer payments
_______
3,025
Personal Income (PI)
$_____
-403
_______
-Personal Taxes
2,622
$_____
Disposable Income (DI)
100
$112
[17th Edition]
Personal taxes
403
Imports
362
+Transfer payments
283
-Corporate Income Taxes 88
-Taxes on prod. & imports 231
Exports
465
Statistical Discrepancy
10
NIA Practice – “How To Do It”
I’m going through an
academic recession.
English
C
Accounting
C
American History
D
Economics
F
-Undistributed corp. profits
46
-Social Security contrib.
169
Personal consumption
2,316
Gross private domes invest.
503
Government purchases
673
Depreciation [Capital consumption] 307
N.F.F.I.E. in the U.S.
-12
C = $_______
2,316
Ig = $_______
503
G = $_______
673
Xn = $_______
+103
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate
Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
3,595
$_____
-307
______
3,288
$______
-12
______
-10
______
3,266
$_____
-46
______
-88
______
-169
______
______
-231
+283
______
3,015
$_____
______
-403
2,612
$_____
ROW
$100
$112
-534
NFFI = -$12
Personal taxes
382
Imports
348
+Transfer payments
330
-Corporate Income Taxes 98
Indirect business taxes
265
Exports
377
C= $
Ig = $
G= $
Xn = $
Gross Domestic Product (GDP)
-Undistributed corp. profits
65
-Social Security contrib.
158
Personal consumption
1,820
Gross private domes invest.
447
Government purchases
587
Depreciation [capital consumption] 317
N.F.F.I.E. in the U.S.
10
1,820
447
587
+29
$2,883
-Consumption of fixed capital
-317
Net Domestic Product (NDP)
$2,566
+Net For. Factor Inc. Earn. U.S.
-Indirect business taxes
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
+10
-265
$2,311
-65
-98
-158
+330
$2,320
-382
$1,938
ROW
$110
$100
NFFI = $10
[17th Edition]
Personal taxes
370
Statistical Discrepancy
12
+Transfer payments
330
-Corporate Income Taxes 98
-Taxes on prod. & imports 265
Exports
377
Imports
348
C= $
Ig = $
G= $
Xn = $
Gross Domestic Product (GDP)
-Undistributed corp. profits
65
-Social Security contrib.
158
Personal consumption
1,820
Gross private domes invest.
447
Government purchases
587
Depreciation [capital consumption] 317
N.F.F.I.E. in the U.S.
10
1,820
447
587
+29
$2,883
-Consumption of fixed capital
-317
Net Domestic Product (NDP)
$2,566
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. & imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
ROW
$110
+10
-12
$2,564
-65
-98
-158
-265
+330
$2,308
-370
$1,938
$100
NFFI = $10
Personal taxes
Imports
+Transfer payments
-Corporate Income Taxes
60
75
24
55
Indirect business taxes
15
Exports
95
Depreciation [Cap. Con.] 25
C=
Ig =
G=
Xn =
$
$
$
$
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Indirect business taxes
National Income (NI)
-Undistributed Corporate
Profits
-Corporate income taxes
-Social Security Contributions
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
[16th Ed.]
-Undistributed corp. profits
-Social Security contrib.
Personal consumption
Gross private domes invest.
Government purchases
N.F.F.I.E.
310
85
130
+20
$545
-25
37
25
310
85
130
-18
ROW
$100
$520
-18
-15
$487
-37
-55
-25
+24
$394
-60
$334
$118
NFFI = -$18
[17th Edition]
Exports
Imports
+Transfer payments
-Corporate Income Taxes
95
75
39
55
-Taxes on prod. & imports 15
Personal taxes
60
Statistical Discrepancy 15
C=
Ig =
G=
Xn =
$
$
$
$
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate
-Personal Taxes
310
85
130
+20
$545
-25
$520
-18
-15
$487
Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. & imports
+Transfer payments
Personal Income (PI)
-Undistributed corp. profits
-Social Security contrib.
Personal consumption
Gross private domes invest.
Government purchases
N.F.F.I.E.
Depreciation
-37
-55
-25
-15
+39
$394
-60
$334
37
25
310
85
130
-18
25
ROW
$100
$118
NFFI = -$18
Personal taxes
Exports
Imports
+Transfer payments
-Corporate income taxes
Indirect business taxes
C=
Ig =
G=
Xn =
58
109
89
41
38
21
-Undistributed corp. profits
23
-Social Security contrib.
40
Personal consumption
358
Gross private domes invest.
130
Government purchases
165
Depreciation [capital consumption] 45
N.F.F.I.E. in the U.S.
-23
$
$
$
$
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Indirect business taxes
National Income (NI)
-Undistributed Corporate
Profits
-Corporate income taxes
-Social Security Contributions
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
358
130
165
+20
$673
-45
ROW
$100
$628
-23
-21
$584
-23
-38
-40
+41
$524
-58
$466
$123
NFFI = -$23
[17th Edition]
Personal taxes
Exports
Imports
+Transfer payments
-Corporate income taxes
-Taxes on prod. & imports
Statistical Discrepancy
C= $
Ig = $
G= $
Xn = $
50
109
89
41
38
21
8
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Indirect business taxes
National Income (NI)
-Undistributed Corporate
Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. and imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
-Undistributed corp. profits
-Social Security contrib.
