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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Measuring Domestic Output and National Income
• National Income Accounting• Assess health of economy
• Compares levels of production
• Track long run course• Grown, constant, or declined
• Formulate policy• Safeguard and improve economy’s health
Assessing the Economy’s Performance
LO1
• Gross Domestic Product (GDP) -- Total value of final goods and services produced in a country in a given year. (Aggregate Output)
• As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).
Gross Domestic Product
2-3
• Gross Domestic Product (GDP): Total market value of all final goods and services produced within a country within a year
Gross Domestic Product (GDP)
LO1
2-5
Total value of final goods and services produced by a country in a given year.
Gross National Product (GNP)
Gross Domestic Product
• Monetary measure
• Avoids multiple counting
• Excludes intermediate goods
• Counts market value of final goods
• Value added counted
LO1
Gross Domestic Product
• Intermediate Goods
• Purchased for resale
• Further processing
• Manufacturing
• Final Goods
• Purchased by end user
LO1
Excludes Non-Production Transactions
• Excludes financial transactions
• Public transfer payments
• Private transfer payments
• Stock (and bond) market transactions
• Excludes second hand sales
LO1
2-10
GDP 2014: $17.4T
•Source: World Development Indicators database, World Bank, 1 July 2015
Gross Domestic Product
Two Approaches to GDP
• Income approach (earnings or allocation)
• Count income derived from production
• Expenditure approach (output)
• Count sum of money spent buying the final goods
LO2
Two Approaches to GDP
• GDP, output, and income all refer to the same thing and can be used interchangeably.
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Income or Allocations Approach
Wages
Plus
Rents
Plus
Interest
Plus
Profits
Plus
Statistical Adjustments
LO2
Expenditures or Output Approach
Consumption Expenditures by Households (C)
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Expenditures Approach
• Personal consumption expenditures (C)• Durable goods (3 years +, 10%)
• Nondurable goods (< 3 years, 30%)
• Services (60%)
• Spending on houses is not included
• Largest component of GDP
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses (G)
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Expenditures Approach
• Gross private domestic investment (Ig)
• Machinery, equipment, and tools• All construction (includes residential)
• R & D
• Creation of music, art, film, software, etc.
• Changes in inventories
LO2
Changes in Inventories
Changes in inventories represent the difference between what was produced during the year, and what was purchased.
LO2
Changes in Inventories
• If inventories increase, more was produced than purchased, so the increase in inventories must be added to Ig and GDP. (unconsumed output)
• Vice versa if inventories fell.
LO2
Net Investment
• Net Investment includes only added capital during the year. (Gross Investment minus Depreciation)
• In = Ig – Depreciation
• Depreciation (Consumption of Fixed Capital - CFC) = amount of capital
goods used during the year.
LO2
Net Investment
• Ig > CFC; therefore In > 0 and economy is growing.
• Ig = CFC; therefore In = 0 and economy is stagnant.
• Ig < CFC; therefore In < 0 and economy is experiencing negative growth (disinvesting).
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services (G)
Plus
Expenditures by Foreigners
LO2
Expenditures Approach
• Government purchases (G)
1. Goods and services to provide public services
2. Publicly owned capital
3. R&D + other to increase economy know-how
• Excludes transfer payments
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners (Net Exports = Xn)
LO2
Expenditures Approach
• Net exports (Xn)
• Add exported goods (X)
• Subtract imported goods (M)
• Xn = exports (X) – imports (M)
LO2
Expenditures or Output Approach
Consumption Expenditures by Households (C)
Plus
Investment Expenditures by Businesses (Ig)
Plus
Government Purchases of Goods and Services (G)
Plus
Expenditures by Foreigners (Xn)
LO2
Compensation
Rents
Interest
Proprietor’s Income
Corporate Profits
Taxes on Production and
Imports
National Income
Net Foreign Factor Income (-)
Consumption of Fixed
Capital (+)
Statistical Discrepancy (+)
Gross Domestic Product
$ 8,612
541
440
1,225
2,031
1,123
$13,972
253
2,543
-17
$ 16,245
Personal Consumption (C)
Gross Private Domestic
Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Gross Domestic Product
in Billions ReceiptsExpenditures Approach
AllocationsIncome Approach
$11,150
2,475
3,167
-547
$ 16,245
U.S. Economy 2012
LO2
Source: Bureau of Economic Analysis, www.bea.gov
Other National Accounts
• Net Domestic Product (NDP)• Measures what has been added to
the stock of capital and the new output = replacement of capital goods used up in production of output.
• NDP = GDP – consumption of fixed capital
LO2
Other National Accounts
• National Income (NI)• Includes all income earned by
U.S.-owned resources whether they are located in the United States or abroad
LO2
Other National Accounts
• Personal Income (PI)• Includes all income received
whether it was earned or unearned
LO2
Other National Accounts
• Disposable Income (DI)• Income that households receive
(personal income minus taxes)• and able to spend as they desire
(consumption or savings)
DI = C + S
LO2
U.S. Income Relationships 2012
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)
$ 16,2452,543
$ 13,702-17253
$ 13,9721,066
951435542
2,766$ 13,744
1,498$ 12,246
LO2
Nominal vs. Real GDP
• Nominal GDP• Uses current prices year produced
• Real GDP• Adjusted for inflation• Use base year’s prices
LO3
GDP Price Index
• Use price index to determine real GDP
PriceIndexIn GivenYear
= x100Price Good in Specific Year
Price of Good In Base Year
RealGDP =
Nominal GDP
Price Index (in hundredths)
LO3
Real-World Considerations
• More complicated than the “one-good scenario
• Assigns a “weight” to several categories of goods and services based on the relative proportion of each category in total output
• The U.S. GDP PI is “chain-type-annual-weights price index”
LO4
Shortcomings of GDP
• Nonmarket activities
• Leisure
• Improved product quality
• The underground economy
LO4
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