Chapter 25

Measuring Domestic Output and National Income

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Assessing the Economy’s Performance

• •

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 25-2 LO1

LO1

Gross Domestic Product

• • • Measure of aggregate output Monetary measure Avoid

multiple counting

• Market value

final goods

• Ignore

intermediate goods

• Count

value added

25-3

LO1

Gross Domestic Product (1) Stage of Production

Firm A, sheep ranch Firm B, wool producer Firm C, coat manufacturer Firm D, clothing manufacturer Firm E, retail clothier Total Sales Value Value Added (total income)

(2) Sales Value Of Materials Or Product

$ 0

(3) Value Added

]--------$120 (= $120 - $ 0) 120 ]-------- 60 (= 180 - 120) 180 ]-------- 40 (= 220 - 180) 220 ]-------- 50 (= 270- 220) 270 ]-------- 80 (= 350 – 270) 350 $1140

$350

25-4

LO1

Gross Domestic Product

• • Exclude financial transactions • Public transfer payments • Private transfer payments • Stock market transactions Exclude second hand sales • Sell used car to a friend 25-5

Two Approaches to GDP

LO1 • •

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?

25-6

LO1

Two Approaches to GDP Expenditures or Output Approach Consumption by Households + Investment by Businesses + Government Purchases + Expenditures By Foreigners = G D P = Income or Allocations Approach Wages + Rents + Interest + Profits + Statistical Adjustments

25-7

LO2

Expenditures Approach

•

Personal consumption expenditures (C)

•

Durable goods

•

Nondurable goods

• Consumer expenditures for

services

• Domestic plus foreign goods produced 25-8

LO2

Expenditures Approach

• • •

Gross private domestic investment (I

g

)

• Machinery, equipment, and tools • All construction • Positive and negative changes in inventories Creation of new capital assets Noninvestment transactions excluded 25-9

LO2

= Expenditures Approach Gross Investment Depreciation Net Investment

Net Investment Gross Investment Depreciation Stock of Capital

January 1

Consumption, government expenditures, and net exports

Year’s GDP

Stock of Capital

December 31

25-10

Expenditures Approach

LO2 • •

Government purchases (G)

• Expenditures for goods and services • • Expenditures for publicly owned capital Excludes transfer payments

Net exports (X

n

)

• Add exported goods • Subtract imported goods •

X n

= exports (X) – imports (M) •

GDP = C + Ig + G + Xn

25-11

LO2

Accounting Statement for the U.S. Economy, 2012 (in Billions)

25-12

LO2

Comparative GDP

25-13

The Income Approach

LO3 • • • • • • Compensation of employees Rents Interest Proprietor’s income Corporate profits • Corporate income taxes • Dividends • Undistributed corporate profits

Taxes on production and imports

25-14

The Income Approach

LO3 • • 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)

25-15

LO4

U.S. Income Relationships 2012

25-16

LO4

Circular Flow Revisited

25-17

Nominal GDP vs. Real GDP

LO5 • • • • GDP is a dollar measure of production Using dollar values creates problems

Nominal GDP

• Based on prices that prevailed when output was produced

Real GDP

• Reflect changes in the price level • Use base year price 25-18

LO5

GDP Price Index

• Use

price index

to determine real GDP

Price Index In Given Year = Price of Market Basket In Specific Year Price of Same Basket In Base Year x 100 Real GDP = Nominal GDP Price Index (in hundredths)

25-19

GDP Price Index

LO5 2 3 4 5 • Calculating Real GDP (Base Year = Year 1) Year 1 (1) Units of Output 5 (2) Price of Pizza Per Unit $10 (3) Price Index (Year 1 = 100) 100 (4) Unadjusted, or Nominal, GDP (1) X (2) $ 50 (5) Adjusted, or Real, GDP $50 7 8 10 11 20 25 30 28 200 250 -- -- 140 200 -- -- 70 80 -- -- 25-20

LO6

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 25-21

LO6

Underground Economy

25-22

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 25-23

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 25-24

Sources of BEA Data

• • Government Purchases • Office of Personnel Management • Construction Surveys • Census Bureau’s Survey of Government Finance Net Exports • U.S. Customs Service • BEA Surveys and Analysis 25-25