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Measuring National Output Chapter 5 Economic goals Economic growth Full employment Low inflation 90 80 70 60 An economy grows because of increases in available resources and improvements in technology. Economic growth is not smooth US Asia Europe 50 40 30 20 10 0 1980 2000 Output The value of goods and services produced is the single most important measure of the nation’s output. Output Output of goods and services is diverse, running the gamut One way to measure output is to classify the goods and services produced according to who is purchasing output Four Sectors of Output Consumption Business Investment Government Government Foreign Sector Net exports Households Gross Domestic Output (GDP) The market value of the final goods and services produced in the economy within some time period, usually one quarter or one year Key terms Market value – price paid Final goods – goods to ultimate consumer Intermediate goods – goods used to make other goods Expenditure Approach Method of computing GDP that sums consumption, gross investment, government purchases, and net exports. GDP = C + I + G + NX Consumption Purchasing by households 70% of GDP Durable goods Nondurable goods Investment Spending now in order to increase output or productivity later; includes spending on capital, new housing, and changes in business inventories 16% of GDP Purchases by firms on capital such as new factories and machines Consumers’ purchases of new housing, a form of consumer capital The market value of change in business inventories Change in Inventories Increase in inventories: part of firms production is not sold, economy slows down Decrease in inventories: firm’s production falls short of sales, economy speeds up Investment Gross investment Net investment The total amount of investment Gross investment minus depreciation Depreciation Reduction in value of an asset due to its use Net investment is positive then economy growing Net investment is negative then economy falling Government Federal, state and local levels 19% of GDP Purchases goods and services Transfer payments such as social security are not included Net Exports Exports – foreign purchase of domestic products Imports – domestic purchases of foreign products Net Exports = Exports minus Imports -4.6% of GDP Income Approach Method of computing GDP that sums various forms of income Compensation of employees + + + + + + + Proprietor’s income Rental income of persons Corporate profits Net interest Capital consumption allowance Indirect business taxes Net income of foreigners GDP as value added added – the difference between the revenue and the cost of purchased inputs. Value Contrasting GDP to GNP Gross National Product Differs in that the value added to production by resources located outside the US but owned by US citizens is counted in GNP GNP excludes value added within the US by foreign owned resources. Shortcomings to GDP Underground economy Market transactions that go unreported to government Household production Environmental issues Measure of Economic Welfare - Tobin Nominal Vs. Real GDP 45 40 35 30 25 20 15 10 5 0 Real 4th Qtr 3rd Qtr Nomin al 2nd Qtr GDP = P X Q Nominal GDP – GDP that is stated without adjusting for inflation Real GDP – the value of GDP after nominal GDP is adjusted for inflation 1st Qtr GDP Price Index Is an index of prices that measures price changes over time, linking each year with the next. Real GDP = Nominal GDP X 100 GDP price index Real GDP across countries Nations of the world compute the value of real GDP for their economics The size of a nation’s real GDP is probably the best indicator of the size of a country’s economy Country Real GDP US 9196.4 Canada 741.6 Germany 2708 Japan 5725.5 Mexico 375. Business Cycle Refers to the expansions and contractions in economic activity that take place over time. REAL GDP Peak Recession Expansion Trough Time Business Cycle Expansion Economic growth GDP Income (Y) , C , GDP , u Recession Contraction Sustained decrease in real GDP GDP Income C GDP U Business Cycle Peak – highest level of economic activity Full employment Potential GDP is reached Trough – lowest level of economic activity Highest level of unemployment Overall economic trend is to grow Leading Indicators Statistics that are expected to change direction before the economy of large does, thereby indicating where the economy is headed Business inventories Housing starts Durable goods production National Income Accounting GDP Less: Depreciation Net Domestic Production -indirect business taxes -business transfer payments National income – payments to owners of capital -corporate profits -net interest -social security taxes Personal income = -personal taxes Disposable income = Consumption + Savings
