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[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”.