Download Measuring National Output and National Income

CHAPTER
6
Measuring National Output
and National Income
Prepared by: Fernando Quijano
and Yvonn Quijano
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
C H A P T E R 6: Measuring National Output and National Income
Gross Domestic Product (GDP)
• Is the most important concept in
macroeconomics, because it measure the total
value of goods and services produced in the
country.
• GDP is part of the national income and
product accounts or national account.
• GDP is useful in determining whether the
economy is expanding or contracting. GDP
give an overall picture of the state of the
economy.
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C H A P T E R 6: Measuring National Output and National Income
Gross Domestic Product
• What is the GDP?
• (GDP) is the total market value of all final
goods and services produced within a nation
during a given year, by factors of production
located within a country.
• Therefore GDP is very important in
measuring the overall performance of the
economy.
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C H A P T E R 6: Measuring National Output and National Income
National Income
and Product Accounts
• National income and product accounts
are data collected and published by the
government describing the various
components of national income and output
in the economy.
• The U.S. Department of Commerce is
responsible for producing and maintaining
the “National Income and Product
Accounts” that keep track of GDP.
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C H A P T E R 6: Measuring National Output and National Income
Tow measures of national product
How do economist measure GDP?
GDP can be measured in two entirely
independent ways.
• The expenditure approach: A method of
computing GDP that measures the total
amount spent on all final goods during a given
period.
• National accountants use market prices as
weights in valuing different commodities
because market prices reflect the relative
economic of diverse goods and services.
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C H A P T E R 6: Measuring National Output and National Income
The Expenditure Approach
Expenditure categories:
• Personal consumption
expenditures (C)—household
spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.
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C H A P T E R 6: Measuring National Output and National Income
The Expenditure Approach
Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
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C H A P T E R 6: Measuring National Output and National Income
The Expenditure Approach
• The expenditure approach calculates
GDP by adding together the four
components of spending. In
equation form:
GDP  C  I  G  ( EX  IM )
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C H A P T E R 6: Measuring National Output and National Income
Components of GDP, 1999:
The Expenditure Approach
Components of GDP, 2002: The Expenditure Approach
Personal consumption expenditures (C)
Durable goods
Nondurable goods
Services
Gross private domestic investment (l)
Nonresidential
Residential
Change in business inventories
Government consumption and gross investment (G)
Federal
State and local
Net exports (EX – IM)
Exports (EX)
Imports (IM)
Total gross domestic product (GDP)
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
7303.7
871.9
2115.0
4316.8
1543.2
1117.4
471.9
3.9
1972.9
693.7
1279.2
 423.6
1014.9
1438.5
10446.2
69.9
8.3
20.2
41.3
14.8
10.7
4.5
0
18.9
6.6
12.2
 4.1
9.8
13.8
100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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C H A P T E R 6: Measuring National Output and National Income
Personal Consumption Expenditures
• Personal consumption expenditures (C) are
expenditures by consumers on the following:
Goods that last a relatively
long time, such as cars and appliances.
• Durable goods:
• Nondurable goods: Goods that are used
up fairly quickly, such as food and clothing.
• Services: Things that do not involve the
production of physical things, such as legal
services, medical services, and education.
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C H A P T E R 6: Measuring National Output and National Income
Gross Private Domestic Investment
• Investment refers to the purchase of
new capital.
• Total investment by the private
sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private sector.
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C H A P T E R 6: Measuring National Output and National Income
Gross Private Domestic Investment
• Nonresidential investment includes
expenditures by firms for machines, tools,
plants, and so on.
• Residential investment includes
expenditures by households and firms on new
houses and apartment buildings.
• Remember that GDP is not the market value of
total sales during a period—it is the market
value of total production.
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C H A P T E R 6: Measuring National Output and National Income
Gross Investment
versus Net Investment
• Gross investment is the total value of all
newly produced capital goods (plant,
equipment, housing, and inventory) produced
in a given period.
• Depreciation is the amount by which an
asset’s value falls in a given period.
• Net investment equals gross investment
minus depreciation.
capitalend of period = capitalbeginning of period + net investment
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C H A P T E R 6: Measuring National Output and National Income
Government Consumption
and Gross Investment
• Government
consumption and gross
investment (G) counts
expenditures by federal,
state, and local
governments for final
goods and services.
