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8/10/2019 ECON 1550 Week 8 Week 9
1/19
Measuring Domestic Outputand National Income
Week: 8 & 9
8/10/2019 ECON 1550 Week 8 Week 9
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National Income Accounting measureseconomys overall performance
U.S. Bureau of Economic Analysis compilesNational Income and Product Accounts
Assess health of economy
Track long run courseFormulate policy
Assessing the Economys Performance
LO1
8/10/2019 ECON 1550 Week 8 Week 9
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Gross Domestic Product
Measure of aggregate output
Monetary measure
Avoid multiple counting
Market value final goods
Ignore intermediate goodsCount value added
LO1
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4/19
Exclude financial transactions
Public transfer payments
Private transfer paymentsStock (and bond) market transactions
Exclude second hand sales
Sell used car to a friend
LO1
Gross Domestic Product
8/10/2019 ECON 1550 Week 8 Week 9
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Two Approaches to GDP
Income approachCount income derived from
production
Wages, rental income, interestincome, profit
Expenditure approach
Count sum of money spent buying thefinal goods
Who buys the goods?
LO2
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G
D
P
= =
+
Consumption by
Households
Investment byBusinesses
Government
Purchases
Expenditures
By Foreigners
+
+
+
+
+
Wages
Rents
Interest
Profits
Statistical
Adjustments
+
Two Approaches to GDPExpenditures or Output
Approach
Income or
Allocations Approach
LO2
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Expenditures Approach
Personal consumption expenditures
(C)
Durable consumer goodsNondurable consumer goods
Consumer expenditures for services
Domestic plus foreign goods
produced
LO2
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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
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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= exportsimports
GDP = C+ Ig+ G+XnLO2
Expenditures Approach
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Compensation
Rents
Interest
Proprietors 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 BillionsReceipts
Expenditures ApproachAllocations
Income Approach
$10,089
1628
2931
-392
$ 14,256
U.S. Economy 2009
LO2
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Comparative GDP
LO2
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The Income Approach
Compensation of employeesRents
Interest
Proprietors incomeCorporate profits
Corporate income taxes
DividendsUndistributed corporate profits
Taxes on production and imports
LO2
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The Income Approach
From national income to GDPSubtract net foreign factor income
Statistical discrepancy
Consumption of fixed capitalOther national accounts
Net domestic product (NDP)
National income (NI)
Personal income (PI)
Disposable income (DI)
LO2
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U.S. Income Relationships 2009
Gross Domestic Product (GDP)Less: Consumption of Fixed Capital
Equals: Net Domestic Product (NDP)
Less: Statistical Discrepancy
Plus: Net Foreign Factor IncomeEquals: National Income (NI)
Less: Taxes on Production and Imports
Less: Social Security Contributions
Less: Corporate Income Taxes
Less: Undistributed Corporate Profits
Plus: Transfer Payments
Equals: Personal Income (PI)
Less: Personal Taxes
Equals: Disposable Income (DI)
$ 14,2561864
$ 12,392
209
105$ 12,288
1090
967
315
418
2528
$ 12,026
1102
$ 10,924LO2
8/10/2019 ECON 1550 Week 8 Week 9
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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
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GDP Price Index
PriceIndexin GivenYear
= x 100
Price of Market Basket
in Specific Year
Price of Same Basketin Base Year
RealGDP =
Nominal GDP
Price Index (in hundredths)
LO3
Use price index to determine real GDP
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Shortcomings of GDP
LO4
Nonmarket activitiesLeisure
Improved product quality
The underground economy
GDP and the environment
Composition and distribution of the
output
Noneconomic sources of well-being
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Underground Economy
LO4
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