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07Measuring Domestic Output and
National Income
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
• National Income Accounting measures economy’s overall performance
• Bureau of Economic Analysis compiles National Income and Product Accounts•Assess health of economy•Track long run course•Formulate policy
Assessing the Economy’s Performance
LO1 7-2
Gross Domestic Product
• Measure of aggregate output• Monetary measure• Avoid multiple counting
•Market value final goods• Ignore intermediate goods•Count value added
LO1 7-3
GDP is the market value of new, final goods and services produced year within the nation’s borders in a given time period.
Gross Domestic Product (GDP)
GDP is our basicmeasure of economic
activity
Final versus Intermediate Goods
A final good or service is produced for a final user and not as a component of a final good.
Examples: Cars, pizzas, luggage
An intermediate good or service is used as a component of a final good or service
Examples: Radiator hoses, flour, plastics.
Gross Domestic Product
(1)Stage of Production
(2)Sales ValueOf MaterialsOr Product
$ 0
Firm A, sheep ranch 120
Firm B, wool producer 180
Firm C, coat manufacturer 220
Firm D, clothing manufacturer 270
Firm E, retail clothier 350
Total Sales Value $1140
Value Added (total income)
(3)ValueAdded
]--------$120 (= $120 - $ 0)
]-------- 60 (= 180 - 120)
]-------- 40 (= 220 - 180)
]-------- 50 (= 270- 220)
]-------- 80 (= 350 – 270)
$350
LO1 7-6
To count the new coat in GDP, we count the final transaction only. Otherwise, we would be counting value added twice.
Gross Domestic Product
• Exclude financial transactions•Public transfer payments•Private transfer payments•Stock (and bond) market
transactions• Exclude second hand sales
•Sell used car to a friend
LO1 7-8
Two Approaches to GDP
• Income approach•Count income derived from
production•Wages, rental income, interest
income, profit• Expenditure approach
•Count sum of money spent buying the final goods
•Who buys the goods?LO2 7-9
GDP
= =
+Consumption by
Households
Investment byBusinesses
GovernmentPurchases
ExpendituresBy Foreigners
+
+
+++
Wages
Rents
Interest
Profits
StatisticalAdjustments
+
Two Approaches to GDPExpenditures or
Output ApproachIncome or
Allocations Approach
LO2 7-10
Expenditures Approach
• Personal consumption expenditures (C)•Durable consumer goods•Nondurable consumer goods•Consumer expenditures for
services•Domestic plus foreign goods
produced
LO2 7-11
Category
Spending in 2009
(billions)
Percent of Total
Durables $1,034.4 10
Nondurables 2,223.3 22
Services 6,835.0 68
Source: Bureau of Economic Analysis
Consumer Spending by Type, 2009 (in billions)
Total spending byU.S. households
in 2009 was a $10.1trillion
Expenditures Approach
• Gross private domestic investment (Ig)
•Machinery, equipment, and tools•All construction•Changes in inventories
• Creation of new capital assets• Noninvestment transactions excluded
LO2 7-13
Expenditures Approach
January 1 Year’s GDP December 31
Consumption& Government
Spending
Depreciation
NetInvestment
GrossInvestment
Stock ofCapital
Increase
Stock ofCapital
Gross InvestmentDepreciationNet Investment
-=
LO2 7-14
Expenditures Approach
• Government purchases (G)• Expenditures for goods and services• Expenditures for publicly owned capital• Excludes transfer payments
• Net exports (Xn)• Add exported goods• Subtract imported goods
• Xn = exports – imports
• GDP = C + Ig + G + XnLO2 7-15
Compensation
Rents
Interest
Proprietor’s Income
Corporate Profits
Taxes on Production and
Imports
National Income
Net Foreign Factor Income (-)
Statistical Discrepancy (+)
Consumption of Fixed
Capital (+)
Gross Domestic Product
$ 7792
268
788
1041
1309
1090
$12,288
105
209
1864
$ 14,256
Personal Consumption (C)
Gross Private Domestic
Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Gross Domestic Product
In Billions ReceiptsExpenditures Approach
AllocationsIncome Approach
$10,089
1628
2931
-392
$ 14,256
U.S. Economy 2009
LO2 7-16
The Income Approach
• Compensation of employees• Rents• Interest• Proprietor’s income• Corporate profits
•Corporate income taxes•Dividends•Undistributed corporate profits
• Taxes on production and importsLO2 7-18
The Income Approach• From national income to GDP
•Subtract net foreign factor income•Statistical discrepancy•Consumption of fixed capital
• Other national accounts•Net domestic product (NDP)•National income (NI)•Personal income (PI)•Disposable income (DI)
LO2 7-19
U.S. Income Relationships 2009
Gross Domestic Product (GDP)Less: Consumption of Fixed CapitalEquals: Net Domestic Product (NDP)Less: Statistical DiscrepancyPlus: Net Foreign Factor IncomeEquals: National Income (NI)Less: Taxes on Production and ImportsLess: Social Security ContributionsLess: Corporate Income TaxesLess: Undistributed Corporate ProfitsPlus: Transfer PaymentsEquals: Personal Income (PI)Less: Personal TaxesEquals: Disposable Income (DI)
$ 14,2561864
$ 12,392209105
$ 12,2881090
967315418
2528$ 12,026
1102$ 10,924
LO2 7-20
Nominal vs. Real GDP
• GDP is a dollar measure of production
• Using dollar values creates problems• Nominal GDP
•Use prevailing price• Real GDP
•Reflect changes in price•Use base year price
LO3 7-22
GDP Price Index
• Use price index to determine real GDP
PriceIndexIn GivenYear
= x100Price of Market Basket
In Specific Year
Price of Same BasketIn Base Year
RealGDP =
Nominal GDP
Price Index (in hundredths)
LO3 7-23
GDP Price Index
• Calculating Real GDP (Base Year = Yr 1)
Year
(1)Units of Output
(2)Price of
PizzaPer Unit
(3)Price Index
(Year 1 = 100)
(4) Unadjusted, or Nominal,
GDP(1) X (2)
(5)Adjusted,
or 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 --- --- ---
LO3 7-24
0
5000
10000
15000
20000
25000
30000
35000
60 65 70 75 80 85 90 95
Nominal Chained 1996 dollars
GDP per Person in the United States
www.economagic.com
-300
-200
-100
0
100
200
300
90 92 94 96 98 00 02 04 06 08 10
Quarter-to-Quarter Change of Real GDP (in billions)
Year/Quarter
Recesssions are shaded
Source: www.bea.gov
Shortcomings of GDP
• Nonmarket activities• Leisure• Improved product quality• The underground economy• GDP and the environment• Composition and distribution of the
output• Noneconomic sources of well-being
LO4 7-30
Sources of BEA Data
• Consumption•Census Bureau’s Retail Trade
Survey•Census Bureau’s Survey of
Manufacturers•Census Bureau’s Service Survey• Industry Trade Sources
LO4 7-32
Sources of BEA Data
• Investment• All consumption data sources• Census Bureau’s Housing Starts Survey and Housing
Sales Survey• Retail Trade Survey• Wholesale Trade Survey• Survey of Manufacturing
LO4 7-33
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