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C H A P T E R 6: Measuring National Output and National Income
Net Exports
• Net exports (EX – IM) is the
difference between exports and
imports. The figure can be positive
or negative.
are sales to foreigners
of U.S.-produced goods and
services.
• Exports (EX)
• Imports (IM) are U.S. purchases
of goods and services from
abroad).
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C H A P T E R 6: Measuring National Output and National Income
The Income or cost Approach
•The income approach:
• A method of computing GDP that measures the
income—wages, rents, interest, and profits—
received by all factors of production in producing
final goods.
•National income is the total income earned by
factors of production owned by a country's citizens.
GDP = national income + depreciation + (indirect
taxes – subsidies) + net factor payments to the rest
of the world + other
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C H A P T E R 6: Measuring National Output and National Income
Who Gets the Income?
• The income that flows to the private
sector is the national income which
is the net national product less
indirect taxes.
• To measure national income,
economists must make three
adjustments to gross domestic
product (GDP).
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C H A P T E R 6: Measuring National Output and National Income
Who Gets the Income?
• The three adjustments to GDP are as follows:
• Add the net income earned by U.S. firms
and residents abroad; subtract income
earned in the U.S. by foreign firms to arrive
at gross national product (GNP).
• Subtract depreciation from GNP to arrive at
net national product (NNP).
• Subtract indirect taxes, which are sales
taxes on products to arrive at national
income (NI).
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C H A P T E R 6: Measuring National Output and National Income
The Income Approach
Components of GDP, 2002: The Income Approach
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
8,199.9
80.3
6,010.0
58.9
Proprietors’ income
943.5
7.3
Corporate profits
748.9
7.3
Net interest
554.8
5.4
Rental income
142.7
1.4
National income
Compensation of employees
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the world
Other
Gross domestic product
1,351.3
739.4
11.1
 96.1
10,205.6
13.2
7.2
0.1
 0.9
100.0
Source: See Table 18.2.
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C H A P T E R 6: Measuring National Output and National Income
Final Goods and Services
• A final product is one that is sold for
consumption purposes or is an
investment good. The point here is that
the product is not changed or modified
and sold again to someone else. The
product has reached its final stage and is
now being used either as a consumption
good or a piece of capital equipment.
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C H A P T E R 6: Measuring National Output and National Income
Intermediate goods
• Intermediate goods are goods
produced by one firm for use in
further processing by another firm.
• Intermediate goods are not added
separately in order to avoid double
counting. Double counting can also
be avoided by adding up national
income using the value added
approach.
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C H A P T E R 6: Measuring National Output and National Income
Value Added
• Value added :
• Value added is the difference between a firm’s total
revenue and what it pays other firms for intermediate
goods.
•
Value added includes wages and salaries, rent,
interest, and profits.
• In calculating GDP, we can either sum up the value
added at each stage of production, or we can take
the value of final sales.
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C H A P T E R 6: Measuring National Output and National Income
Value Added
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF PRODUCTION
VALUE OF SALES
VALUE ADDED
$ .50
$ .50
(2) Refining
.65
.15
(3) Shipping
.80
.15
1.00
.20
(1) Oil drilling
(4) Retail sale
Total value added
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C H A P T E R 6: Measuring National Output and National Income
Exclusions of Used Goods
and Paper Transactions
• Old output is not counted in current
GDP because it was already counted
back at the time it was produced. It
would be double counting to count
sales of used goods in current GDP.
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C H A P T E R 6: Measuring National Output and National Income
Paper Transactions
• Sales of stocks and bonds are not counted in
GDP. These sales are exchanges of paper
assets and do not correspond to current
production. However, what if I sell the stock or
bond for more than I originally paid for it?
• Profits from the stock or bond market have
nothing to do with current production, so they
are not counted in GDP. What about stock
market dealers?
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C H A P T E R 6: Measuring National Output and National Income
Exclusion of Output Produced Abroad
by Domestically Owned Factors of Production
• GDP is the value of output produced by factors of
production located within a country. Output
produced by a country’s citizens, regardless of
where the output is produced, is measured by
gross national product (GNP).
