Download GDP

Measuring National Output and
National Income
Chapter 18
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1
Gross Domestic Product
• Gross domestic product (GDP) is
the total market value of all final
goods and services produced within
a given period by factors of
production located within a country.
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2
National Income
and Product Accounts
• National income and product accounts are
data collected and published by the government
describing the various components of national
income and output in the economy.
• The U.S. Department of Commerce is
responsible for producing and maintaining the
“National Income and Product Accounts” that
keep track of GDP.
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3
Final Goods and Services
• The term final goods and services in
GDP refers to goods and services
produced for final use.
• Intermediate goods are goods produced
by one firm for use in further processing by
another firm.
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4
Value Added
• Value added is the difference between the
value of goods as they leave a stage of
production and the cost of the goods as
they entered that stage.
– In calculating GDP, we can either sum up the
value added at each stage of production, or we
can take the value of final sales.
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5
Value Added
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF
PRODUCTION
VALUE OF
SALES
VALUE
ADDED
$ .50
$ .50
(2) Refining
.65
.15
(3) Shipping
.80
.15
(4) Retail sale
1.0
0
.20
(1) Oil drilling
Total value added
$ 1.0
0
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6
Exclusions of Used Goods
and Paper Transactions
• GDP ignores all transactions in which
money or goods change hands but in
which no new goods and services are
produced.
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7
Exclusion of Output Produced Abroad
by Domestically Owned Factors of Production
• GDP is the value of output produced by
factors of production located within a
country. Output produced by a country’s
citizens, regardless of where the output is
produced, is measured by gross national
product (GNP).
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8
Calculating GDP
GDP can be computed in two ways:
• The expenditure approach: A method of
computing GDP that measures the total
amount spent on all final goods during a
given period.
• The income approach: A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods.
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9
The Expenditure Approach
Expenditure categories:
• Personal consumption expenditures (C)—
household spending on consumer goods.
• Gross private domestic investment (I)—
spending by firms and households on new
capital: plant, equipment, inventory, and
new residential structures.
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10
The Expenditure Approach
Expenditure categories:
• Government consumption and gross
investment (G)
• Net exports (EX – IM)—net spending by
the rest of the world, or exports (EX)
minus imports (IM)
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11
The Expenditure Approach
• The expenditure approach calculates GDP
by adding together the four components of
spending. In equation form:
GDP  C  I  G  ( EX  IM )
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12
Components of GDP, 1999:
The Expenditure Approach
Components of GDP, 2002: The Expenditure Approach
Personal consumption expenditures (C)
Durable goods
BILLIONS OF
DOLLARS
7303.7
PERCENTAGE
OF GDP
69.9
871.9
8.3
Nondurable goods
2115.0
20.2
Services
4316.8
41.3
Gross private domestic investment (l)
Nonresidential
Residential
Change in business inventories
Government consumption and gross investment (G)
Federal
State and local
Net exports (EX – IM)
1543.2
14.8
1117.4
10.7
471.9
4.5
3.9
0
1972.9
18.9
693.7
6.6
1279.2
12.2
 423.6
 4.1
Exports (EX)
1014.9
9.8
Imports (IM)
1438.5
13.8
Total gross domestic product (GDP)
Note: Numbers may not add exactly because of rounding.
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Source: U.S. Department of Commerce, Bureau of Economic Analysis.
10446.2
100.0
13
Personal Consumption
Expenditures
• Personal consumption expenditures (C) are
expenditures by consumers on the following:
– Durable goods: Goods that last a relatively
long time, such as cars and appliances.
– Nondurable goods: Goods that are used up
fairly quickly, such as food and clothing.
– Services: Things that do not involve the
production of physical things, such as legal
services, medical services, and education.
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14
Gross Private Domestic
Investment
• Investment refers to the purchase of new
capital.
• Total investment by the private sector is
called gross private domestic
investment. It includes the purchase of
new housing, plants, equipment, and
inventory by the private sector.
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15
Gross Private Domestic
Investment
• Nonresidential investment includes
expenditures by firms for machines, tools, plants,
and so on.
• Residential investment includes expenditures
by households and firms on new houses and
apartment buildings.
• Change in inventories computes the amount by
which firms’ inventories change during a given
period. Inventories are the goods that firms
produce now but intend to sell later.
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16
Gross Private Domestic
Investment
• Remember that GDP is not the market
value of total sales during a period—it is
the market value of total production.
• The relationship between total production
and total sales is:
GDP = final sales + change in business inventories
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17
Gross Investment
versus Net Investment
• Gross investment is the total value of all newly
