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7
C HAPTE R
Measuring Domestic Output,
National Income, and
the Price Level
The Importance of
Macroeconomic Measurement
National Income Accounting:
•Health of the Economy
•Comparisons Over Time
•Formulation of Public Policy
What Are These Accounting
Measures?
GROSS DOMESTIC PRODUCT
The total market value of all
final goods and services
produced in a given year
•A Monetary Measure
•Avoid Multiple Counting
•Final Goods
•Intermediate Goods
•Value Added
GROSS DOMESTIC PRODUCT
• Excludes
•Nonproduction Transactions
•Financial Transactions
•Public Transfer Payments
•Private Transfer Payments
•Stock Market Transactions
•Secondhand Sales
• Two Approaches
•Expenditures Approach
•Income Approach more…
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
•Durable Consumer Goods
•Nondurable Consumer Goods
•Consumer Expenditures for Services
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
•Machinery, Equipment, and Tools
•All Construction
•Changes in Inventories
•Noninvestment Transactions
•Gross vs. Net Investment
•Net Private Domestic Investment
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases ( G )
•Expenditures for Goods & Services
•Expenditures for Social Capital
•Does NOT include Government
Transfer Payments
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases ( G )
Net Exports ( Xn)
Net Exports (Xn) = Exports (X) – Imports (M)
EXPENDITURES APPROACH
Putting it all together:
GDP = C + Ig + G + Xn
Next: The Income Approach
THE INCOME APPROACH
•
•
•
•
•
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
• Corporate Income Taxes
• Dividends
• Undistributed Corporate
Profits
THE INCOME APPROACH
• From National Income to GDP
• Indirect Business Taxes
• Consumption of Fixed Capital
(Depreciation)
• Net Foreign Factor Income
OTHER NATIONAL ACCOUNTS
U.S. GDP, NDP, NI, PI, & DI, 2000
Gross Domestic Product (GDP)
Consumption of fixed capital
Net Domestic Product (NDP)
Net foreign factor income earned
in the U.S.
Indirect business taxes
National Income (NI)
Social security contributions
Corporate income taxes
Undistributed corporate profits
Transfer payments
Personal Income (PI)
Personal Taxes
Disposable Income (DI)
$9966
-1257
$8709
- 9
-682
$8018
-706
-286
-274
+1530
$8282
1292
$6990
NOMINAL GDP vs. REAL GDP
• Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when Prices fall
• Nominal GDP
• Calculating Real GDP
(4)
(2)
Unadjusted,
(1)
Price
(3)
or Nominal,
(5)
Units of
Pizza
Price Index
GDP,
Adjusted, or
Year
Output
Per Unit
Year 1 = 100
(1)x(2)
Real, GDP
1
5
$10
100
$ 50
$50
2
7
20
200
140
70
3
8
25
250
200
80
4
10
30
-
-
-
5
11
28
-
-
-
NOMINAL GDP vs. REAL GDP
• Adjustment Process
• GDP Price Index
Price of market basket
in specific year
Price Index
in a given
year
=
Real GDP
Price of same market
basket in base year
=
Nominal GDP
Price Index
(in hundredths)
An Alternative Method
Price Index
(in hundredths)
=
Nominal GDP
Real GDP
x 100
NOMINAL GDP vs. REAL GDP
•Consumer Price Index
CPI =
Price of 1993-1995 market
basket in any given year
Price of the same market
basket in 1982-1984
x 100
SHORTCOMINGS OF GDP
•Nonmarket Transactions
•Leisure
•Improved Product Quality
•The Underground Economy
•GDP and the Environment
•Composition and Distribution of
Output
•Per Capita Output
•Noneconomic Sources of WellBeing
GLOBAL PERSPECTIVE
The Underground Economy as a Percent of GDP
0
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United
Kingdom
Japan
United States
Switzerland
5
10
15
20
25
30
Source: The Journal of Economic Literature, 2000
Chapter
Conclusions
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 McGraw-Hill/Irwin, 2002
government purchases (G)
net exports (Xn)
national income
indirect business taxes
consumption of fixed capital
net domestic product (NDP)
personal income (PI)
disposable income (DI)
nominal GDP
price index
real GDP
consumer price index (CPI)
per capita output
BACK
END
Next...
Introduction to
Economic Growth
And Instability
Chapter 8