• GNP =GDP + Net Factor Income From Abroad
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C H A P T E R 6: Measuring National Output and National Income
From GDP to Disposable Personal Income
• Net national product equals gross national
product minus depreciation; a nation’s total
product minus what is required to maintain
the value of its capital stock.
• NNP = GNP - Depreciation
• Personal income is the income received by
households after paying social insurance
taxes but before paying personal income
taxes.
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C H A P T E R 6: Measuring National Output and National Income
From GDP to Disposable Personal Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation
Equals: net national product (NNP)
Less: indirect taxes minus subsidies plus other
Equals: national income
Less:
Less:
Plus:
Plus:
corporate profits minus dividends
social insurance payments
personal interest income received from the government and consumers
transfer payments to persons
Equals: personal income
Less: personal taxes
Equals: disposable personal income
DOLLARS
(BILLIONS)
10,205.6
+ 342.1
 353.2
10,194.5
 1,351.3
8,843.2
 643.3
8,199.9
 332.6
 731.2
+ 439.1
+1,148.7
8,723.9
 1,306.2
7,417.7
Source: See Table 18.2.
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C H A P T E R 6: Measuring National Output and National Income
Disposable Personal Income and
Personal Saving
• .disposable personal income is the amount of
income that households can spend or save.
• The personal saving rate is the percentage of
disposable personal income that is saved, this is
an important indicator of household behaviour.
• If the personal saving rate is low, households are
spending a large amount relative to their
incomes; if it is high, households are spending
carefully.
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C H A P T E R 6: Measuring National Output and National Income
Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLIONS)
Disposable personal income
Less:
Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
Equals: personal saving
Personal savings as a percentage of disposable personal income:
7,417.7
 7063.5
 204.3
 31.3
118.6
1.6%
Source: See Table 18.2.
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C H A P T E R 6: Measuring National Output and National Income
Real versus Nominal GDP
• Because prices change over time, as inflation
generally sends prices upward year after year.
Economists have to solve the problem of
changes prices by using a reliable measure.
• We can measure GDP for a particular year using
the actual market prices of that year, this gives
us the Nominal GDP, or GDP at Current prices.
• but we are usually more interested in
determining what has happened to the Real
GDP.
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C H A P T E R 6: Measuring National Output and National Income
• Real GDP is calculated by tracking the volume
or quantity of production after removing the rate
of inflation.
• Hence, Nominal GDP is calculated using
changing prices, while Real GDP represent the
change in the volume of total output after price
changes are removed.
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C H A P T E R 6: Measuring National Output and National Income
• When we evaluate the nation’s current output at current
market prices, we measure nominal GDP. This is
equivalent to multiplying output by price, for all units of
every commodity that is produced, and then adding all
these numbers up.
• So, nominal GDP is a huge sum of prices times quantities.
Therefore, if nominal GDP changes from one year to the
next it could be due to a change in P, or Q, or both.
•
Since we are very interested in the growth of the economy
over time, we need to know which component of GDP is
(are) changing.
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C H A P T E R 6: Measuring National Output and National Income
• Suppose, for example, that prices increase from
one year to the next, and output decreases .In
fact, this economy has a couple of new
problems. Prices are higher, so there is an
increase in inflation. Output is lower, so there is
probably an increase in unemployment, too.
• When both inflation and unemployment
increase together, economists refer to this
situation as stagflation. (The economy slows
down or stagnates at the same time that prices
increase.)
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C H A P T E R 6: Measuring National Output and National Income
Calculating Real GDP
• In order to accurately assess the real growth of the
economy over time, we need to measure output with a
constant set of prices. One year is chosen as the base
year and then every year’s output is evaluated in terms
of the prices in the base year.
• A weight is the importance attached to an item within a
group of items.
• A base year is the year chosen for the weights in a
fixed-weight procedure.
• A fixed-weight procedure uses weights from a given
base year.
