Download Chapter 07_20e

7
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
•
LO1
• Assess health of economy
• Track long run course
• Formulate policy
Gross Domestic Product (GDP): Total
market value of all final goods and
services produced within a country
within a year
Gross Domestic Product
• Monetary measure
• Avoid multiple counting
• Market value final goods
• Exclude intermediate goods
• Value added counted
LO1
Gross Domestic Product
• Exclude financial transactions
• Public transfer payments
• Private transfer payments
• Stock (and bond) market
•
LO1
transactions
Exclude second hand sales
Circular Flow
RESOURCE
MARKET
•Households sell
•Businesses buy
BUSINESSES
• buy
resources
• sell products
HOUSEHOLDS
• sell
resources
• buy products
PRODUCT
MARKET
•Businesses sell
•Households
buy
LO1
Circular Flow Revisited
LO2
Two Approaches to GDP
• Income approach
• Count income derived from
•
LO2
production
Expenditure approach
• Count sum of money spent buying
the final goods
Two Approaches to GDP
• GDP, output, and income all refer to
the same thing and can be used
interchangeably.
LO2
Expenditures Approach
• Personal consumption expenditures
•
LO2
(C)
• Durable goods
• Nondurable goods
• Services
• Spending on houses is not
included
Largest component of GDP
Expenditures Approach
• Gross private domestic investment (Ig)
• Machinery, equipment, and tools
• All construction
• Changes in inventories
LO2
Changes in Inventories
Changes in inventories represent the
difference between what was
produced during the year, and what
was purchased.
LO2
Changes in Inventories
• If inventories increase, more was
produced than purchased, so the
increase in inventories must be added
to Ig and GDP.
• Vice versa if inventories fell.
LO2
Net Investment
• Net Investment includes only added
capital during the year.
• In = Ig – Depreciation
• Consumption of Fixed Capital
(Depreciation) – amount of capital
goods used during the year.
LO2
Net Investment
• Ig > CFC; therefore In > 0 and
economy is growing.
• Ig = CFC; therefore In = 0 and
economy is stagnant.
• Ig < CFC; therefore In < 0 and
economy is experiencing negative
growth.
LO2
•
•
•
LO2
Expenditures Approach
Government purchases (G)
• Goods and services
• Publicly owned capital
• Excludes transfer payments
Net exports (Xn)
• Add exported goods
• Subtract imported goods
• Xn = exports - imports
GDP = C+Ig+G+Xn
U.S. Economy 2012
in Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)$11,150
Compensation
Gross Private Domestic
Rents
541
Interest
440
Investment (Ig)
2,475
$ 8,612
Government Purchases (G) 3,167
Proprietor’s Income
1,225
Net Exports (Xn)
Corporate Profits
2,031
-547
Taxes on Production and
Imports
1,123
National Income
$13,972
Net Foreign Factor Income (-)
Consumption of Fixed
253
2,543
Capital (+)
Statistical Discrepancy (+)
Gross Domestic Product $ 16,245
Gross Domestic Product
-17
$ 16,245
Source: Bureau of Economic Analysis, www.bea.gov
LO2
Comparative GDP
LO2
Other National Accounts
• Net Domestic Product (NDP)
• Measures what has been added to
•
LO2
the stock of capital and the new
output
National Income (NI)
• Includes all income earned by
U.S.-owned resources whether
they are located in the United
States or abroad
Other National Accounts
• Personal Income (PI)
• Includes all income received
•
LO2
whether it was earned or unearned
Disposable Income (DI)
• Income that households receive
and able to spend as they desire
DI = C + S
U.S. Income Relationships 2012
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
$ 16,245
2,543
$ 13,702
-17
253
$ 13,972
1,066
951
435
542
2,766
$ 13,744
1,498
$ 12,246
Nominal vs. Real GDP
• Nominal GDP
• Uses current prices
• Real GDP
• Adjusted for inflation
• Use base year’s prices
LO3
GDP Price Index
• Use price index to determine real
GDP
Price
Index
In Given
Year
Real
GDP
LO3
Price Good in Specific Year
=Price of Good In Base Year x 100
=
Nominal GDP
Price Index (in hundredths)
Shortcomings of GDP
• Nonmarket activities
• Leisure
• Improved product quality
• The underground economy
• GDP and the environment
• Composition and distribution of the
•
LO4
output
Noneconomic sources of well-being
Underground Economy
LO4