Tracking the U.S. EconomyTracking the U.S. Economy

Chapter 6

National Income AccountsNational Income AccountsGDP (Gross Domestic Product)

What is it???It measures the market value of all

final goods and services produced during a year by resources located in the U.S., regardless of who owns the resources.

National Income AccountNational Income AccountIt is based on the simple fact that one

person’s spending is another person’s income.

It is measured in two ways: Total spending of the U.S. production or by the Total income received from that production.

What is included in GDP?What is included in GDP?It includes only final goods and services,

i.e. goods sold to the final user.Example

Intermediate goods and services are not included.These are goods that are purchased for

resale.Example

Expenditure ApproachExpenditure ApproachThis approach adds up spending on all

final goods and services produced during the year.

Expenditure ApproachExpenditure ApproachFor the expenditure approach, its

components are divided into four:ConsumptionInvestmentGovernment purchasesNet Exports

Income ApproachIncome ApproachThis approach adds up earnings during

the year by those who produce all that output.

Income ApproachIncome ApproachThe income approach sums, or

aggregates, income arising from production.WagesInterestRentProfit

Aggregate Income Aggregate Income Aggregate Income equals the sum of all

the income earned by resource suppliers in the economy.SO… we can say :

Aggregate Expenditures = GDP=Aggregate Income

Value Added: At each stage of production, the value added to the product. This is the selling price of the product minus the cost of the intermediate goods purchased from other firms.

Disposable Income (DI)Disposable Income (DI)The income households have available

to spend or to save after paying taxes and receiving transfer payments.

This is income that is adjusted for net taxes(NT). This subtracts taxes and adds back transfer

payments.Take-home pay for households.

Expenditure Half of the Circular FlowExpenditure Half of the Circular FlowWhere does DI (Disposable Income) go?

Part is spent on Consumption (C ) and part is spent on Savings ( S).

Consumption remains in the circular flowHowever, savings flows to financial markets-

banks and other financial institutions.

Leakages Equal InjectionsLeakages Equal InjectionsInjections

Government purchasesExports

LeakagesSavingNet taxesImports

Some Production is not included in GDPSome Production is not included in GDPIt ignores all do-it-yourself production

Child careMeal preparationHouse cleaningLaundryHome maintenance and repair

It ignores off-the-book productionUnderground economies

Some Other LimitationsSome Other LimitationsLeisure, Quality, and VarietyIt does not take into account

depreciationNet domestic product.

GDP does not reflect all costs.Environmental costsOther externalities

GDP and Economic Welfare

Nominal GDPNominal GDPIt is based on the prices prevailing when

production takes place. Since, price levels change over time,

then nominal GDP cannot be compared across years.It does not adjust for inflation!!

Price IndexesPrice IndexesBase year- the point of reference year

Prices in other years are expressed relative to the base-year price.

A price index is constructed by dividing each year’s price in the base year and then multiplying by 100.

The price index in the base year is ALWAYS 100.

Consumer Price Index (CPI)Consumer Price Index (CPI)The CPI measures changes over time in

the cost of buying a “market basket” of goods and services purchased by a typical family.

The government used the 36 months of 1982 thru 1984 as the base period for calculating the CPI for a market basket .

It is reported monthly.

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUSR0000SA0&output_view=pct_1mth

Some Tables:ftp://ftp.bls.gov/pub/special.requests/ppi/

sopnew10.txt

http://www.bls.gov/ppi/#tables

Problems with CPIProblems with CPIQuality bias

It overstates inflationIt ignores the substitution effect.

It overstates inflationDiscount storesWidely used products

GDP Price IndexGDP Price Index It measures the average price of all

goods and services produced in the economy.

(Nominal GDP/Real GDP)*100

Before 1995

Fixed-weighted system; base year 1987

Chain-weighted system; base year 2000