Download Measuring Domestic Output, National Income, and the Price Level

Measuring Domestic Output,
National Income, and the Price Level
CH 7
*
Gross Domestic Product
Total market value of all final goods and
services produced within a country in one
year
Goods or Services?
What are goods?
What are services?
Types of Goods
Final goods: purchased by final use by the
purchaser and not for resale or
manufacturing
Intermediate goods: purchased for resale
or manufacturing
Which is counted in GDP?
Avoid Multiple Counting
1. Use product’s final sale price
2. Value added: market value of firm’s
output less the value of inputs which it
has purchased from others
In Your Groups
Make a list of all the final goods and
services you used from the time you woke
up yesterday until you went to bed last
night.
Combine all information in your group to
one list, but do not repeat information.
Expenditures Approach
1. Personal Consumption Expenditures (C)
• Represents largest category of spending
• 2/3 of all spending in the US
• Consumer Goods
• Durable
• Non-Durable
• Payment for Services
*
Expenditures Approach
2. Gross Private Domestic Investment: (Ig)
 Final purchases of capital by firms
 Construction: residential and business building
 Changes in inventories: produced this year
even though not sold this year
 Only private business in the nation, not abroad
 Gross = production of all investment goods
 Net (investment in added capital) = gross
investment-depreciation (capital used up)
Expenditures Approach
3. Government Purchases include: (G)
 Direct purchases of consumption and
capital goods
 Labor
 Excludes:
 Government transfers
Expenditures Approach
4. Net Exports (Xn): exports minus imports
GDP Expenditure Formula
C + Ig + G + Xn = GDP
What is excluded from GDP?
Financial Transactions:
Public Transfer Payments: recipients
make no contribution to current production
in return for these payments
Private Transfer Payments: monetary gifts
Security Transactions: buying and selling
stocks and bonds
Secondhand Sales: used products
Price Index
Price of Market Basket in Given Year
100
Price of Market Basket in Base Period
Page 123 Example
X
Real GDP
GDP Price index
= Nominal GDP/Price index
(decimal/hundredths form)
Calculating Real GDP
Year
Units
Price Price Index (Year 1
of
=100)
Output
Unadjusted, Nominal,
Current GDP
Adjusted,
Real,
Constant
GDP
1
5
$10
100
$50
$50
2
7
$20
200
$140
$70
3
8
$25
250
$200
$80
4
10
$30
300
$300
5
11
$28
280
$308
Price in Year y
100
Price in Year 1
X
Price in Year y X output
in
Year
y
Nom GDP/
Price Index (in
hundredths)
Nonmarket Transactions
Some transactions not included in GDP
Homemakers’ services
Self-Repairs
Leisure
GDP does not recognize well-being
produced by leisure
Workweek: 53 hours in early 1900s36
hours today
Ignores “psychic income” generated by
work
Improved Product Quality
GDP measures quantity, not quality
Composition and Distribution of
Output
GDP measures dollar value of goods not
what these goods are (i.e., guns and
encyclopedias which cost the same are
evaluated equally)
GDP ignores income distribution
Per Capita Output
GDP should be divided by the population
Environment
Increased production and consumption
leads to more pollution
Underground Economy
GDP does not measure illegal activities:
Prostitution, drugs, loan-sharking,
gambling
Underreporting income or tips to IRS
Questions
Page 128 #1-13
Net Investment and Economic
Growth
Income Approach
1.
2.
Compensation of Employees:
-Wages and salaries paid by businesses and
government to suppliers of labor
-Wage and salary supplements (payments by
employers into social insurance and pension,
health and welfare funds
Net Rents
-income payments received from property resources:
-gross rental minus depreciation
3.
Interests
-money-income payments from firms to suppliers of money
capital
Income Approach
4.
5.
Proprietors’ Income: net income of sole proprietorships and
partnerships
Corporate Profits:
-Corporate income tax
-Dividends
-Undistributed corporate profits
(Adjustments) add:
-Indirect business taxes: sales, excise, business property,
license
taxes, and custom duties
-Depreciation (consumption of fixed capital)
-Net foreign factor income: income U.S. citizens gain from
supplying resources abroad and the income foreigners gain by
supplying resources in the USA
Other National
Accounts…
Net Domestic Product
GDP minus consumption of fixed capital
Subtract from GDP the amount of
depreciation of machinery and equipment
which was consumed in producing the
GDP and which had to be replaced
National Income
National Income: All income earned by
U.S. owned resources at home and
abroad
1. Subtract net foreign factor income
earned in the United States from NDP
-All factor income earned in the USA
by foreigners and add factor income
earned by US citizens abroad
2. Subtract indirect business taxes from
Personal Income
 All income received whether earned or unearned
 From national income:
-Subtract incomes which are earned but not
received (social security contributions,
corporate income taxes, undistributed
corporate profits)
-Add income received but not currently
earned (transfer payments)
Disposable Income
Personal Income
minus personal taxes (personal income taxes,
personal property taxes, and inheritance taxes)
Income which households have to dispose of as
they see fit
= consumption plus savings
Table:
Gross domestic product (GDP)…………………….$8084
Consumption of fixed capital………………-868
Net domestic product (NDP)………………….…...$7216
Net foreign factor income earned in U.S…….-21
Indirect business taxes……………………...-545
National Income (NI)……………………………….$6650
Social security contributions………………..-732
Corporate income taxes……………………..-319
Undistributed corporate profits……………...-149
Transfer payments…………………………+1424
Personal income (PI)………………………………...$6874
Personal taxes……………………………………...-987
Disposable income (DI)……………………………...$5887