produced capital goods (plant, equipment,
housing, and inventory) produced in a given
period.
• Depreciation is the amount by which an asset’s
value falls in a given period.
• Net investment equals gross investment minus
depreciation.
capitalend of period = capitalbeginning of period + net investment
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18
Government Consumption
and Gross Investment
• Government consumption and
gross investment (G) counts
expenditures by federal, state, and
local governments for final goods and
services.
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19
Net Exports
• Net exports (EX – IM) is the difference
between exports and imports. The figure
can be positive or negative.
– Exports (EX) are sales to foreigners of U.S.produced goods and services.
– Imports (IM) are U.S. purchases of goods and
services from abroad).
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20
The Income Approach
• National income is the total income
earned by the factors of production owned
by a country’s citizens.
• The income approach to GDP breaks
down GDP into four components:
GDP = national income + depreciation + (indirect
taxes – subsidies) + net factor payments to the rest
of the world + other
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21
The Income Approach
Components of GDP, 2002: The Income Approach
BILLIONS OF
DOLLARS
National income
Compensation of employees
Proprietors’ income
Corporate profits
Net interest
Rental income
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the world
Other
Gross domestic product
PERCENTAGE
OF GDP
8,199.9
80.3
6,010.0
943.5
748.9
554.8
142.7
58.9
7.3
7.3
5.4
1.4
1,351.3
739.4
11.1
 96.1
10,205.6
13.2
7.2
0.1
 0.9
100.0
Source: See Table 18.2.
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22
From GDP to Disposable Personal Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income,
2002
GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation
Equals: net national product (NNP)
Less: indirect taxes minus subsidies plus other
Equals: national income
Less: corporate profits minus dividends
Less: social insurance payments
Plus: personal interest income received from the government and
consumers
Plus: transfer payments to persons
Equals: personal income
Less: personal taxes
Equals: disposable personal income
Source: See Table 18.2.
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DOLLARS
(BILLIONS)
10,205.6
+ 342.1
 353.2
10,194.5
 1,351.3
8,843.2
 643.3
8,199.9
 332.6
 731.2
+ 439.1
+1,148.7
8,723.9
 1,306.2
7,417.7
23
From GDP to Disposable Personal
Income
• Net national product equals gross
national product minus depreciation; a
nation’s total product minus what is
required to maintain the value of its capital
stock.
• Personal income is the income received
by households after paying social
insurance taxes but before paying
personal income taxes.
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24
Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLIONS)
7,417.7
Disposable personal income
Less:
 7063.5
Personal consumption expenditures
 204.3
Interest paid by consumers to business
Personal transfer payments to foreigners
118.6
Equals: personal savinga
Personal savings as a percentage of disposable personal income:
Source: See Table 18.2.
 31.3
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1.6%
25
Disposable Personal Income
and Personal Saving
• The personal saving rate is the
percentage of disposable personal income
that is saved.
• If the personal saving rate is low,
households are spending a large amount
relative to their incomes; if it is high,
households are spending cautiously.
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26
Nominal Versus Real GDP
• Nominal GDP is GDP measured in
current dollars, or the current prices we
pay for things. Nominal GDP includes all
the components of GDP valued at their
current prices.
• When a variable is measured in current
dollars, it is described in nominal terms.
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27
Calculating Real GDP
• A weight is the importance attached to an
item within a group of items.
• A base year is the year chosen for the
weights in a fixed-weight procedure.
• A fixed-weight procedure uses weights
from a given base year.
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28
Calculating Real GDP
A Three-Good Economya
(1)
(2)
PRODUCTION
YEAR
YEAR 2
1
Q1
Q2
(3)
(4)
PRICE PER UNIT
YEAR 1 YEAR 2
(5)
(6)
(7)
(8)
GDP IN
YEAR 1
IN
YEAR 1
PRICES
GDP IN
YEAR 2
IN
YEAR 1
PRICES
GDP IN
YEAR 1
IN
YEAR 2
PRICES
GDP IN
YEAR 2
IN
YEAR 2
PRICES
P1
P2
P1 x Q1
P1 x Q2
P2 x Q1
P2 X Q2
Good A
6
11
$.50
$ .40
$3.00
$5.50
$2.40
$4.40
Good B
7
4
.30
1.00
2.10
1.20
7.00
4.00
Good C
10
12
.70
.90
7.00
8.40
9.00
10.80
$12.10
$15.10
$18.40
$19.20
Total
Nominal
GDP
in year 1
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Nominal
GDP
in year 2
29
Calculating the GDP Deflator
• The GDP deflator is one measure of the
overall price level. The GDP deflator is
computed by the Bureau of Economic
Analysis (BEA).
• Overall price increases can be sensitive to
the choice of the base year. For this
reason, using fixed-price weights to
compute real GDP has some problems.
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30
The Problems of Fixed Weights
The use of fixed price weights to estimate real
GDP leads to problems because it ignores:
1. Structural changes in the economy.
2. Supply shifts, which cause large
decreases in price and large increases
in quantity supplied.
3. The substitution effect of price
increases.
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31
GDP and Social Welfare
• Society is better off when crime
decreases, however, a decrease in crime
is not reflected in GDP.
• An increase in leisure is an increase in
social welfare, but not counted in GDP.
• Nonmarket and household activities are
not counted in GDP even though they
