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Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-1 6 Measuring Domestic Output and National Income Copyright 2008 The McGraw-Hill Companies Chapter Objectives Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-2 • How GDP is Defined and Measured • Relationships Between GDP, Net Domestic Product, National Income, Personal Income, and Disposable Income • The Nature and Function of a GDP Price Index • The Difference Between Nominal GDP and Real GDP • Some Limitations of the GDP Measure Copyright 2008 The McGraw-Hill Companies Assessing Economy’s Performance Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word • National Income Accounting • Bureau of Economic Analysis • Gross Domestic Product (GDP) – A Monetary Measure – Avoid Multiple Counting • Intermediate Goods • Final Goods • Value Added – Exclude Nonproduction Transactions Key Terms End Show 6-3 Copyright 2008 The McGraw-Hill Companies Assessing Economy’s Performance Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms • Financial Transactions Excluded –Public Transfer Payments –Private Transfer Payments –Stock (and Bond) Market Transactions • Second Hand Sales End Show 6-4 Copyright 2008 The McGraw-Hill Companies Two Approaches to GDP Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-5 • Income Approach –Wages –Rental Incomes –Interest Incomes –Profits • Expenditure Approach –Final-Product or ValueAdded –The Sum of the Money Spent to Buy the Output Copyright 2008 The McGraw-Hill Companies Two Approaches to GDP Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms Expenditure Approach Income Approach Consumption by Households Wages Investment by Businesses Rents + + Government Purchases + Expenditures By Foreigners End Show 6-6 Copyright 2008 The McGraw-Hill Companies G = D= P + + + + Interest Profits Statistical Adjustments Expenditure Approach Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms Personal Consumption Expenditures C • Durable Consumer Goods • Nondurable Consumer Goods • Consumer Expenditures for Services Gross Private Domestic Investment Ig • Machinery, Equipment, and Tools • All Construction • Changes in Inventories • Noninvestment Transactions End Show 6-7 Copyright 2008 The McGraw-Hill Companies Expenditure Approach Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Gross Investment Depreciation = Net Investment - Gross Investment Net Investment Depreciation Increased Stock of Capital Consumption & Government Spending Stock of Capital January 1 Year’s GDP December 31 Key Terms End Show 6-8 Copyright 2008 The McGraw-Hill Companies Expenditure Approach Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-9 G Government Purchases • Expenditures for Goods and Services • Expenditures for Social Capital Net Exports Xn Xn = Exports (X) – Imports (M) Putting It All Together: GDP = C + I + G + Xn GDP= $8,746 + 2,105 + 2,363 - 727 = $12,487 in 2005 Copyright 2008 The McGraw-Hill Companies GDP Approaches Compared Accounting Statement for the U.S. Economy, 2005 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word in Billions Receipts Expenditures Approach Allocations Income Approach Personal Consumption (C) $ 8746 Compensation Gross Private Domestic Rents $ 7125 73 Investment (Ig) 2105 Interest 498 Government Purchases (G) 2363 Proprietor’s Income 939 Net Exports (Xn) -727 Corporate Profits Taxes on Production and 1352 917 Imports National Income Net Foreign Factor Income Statistical Discrepancy $10,904 -34 43 Consumption of Fixed Key Terms Capital End Show Gross Domestic Product $ 12,487 Gross Domestic Product 6-10 Copyright 2008 The McGraw-Hill Companies 1574 $ 12,487 Comparative GDPs GLOBAL PERSPECTIVE Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Select Nations GDPs - 2005 GDP in Trillions of Dollars 0 United States Japan Germany China United Kingdom France Italy Spain Canada Brazil Korea, Rep. India Mexico Russian Fed. Australia 1 2 3 4 5 6 7 8 9 10 12 $12.4 $4.5 $2.8 $2.2 $2.2 $2.1 $1.7 $1.1 $1.1 $.79 $.79 $.78 $.77 $.76 $.70 Source: World Bank 6-11 Copyright 2008 The McGraw-Hill Companies The Income Approach Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-12 • • • • • Compensation of Employees Rents Interest Proprietor’s Income Corporate Profits – Corporate Income Taxes – Dividends – Undistributed Corporate Profits – Taxes on Production and Imports Copyright 2008 The McGraw-Hill Companies The Income Approach Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-13 • From National Income to GDP – Net Foreign Factor Income – Statistical Discrepancy – Consumption of Fixed Capital • Other National Accounts – Net Domestic Product (NDP) – National Income (NI) – Personal Income (PI) – Disposable Income (DI) DI = C + S Copyright 2008 The McGraw-Hill Companies W 6.1 The Income Approach Income Relationships – United States, 2005 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-14 Gross Domestic Product (GDP) Consumption of Fixed Capital Net Domestic Profit (NDP) Statistical Discrepancy Net Foreign Factor Income National Income (NI) Taxes on Production and Imports Social Security Contributions Corporate Income Taxes Undistributed Corporate Profits Transfer Payments Personal Income (PI) Personal Taxes Disposable Income (DI) Copyright 2008 The McGraw-Hill Companies $ 12,487 -1,574 $ 10,913 -43 34 $ 10,904 -917 -871 -378 -460 +1,970 $ 10,248 -1,210 $ 9,038 Circular Flow Revisited Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word U.S. Domestic Output and the Flows of Expenditure and Income Key Terms End Show 6-15 Copyright 2008 The McGraw-Hill Companies Nominal Versus Real GDP Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word • Nominal GDP • Real GDP • Price Index • GDP Price Index Price Index In Given Year Real GDP Key Terms End Show 6-16 = Price of Market Basket In Specific Year Price of Same Basket In Base Year = Copyright 2008 The McGraw-Hill Companies W 6.2 O 6.1 x 100 Nominal GDP Price Index (in hundredths) Shortcomings of GDP Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-17 • • • • • • Nonmarket Activities Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of the Output • Noneconomic Sources of Well-Being Copyright 2008 The McGraw-Hill Companies Shortcomings of GDP GLOBAL PERSPECTIVE Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-18 Underground Economy as a Percentage of GDP - Select Nations Percentage of GDP 0 Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland Copyright 2008 The McGraw-Hill Companies 5 10 15 20 25 30 Source: Journal of Economic Literature Magical Mystery Tour Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-19 BEA Sources of Data for Analysis • Consumption – Census Bureau’s Retail Trade Survey – Census Bureau’s Survey of Manufacturers – Census Bureau’s Service Survey • Investment – – – – – All Consumption Data Sources Survey of Manufacturers Service Survey Industry Sources Census Bureau’s Housing Starts Survey and Housing Sales Survey – Retail Trade Survey – Wholesale Trade Survey – Survey of Manufacturing Copyright 2008 The McGraw-Hill Companies Magical Mystery Tour Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word • Government Purchases – Office of Personnel Management – Construction Surveys – Census Bureau’s Survey of Government Finance • Net Exports – U.S. Customs Service – BEA Surveys and Analysis Key Terms End Show 6-20 Copyright 2008 The McGraw-Hill Companies Key Terms Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6-21 • national income accounting • gross domestic product • intermediate goods • final goods • multiple counting • value added • expenditures approach • income approach • personal consumption expenditures (C) • gross private domestic investment (Ig) • net private domestic investment Copyright 2008 The McGraw-Hill Companies • government purchases • net exports (Xn) • taxes on production and imports • national income • consumption of fixed capital • net domestic product (NDP) • personal income (PI) • disposable income (DI) • nominal GDP • real GDP • price index Next Chapter Preview… Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Introduction to Economic Growth, Unemployment, and Inflation Key Terms End Show 6-22 Copyright 2008 The McGraw-Hill Companies
