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Chapter 7: Measuring Domestic Output, National Income, and Price Level Alomar_111 1 National income accounting: Used to measure the economy’s overall performance It inform us about: 1. Levels of production over time 2. Performance of the economy (growing, constant, declining) 3. Formulate economic policies Alomar_111 2 Definitions: Gross Domestic Product (GDP): The annual total output of goods and services; “the total market value1 of all final2 goods and services produced in a given year3” Within the country 1. Alomar_111 3 Notes: 1. Monetary measure: - The GDP is a monetary measure: “Price of the good × Quantity of the good” - Count only goods sold in the market but estimate non-market goods Alomar_111 4 2. Avoiding multiple counting: The GDP uses only final goods; No intermediate goods. Intermediate goods: goods and services used in the production process for other goods and services. Alomar_111 5 If we count both: final goods and intermediate goods: Double Counting The value of final goods already includes the value of intermediate goods. Example of Multiple counting Alomar_111 6 Production Stage Sales Value Value Added Firm A, ranch 120 120 Firm B, wool proc. 180 60 Firm C, manufact. 220 40 Firm D, wholesale 270 50 Firm E, retail 350 80 1140 350 Alomar_111 7 Therefore, we can avoid double counting by only counting the “value added”: The market value of a firm’s output – value of the inputs bought from others. Alomar_111 8 3. Count goods produced in a given year: GDP2011 vs. GDP2010 - Secondhand sales? Alomar_111 9 - Note that GDP excludes nonproduction transactions: Financial transactions and 2ndhand sales: Public transfer payments Private transfer payments Stock market transactions Alomar_111 10 1. Public transfer payments Social security payments Welfare payments The recipients contribute noting to the production process Alomar_111 11 2. Private transfer payments Parents to their children Cash gifts They are transfers of funds, no production process Alomar_111 12 3. Stock market transactions Buying and selling of stocks (secondary market) Add nothing to the production process Payments to brokers and dealers are included Alomar_111 13