amount to real production.
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32
GDP and Social Welfare
• GDP accounting rules do not adjust for
production that pollutes the environment.
• GDP has nothing to say about the
distribution of output. Redistributive
income policies have no direct impact on
GDP.
• GDP is neutral to the kinds of goods an
economy produces.
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33
The Underground Economy
• The underground economy is the
part of an economy in which
transactions take place and in which
income is generated that is
unreported and therefore not
counted in GDP.
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34
Gross National Income per
Capita
• To make comparisons of GNP between
countries, currency exchange rates must be
taken into account.
• Gross National Income (GNI) is a measure
used to make international comparisons of
output. GNI is GNP converted into dollars using
an average of currency exchange rates over
several years adjusted for rates of inflation.
• GNI divided by population equals gross national
income per capita.
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35
Gross National Income per Capita
Per Capita Gross National Income for Selected Countries, 2002
COUNTRY
Switzerland
Japan
Norway
United States
Denmark
Ireland
Sweden
United Kingdom
Netherlands
Austria
Finland
Germany
Belgium
France
Canada
Australia
Italy
Spain
Greece
U.S. DOLLARS
36,970
35,990
35,530
34,870
31,090
28,880
25,400
24,230
24,040
23,940
23,840
23,700
23,340
22,640
21,340
18,770
18,470
14,860
11,780
Source: The World Bank Atlas, 2002.
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COUNTRY
Portugal
South Korea
Argentina
Mexico
Czech Republic
Brazil
South Africa
Turkey
Colombia
Jordan
Romania
Philippines
China
Indonesia
India
Pakistan
Nepal
Rwanda
Ethiopia
U.S. DOLLARS
10,670
9,400
6,860
5,540
5,270
3,060
2,900
2,540
1,910
1,750
1,710
1,050
890
680
460
420
250
220
10036
Terms and Concepts:
base year: temel yıl
change in business inventories: işletme stoklarında değişme
compensation of employees: çalışanlara ücret-maaş
corporate profits: şirket karları
current dollars: cari-bugünkü dolar değeriyle, cari- bugünkü
fiyatlarla
depreciation: aşınma payı, amortisman
disposable personal income, or after-tax income:
kullanılabilir kişisel gelir, vergiden sonra kişinin dilediği gibi
harcayabileceği gelir
durable goods: dayanıklı mallar
expenditure approach: harcama yaklaşımı
final goods and services: nihai mal ve hizmetler
fixed-weight procedure: sabit ağırlık-tartı işlemi-prosedürüyöntemi
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Terms and Concepts:
government consumption and gross investment (G):
hükümet-devlet harcamaları ve gayrı safi yatırımı
gross domestic product (GDP): brüt- gayri safi yurtiçi
hasıla (GSYİH)
gross investment: brüt- gayrı safi yatırım
gross national income (GNI): brüt- gayri safi milli gelir
(GSMG)
gross national product (GNP): brüt- gayri safi milli hasıla
(GSMH)
gross private domestic investment (I): brüt- gayrı safi özel
yurtiçi yatırım
income approach: gelir yaklaşımı
indirect taxes: dolaylı vergiler
intermediate goods: ara mallar
national income: milli gelir
national income and product accounts: milli gelir ve
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38
hasılat muhasebesi
Terms and Concepts:
net exports (EX – IM): net ihracat
net factor payments to the rest of the world: net dış alem
faktör gelirleri
net interest: net faiz
net investment: net yatırım
net national product (NNP): net milli hasıla
nominal GDP: nominal GSYİH
nondurable goods: dayanıksız mallar
nonresidential investment: yerleşik olmayan yatırım
personal consumption expenditures (C): kişisel tüketim
harcamaları
personal income: kişisel gelir
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39
Terms and Concepts:
personal saving: kişisel tasarruf
personal saving rate: kişisel tasarruf oranı
proprietors’ income: mal sahibi kazancı
rental income: kira geliri
residential investment: konut yatırımları, yerleşik yatırım
services: hizmetler
subsidies: sübvansiyonlar, yardımlar, devlet yardımları
underground economy: kayıt dışı ekonomi
value added: katma değer
weight: ağırlık, tartı
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40
Problems:
1) If net investment is negative, we know that
A) net exports are positive.
B) net exports are negative.
C) GDP is less than GNP.
D) GDP is greater than GNP.
E) the capital stock has decreased.
2) If depreciation is greater than gross investment, we know that
A) the capital stock has decreased.
B) the capital stock has increased.
C) GDP is less than GNP.
D) GDP is greater than GNP.
E) None of the above
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41
Problems:
3) Inventories are counted as __________ and changes in inventory
are counted as __________.
A) capital; personal consumption expenditures
B) capital; investment
C) services; investment
D) investment; personal consumption expenditures
E) services; personal consumption expenditures
4) If net investment is zero, we know that
A) the capital stock has increased.
B) GDP is less than GNP.
C) the capital stock has decreased.
D) GDP is greater than GNP.
E) None of the above
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42
Problems:
5) Net national product (NNP) is equal to
A) GDP minus depreciation.
B) GNP plus depreciation.
C) GDP plus depreciation.
D) GNP minus depreciation.
E) GNP minus net investment.
6) In 2000, government consumption and gross investment (G)
accounted for approximately what percentage of GDP?
A) 38%
B) 10%
C) 18%
D) 28%
E) 48%
7) Which of the following is NOT a durable good?
A) Automobiles
B) Clothing
C) Household appliances
D) Furniture
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E) None of the above
43
Problems:
SCENARIO 1: The components of GDP in 1999 in billions of dollars are:
 