Personal consumption
Gross private domes invest.
Government purchases
Depreciation [capital consumption]
N.F.F.I.E. in the U.S.
358
130
165
+20
$673
-45
$628
-23
-8
$597
-23
-38
-40
-21
+41
$516
-50
$466
23
40
358
130
165
45
-23
ROW
$100
$123
NFFI = -$23
Personal taxes
Exports
Imports
+Transfer payments
-Corporate income taxes
Indirect business taxes
C=
Ig =
G=
Xn =
60
37
23
26
42
24
-Undistributed corp. profits
-Social Security contrib.
Personal consumption
Ig
Government purchases
N.F.F.I.E. in the U.S.
Depreciation
$
$
$
$
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Indirect business taxes
National Income (NI)
-Undistributed Corporate
Profits
-Corporate income taxes
-Social Security Contributions
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
312
104
110
+14
$540
-24
$516
-30
-24
$462
-16
-42
-32
+26
$398
-60
$338
16
32
312
104
110
-30
24
ROW
$100
$130
NFFI = -$30
[17th Edition]
Personal taxes
60
Exports
37
Imports
23
+Transfer payments
50
-Corporate income taxes 42
-Taxes on prod. & imports
34
Depreciation [cap. Consumption] 24
C= $
Ig = $
G= $
A “streaker”
Xn = $
Gross Domestic Product (GDP)
-Consumption of fixed capital
Net Domestic Product (NDP)
+Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy
National Income (NI)
-Undistributed Corporate
Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. and imports
+Transfer payments
Personal Income (PI)
-Personal Taxes
Disposable Income (DI)
-Undistributed corp. profits
-Social Security contrib.
Personal consumption
Gross Investment
Government purchases
N.F.F.I.E. in the U.S.
Statistical Discrepancy
312
104
110
+14
$540
-24
$516
-30
-14
$472
-16
-42
-32
-34
+50
$398
-60
$338
16
32
312
104
110
-30
14
ROW
$100
$130
NFFI = -$30
• GDP can be measured either by total
spending on U.S. production or by total
income received from that production.
• Expenditure approach [C+Ig+G+Xn]
– Adds up the aggregate expenditure on all final
goods and services produced during that year
Gross Domestic Production
• Income approach [R+I+P+SA+W (RIP SAW)]
– Adds up the aggregate income earned during the
year by those who produce that output Gross
Domestic Income[sales]
Expenditure Approach
Gross Domestic Production
Income Approach
Gross Domestic Sales
Consumption by
Households
Rents
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
+
+
+
Interest
G
= D=
P
Profits
Statistical Adjustments
[corporate income taxes,
Dividends, undistributed
Corporate profits]
+
Wages
The Circular-Flow Diagram
Resource Market
1
$
Businesses
$
2
A. Goods/services?
B. Consumer expenditures?
C. Land, labor, capital and
entrepreneurial ability?
D. Rent, wages, interest,
and profits?
Households
Businesses
$
3
4
Product Market
$
THE INCOME APPROACH [RIP SAW]
Compensation of Employees
Rents
Interest
Profits [Proprietors’ Income]
SA [statistical adjustments]
Corporate Income Taxes
Dividends
Undistributed Corporate Profits
Wages
Receipts: Expenditures Approach
C
Ig
G
Xn
$8746
2105
2363
-727
Allocations: Income Approach____
Compensation of employees
$7125
Rents
73
Interest
498
Proprietor’s income
939
Corporate Profits
1352
Taxes on production & imports 917
National Income
$10,904
Net Foreign Factor Inc
-34
Statistical Discrepancy
43
Consumption of fixed capital 1574
GDP
$12,487
GDP
$12,487
3. [8 pts] Indicate whether each of the following is counted in
the U.S. GDP for the year 2006. Explain each of your answers.
(a) The value of used textbook sold through online auction in 2006.
Answer: No, it was counted the year it was produced. Because it was
not produced again, it would not be counted. That would be double counting.
[2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]
b. Rent paid in 2006 by residents in an apartment building built in 2000
Answer: Yes, rents consist of the income received by the households and
businesses that supply property resources. The properties have to be maintained
or “serviced” each year. It is included in the income approach to GDP.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
c. Commissions earned in 2006 by a stockbroker
Answer: Yes, payment is being made for productive services of the
broker. So the purchase of stocks would not count but his work would.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
d. The value of autos produced in 2006 entirely in South Korea by a
firm fully owned by U.S. citizens
Answer: No, GDP measures production inside the U.S. regardless of
ownership. These autos were produced in South Korea.
[2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]
Nominal GDP
[prices of output in the current year]
[measures “output and prices”]
and
Real GDP
[base year prices of the year being measured]
[measures “only output”]
Importance of Real GDP in Determining a Recession
Real GDP measures current output at base-year prices.