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C H A P T E R 6: Measuring National Output and National Income
Calculating Real GDP
A Three-Good Economy
(1)
(2)
PRODUCTION
YEAR 1
YEAR 2
Q1
Q2
(3)
(4)
PRICE PER UNIT
YEAR 1
YEAR 2
P1
P2
(5)
(6)
(7)
(8)
GDP IN
YEAR 1
IN
YEAR 1
PRICES
P 1 x Q1
GDP IN
YEAR 2
IN
YEAR 1
PRICES
P 1 x Q2
GDP IN
YEAR 1
IN
YEAR 2
PRICES
P 2 x Q1
GDP IN
YEAR 2
IN
YEAR 2
PRICES
P 2 X Q2
Good A
6
11
$.50
$ .40
$3.00
$5.50
$2.40
$4.40
Good B
7
4
.30
1.00
2.10
1.20
7.00
4.00
Good C
10
12
.70
.90
7.00
8.40
9.00
10.80
$12.10
$15.10
$18.40
$19.20
Total
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Nominal
GDP
in year 1
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GDP
in year 2
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C H A P T E R 6: Measuring National Output and National Income
Calculating the CPI,GDP Deflator and PPI
• The most widely used measure of inflation is the
consumer price index ( CPI).
• CPI is a measure of the average change over
time in the prices paid by consumes for a market
basket of consumer goods and services.
• If we divide nominal GDP by real GDP (and
multiply by 100), we get the overall price index
which we call the GDP Deflator.
• PPI measures the level of prices at the
wholesale or producer stage.
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C H A P T E R 6: Measuring National Output and National Income
The Problems of Fixed Weights
The use of fixed price weights to
estimate real GDP leads to problems
because it ignores:
1. Structural changes in the economy.
2. Supply shifts, which cause large decreases in
price and large increases in quantity supplied.
3. The substitution effect of price increases.
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C H A P T E R 6: Measuring National Output and National Income
The Underground Economy
• The underground economy is the part of
an economy in which transactions take
place and in which income is generated
that is unreported and therefore not
counted in GDP.
• Tax evasion is usually thought to be the
major incentive for people to participate in
the underground economy
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C H A P T E R 6: Measuring National Output and National Income
Gross National Income per Capita
• To make comparisons of GNP between countries,
currency exchange rates must be taken into account.
• Gross National Income (GNI) is a measure used to
make international comparisons of output. GNI is GNP
converted into dollars using an average of currency
exchange rates over several years adjusted for rates of
inflation.
• GNI divided by population equals gross national
income per capita.
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C H A P T E R 6: Measuring National Output and National Income
Gross National Income per Capita
Per Capita Gross National Income for Selected Countries, 2002
COUNTRY
Switzerland
Japan
Norway
United States
Denmark
Ireland
Sweden
United Kingdom
Netherlands
Austria
Finland
Germany
Belgium
France
Canada
Australia
Italy
Spain
Greece
U.S. DOLLARS
36,970
35,990
35,530
34,870
31,090
28,880
25,400
24,230
24,040
23,940
23,840
23,700
23,340
22,640
21,340
18,770
18,470
14,860
11,780
COUNTRY
Portugal
South Korea
Argentina
Mexico
Czech Republic
Brazil
South Africa
Turkey
Colombia
Jordan
Romania
Philippines
China
Indonesia
India
Pakistan
Nepal
Rwanda
Ethiopia
U.S. DOLLARS
10,670
9,400
6,860
5,540
5,270
3,060
2,900
2,540
1,910
1,750
1,710
1,050
890
680
460
420
250
220
100
Source: The World Bank Atlas, 2002.
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C H A P T E R 6: Measuring National Output and National Income
Review Terms and Concepts
base year
government consumption and gross
investment (G)
change in business inventories
gross domestic product (GDP)
compensation of employees
gross investment
corporate profits
gross national income (GNI)
current dollars
gross national product (GNP)
depreciation
disposable personal income, or after-tax
income
gross private domestic investment (I)
income approach
durable goods
indirect taxes
expenditure approach
intermediate goods
final goods and services
national income
fixed-weight procedure
national income and product accounts
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C H A P T E R 6: Measuring National Output and National Income
Review Terms and Concepts
net exports (EX – IM)
personal saving
net factor payments to the rest of the
world
personal saving rate
net interest
proprietors’ income
rental income
net investment
residential investment
net national product (NNP)
services
nominal GDP
subsidies
nondurable goods
underground economy
nonresidential investment
value added
personal consumption expenditures (C)
weight
personal income
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