 












 



















































































































8) Refer to Scenario 1. Personal consumption expenditures in 1999
were
A) $3,656.
B) $6,255.
C) $6,299.
D) $5,497.
E) $2,599.
9) The National Income and Product Accounts
A) are like income and balance sheets in accounting.
B) provide profit data on industrial markets.
C) describe the financial sector of the economy.
D) describe the components of
national income in the economy44
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E) are collected and compiled by firms in the private sector.
Problems:
10) For countries like the United States, we know that
A) the difference between GDP and GNP will be small.
B) GNP and GDP will be equal when net exports are zero.
C) GDP will always exceed GNP.
D) GNP will always exceed GDP.
E) GDP will always equal GNP.
Refer to Scenario 2 below to answer the questions that follow.
SCENARIO 2: The components of personal income in 1999 in billions
of dollars are:














































































11) Refer to Scenario 2. Personal income in 1999 was
A) $7,791.
B) $6,255.
C) $6,865.
D) $6,413.
E) $6,639.
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45
Problems:
12) Which of the following statements is correct?
A) Consumption is spending by firms and households on new
capital.
B) Consumption includes spending on inventory and new
residential structures.
C) The purchase of a new home is treated as investment.
D) Net exports are imports minus exports.
E) Investment represents household purchases of assets.
13) Which of the following statements is correct?
A) There is only one way to compute GDP.
B) Each buyer's payment is different from his/her seller's receipt.
C) The expenditure approach to calculating GDP measures the
income¹wages, rents, interest, and profits received by all
factors of production in producing final goods.
D) The expenditure approach to calculating GDP measures the
amount spent on all goods during a given period.
E) None of the above
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46
Problems:
14) Per capita GDP is a country's
A) GDP divided by its population.
B) GDP divided by its GNP.
C) GNP divided by its GDP.
D) population multiplied by its GDP.
E) population divided by its GDP.
15) The personal saving rate is the percentage of
A) GNP that is saved.
B) national income that is saved.
C) disposable personal income that is saved.
D) disposable income that is saved.
E) GDP that is saved.
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47
Problems:
Refer to Table 6.1 below to answer the following questions.
Table 6.1
 

 

 


 


















 


































16) Refer to Table 6.1. If we use a fixed-weight procedure and year 1
as the base year, then real GDP in year 2 is
A) $6.20.
B) $9.70.
C) $8.50.
D) $7.80.
E) None of the above
17) In 2000, services accounted for approximately what percentage of
GDP?
ch18
A) 40%
B) 75%
C) 50%
D) 83%
E) 68% 48