Download Measuring Domestic Output, National Income and the Price Level

Measuring Domestic Output,
National Income and the Price
Level
Krugman Section 3
Modules 10 and 11
Assessing the Economy
National income accounts serve a purpose
just as income statements do for a
business
Compare conditions with other countries
Provides a basis for public policies to
improve economic performance
Gross Domestic Product (GDP)
GDP = the total market value of all final
goods and services produced within a
country in one year
Measured in quarters (every 3 months)
– 1st = January - March
– 2nd = April - June
– 3rd = July – September
– 4th = October - December
GDP
Includes only final goods = g & s that are
purchased for final use by the consumer
Does not include intermediate goods = g &
s that are resold or go on for further
processing or manufacturing
– This avoids multiple counting
Is the value of what has been produced,
not what was actually sold
GDP Excludes Nonproduction
Transactions
Existing assets or property that is sold or
transferred, including used items, is NOT
counted
Public or private transfer payments
--public = SS or welfare payments
--private = student allowance or alimony
--sale of stocks and bonds
--broker services rendered ARE counted
More Nonproduction Transactions
Secondhand sales
Unreported business activities done in
cash (ie unreported tips)
Illegal activities
“Non-market” activities like volunteering or
family work
US corporation’s production in overseas
plants
2 ways to look at GDP
Expenditures Approach
GDP has 4 components
GDP = C + Ig + G + Xn
C = Personal Consumption
– durable & nondurable finished g & s (but
not houses)
Expenditures Approach
Ig = Gross Private Domestic
Investment (Gross Investment)
– Purchases of machinery, equipment &
tools
– Factory equipment maintenance
– All construction (including houses)
– Unsold inventory of products
Expenditures Approach
G = Government Spending
– Government purchase of resources
(mainly labor)
– Again, it excludes transfer payments like
SS
Expenditures Approach
Xn = Net Exports (exports – imports)
--All spending on g & s produced in the US
must be included in the GDP, whether the
purchase is made here or abroad
--For decades, Xn has been a negative
(= trade deficit)
Expenditures Approach
C + Ig + G + Xn
= GDP
Income Approach
W+R+I+P
– Wages
– Rents received
– Interest earned
– Profits