Apple GDP Example
A country produces 10 apples in base year x $1;
Nominal and Real GDP both = $10
Year 2: A country produces 10 apples x $1.25;
Nominal GDP=$12.50
(no recession but worse off)
[Real GDP would = $10 (10 apples x $1)]
Or Year 2: A country produces 9 apples x $1.25;
Nominal GDP=$11.25 but real is $9 (9 apples x $1)
(recession although nominal GDP is up)
Nominal
[money]
GDP v. Real GDP
An increase in prices and/or output will increase
nominal GDP.
Only an increase in output will increase real GDP.
Nominal GDP could increase even if output falls.
Real GDP = Nominal Y/GDP deflator x 100
So, nominal GDP measures output & prices.
Real measures only output [actual production]
Constant (real) GDP v. current (money) GDP
Nominal GDP v. Real GDP
Base year[$50/$50=1x100=100] $46/$50x100=92 [deflation of 8%]
Price of Market Basket(2001)
[nominal GDP]
$64
= Price of same Market Basket(1998)x100; [Real GDP] $50x100=128
[GDP Deflator] in the base year (1998)
[$64/128 x 100 = $50]
GDP Price Index
Nominal [Current) GDP
v.
Real (constant) GDP
The “GDP” Balloon
$6,736.9/126.1 x 100 = $5,342.5
Nominaltakes
– measured in terms of money.
Real–measured in terms of goods/services.
[Real GDP must decline for 6 months]
Recession
[Real, not nominal GDP has declined]
Inflation
component
Real GDP
1990-91
The Business Cycle in U.S. History
[11 Recessions since WWII, from 6 months to 16 months]
GROWTH RATE (percent per year)
Recessions
20
Annual
growth
15
10
5
3
0
-5
Zero growth
-10
1930
1940
1950
1960
1970
Long-term average
growth (3%)
1980
1990
2000 2005
Positive Net Investment [Ig>D]
Gross Investment
- Depreciation
=Net Investment
Gross
Investment
Net
Investment
Depreciation
[increasing product. capac.]
Increased
Stock of
Capital
Consumption
and
Government
Spending
Stock of
Capital
January 1
Year’s GDP
December 31
Depreciation, Investment & Disinvestment
Negative Net Investment
Depreciation exceeds Ig
Disinvestment
of $6 billion
Depreciation
1933
$7.6 billion
[in current dollars]
Declining
productive
capacity
Positive Net Investment
Ig exceeds Depreciation
Ig
Investment
of $531 bil. $2,105 Trillion
Expanding
Depreciation
productive
2005
capacity
$1,574 Trillion
Ig
$1.6 billion
Ig($1.6) - D($7.6) = (Disinv. of $6) Ig($2,105) - D($1,574) = (In of $531)
(Disinvest. of $6) + D($7.6)=($1.6) In($531) + D($1,574) = (Ig of $2,105)
Ig($1.6)–Disinv.($6)=(Depr. of $7.6) Ig($2,105)-In($531)=(Depr. of $1,574)
Expanding/Static/Declining Productive Capacity
Expanding Productive Capacity
Maintaining
our production
possibilities
Static Productive Capacity
Declining Productive Capacity
SHORTCOMINGS OF GDP
Non-market Transactions don’t count
Earthquakes, divorces, etc. increase GDP
Leisure isn’t factored in
Improved Product Quality
The Underground Economy
GDP’s impact on the Environment
Per Capita Output
Countries with low GDP per capita have more infants with
low birth weight, higher rates of infant mortality, higher rates
of maternal mortality, higher rates of child malnutrition, and
less common access to safe drinking water. Also, fewer go
to school and they have fewer teachers. They have fewer
TVs and telephones, fewer paved roads. They also win fewer
Olympic medals.
NIA NS 1-10
1. GDP is the monetary value of all final domestic goods/services
produced (by/within) a nation in one year.
2. If N.F.F.I. is positive, which means U.S. profits are greater in the
ROW than foreign profits in the U.S., then (GDP/GNP) is larger.
3. Double or multiple counting can be avoided by counting only
(intermediate/final) goods.
4. (Final/Intermediate) goods and services refer to products
purchased by the ultimate users.
5. Transfer payments [when you take tax money from those who
are working & give it to those who are not working] (do/do not)
count in GDP because they (do/do not) reflect current production.
6. (The purchase of 100 shares of Playboy stock/
The purchase of a drill press) is not considered real investment.
7. If depreciation exceeds gross private domestic investment,
it can be concluded that In is (positive/negative) & we have
declining productive capacity.
8. Depreciation can be determined by (adding/subtracting) In from Ig.
9. The largest component of GDP (spending) is (C/Ig/G/Xn)
and the smallest is (C/Ig/G/Xn).
10. NDP is (GDP-indirect business taxes/GDP-Depreciation).
GDP NS 11 and 14-15
11. Real GDP and nominal GDP differ because real GDP has
been adjusted for changes in (depreciation/prices).
14. Which economy has expanding productive capacity(positive Ig)?
(A/B/C). Which has declining productive capacity[negative Ig?
(A/B/C). Which has static productive capacity? (A/B/C).
If this is Pat then this is “The End”.