Chapter 7Chapter 7

Measuring Domestic Output, Measuring Domestic Output,

National Income & Price LevelNational Income & Price Level

Assessing Economic PerformanceAssessing Economic Performance

National Income Accounting is done National Income Accounting is done by the Dept of Commerce (Bureau of by the Dept of Commerce (Bureau of Economic Analysis)Economic Analysis)

Consistent indicators which provide Consistent indicators which provide policy makers the information to policy makers the information to manage the economymanage the economy

GDP or Aggregate OutputGDP or Aggregate Output

GDPGDP – total of goods and services – total of goods and services produced in a given year produced in a given year

Monetary measure – Allows us to Monetary measure – Allows us to compare/ contrast different yearscompare/ contrast different years

Only includes final products, cannot Only includes final products, cannot count products twice when figuring GDPcount products twice when figuring GDP

Excludes public transfers, private Excludes public transfers, private transfers, and stock market transactionstransfers, and stock market transactions

Continuing w/ GDPContinuing w/ GDP

What is spent on a product equates What is spent on a product equates to income for the people that helped to income for the people that helped to produce and sell that productto produce and sell that product

Income is crucial to the National Income is crucial to the National Accounting ProcessAccounting Process

Two ways to examine – Expenditures Two ways to examine – Expenditures & Income & Income

Expenditures ApproachExpenditures Approach

Personal Consumption Personal Consumption ExpendituresExpenditures (C) (C)

Includes all purchases of durable, non-Includes all purchases of durable, non-durable, and services by householddurable, and services by household

Gross Private Domestic InvestmentGross Private Domestic Investment (Ig)– includes final purchase of capital (Ig)– includes final purchase of capital equipment, construction, and changes equipment, construction, and changes in inventoryin inventory

Government Purchases (G)Government Purchases (G)

All spending at all levelsAll spending at all levels All purchases of resources, mainly All purchases of resources, mainly

laborlabor Excludes transfer paymentsExcludes transfer payments

Net Exports (Xn)Net Exports (Xn)

Determining the amount of goods Determining the amount of goods shipped overseas is also important to shipped overseas is also important to figuring GDP.figuring GDP.

Xn = ExportsXn = Exports (X) minus imports (n) (X) minus imports (n)

GDP SummarizedGDP Summarized

GDP = C + Ig + G + XnGDP = C + Ig + G + Xn

Income ApproachIncome Approach

Compensation or WagesCompensation or Wages RentsRents Interest AccumulatedInterest Accumulated Proprietors Income or Profits Proprietors Income or Profits

(Unincorporated Businesses) (Unincorporated Businesses) Corporate Profits (Less taxes & Corporate Profits (Less taxes &

dividends paid to shareholders)dividends paid to shareholders) The sum of these = National IncomeThe sum of these = National Income

Modifications to Income ApproachModifications to Income Approach

In order to correctly arrive @ GDP we In order to correctly arrive @ GDP we must also figure in must also figure in Indirect Indirect Business Taxes, Net Business Taxes, Net Consumption of Fixed Capital Consumption of Fixed Capital (Depreciation), and Net Foreign (Depreciation), and Net Foreign Factor Income Factor Income

National Income (All Americans) vs. National Income (All Americans) vs. Domestic Income (All income paid Domestic Income (All income paid within the U.S.)within the U.S.)

Other National AccountsOther National Accounts

Net Domestic Product (NDP) = Net Domestic Product (NDP) =

GDP - depreciationGDP - depreciation National Income (NI) = National Income (NI) =

NDP – Net Foreign Factor NDP – Net Foreign Factor

($ earned in the USA by non-($ earned in the USA by non-citizens)citizens)

– – Indirect taxes (fees, etc.)Indirect taxes (fees, etc.)

Figuring Personal IncomeFiguring Personal Income

PIPI – Income received by households – Income received by households National Income needs to be National Income needs to be

adjusted for taxes not received, and adjusted for taxes not received, and conversely, for income not accounted conversely, for income not accounted for by the National Income figurefor by the National Income figure

In simple, subtract all taxes and add In simple, subtract all taxes and add all transfer payments to National all transfer payments to National IncomeIncome

National Accounts ContinuedNational Accounts Continued

Disposable Income (DI) = C + S Disposable Income (DI) = C + S (Savings)(Savings)

Make sure you understand page and Make sure you understand page and are familiar with the Circular Flow are familiar with the Circular Flow Model (Pg. 126)Model (Pg. 126)

Real vs. Nominal GDPReal vs. Nominal GDP

NominalNominal – not adjusted for inflation – not adjusted for inflation RealReal – After inflationary adjustments – After inflationary adjustments Rates of inflation are inconsistent Rates of inflation are inconsistent

and this is why we must make these and this is why we must make these adjustments adjustments

Price IndexesPrice Indexes

Used in figuring Real GDP by Used in figuring Real GDP by accounting for any inflationaccounting for any inflation

Consumer Price Index – 300 goods & Consumer Price Index – 300 goods & services purchased by a typical services purchased by a typical consumer consumer

GDP and its ShortcomingsGDP and its Shortcomings

Non–Market TransactionsNon–Market Transactions

LeisureLeisure

Improved Product QualityImproved Product Quality

The Underground EconomyThe Underground Economy

GDP & The EnvironmentGDP & The Environment