2/25/21 Chapter 2.2: MEASURING OUTPUT USING GDP Measuring output using GDP • GDP can be measured using the expenditure approach; • GDP can be determined by summing up national income and adjusting for depreciation, taxes and subsidies • GDP can be determined in two ways, both of which, in principle, give the same result The expenditures approach GDP = C + I + G + X – M • C: Consumption S: Saving S = Yd – C Yd: Disposable Income The amount of money that an individual or household has to spend or save after income taxes have been deducted 2/25/21 The expenditures approach • G: Government expenditure: Government spending on goods and servives (G) and Transfer Payments (Tr) • I: Investment • De: Depreciation • Net Investment = Gross Investment – Depreciation I = In + De ó In = I – De Government spending (G) is the sum of government expenditures on final goods and services It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government (Cg, Ig) It does not include any transfer payments, such as social security or unemployment benefits • Economic Investment includes: • 1) all final purchases of machinery, equipment, and tools by businesses 2) all construction (including homes) 3) changes in inventories (To include items produced one year but sold the next If businesses are able to sell more than they currently produce, this entry will be a negative number ) • NX: net export: NX = X - M • In an economy: households receive wages • Then they use to purchase final goods and services • Since wages eventually are used in consumption (C), the expenditure approach to calculating GDP focuses on the end consumption expenditure to avoid double counting • The income approach, alternatively, would focus on the income made by households as one of its components to derive GDP 2/25/21 The income approach • GDP = De + W + R + i + Pr + Ti • Retained earnings • Dividents • W: Wages (Labor Income ) • R: Rent • i: Interest • Pr: Profit • Tax including: Ti (Indirect Taxes: VAT, sales tax, custom duties, excise tax) and Td (Direct Taxes: Income tax, corporation tax, property tax, inheritance tax, gift tax) Tx = Ti + Td • Personal Income Taxes? • Indirect Business Taxes? 10 The output approach (net product/value added approach) • Income tax • Corporation tax • Property tax • Inheritance tax • Gift tax • Sales • Value-added tax • EXCISE TAX 11 •GDP = AVA + IVA + SVA • Value added from each of the main economic sectors: Agriculture, Industry, Services 12 2/25/21 GDPfc = GDPmp - Ti • NDP (Net Domestic Product) = GDP - De • NNP (Net National Product) = GNP – De • NI (National Income) = NNPmp – Ti •PI (Personal Income) = NI - Pr*+ Tr •PI (Personal Income) = NI - Pr*+ Tr (Pr*: the profit retained (Retained earnings) and paid to the government Retained earnings are used to set up funds such as production development fund, welfare and reward fund, reserve fund, Profits paid to the government include corporate income tax and other required deductions Corporate profits (which equals the sum of corporate taxes, dividends, and retained earnings) DI (Disposable Income): DI = PI - personal income tax 13 14 • Personal Income = National Income − Indirect Business Taxes − Corporate Profits − Social Insurance Contributions − Net Interest + Dividends + Government Transfers to Individuals + Personal Interest Income • Next, if we subtract personal tax payments and certain nontax payments to the government (such as parking tickets), we obtain disposable personal income: • Disposable Personal Income = Personal Income − Personal Tax and Nontax Payments 15 GNP = GDP + NIA • NIA: Net income from Abroad 16 2/25/21 GDP and Economic Well-Being • GDP per capita is often used to measure a country's well being or standard of living • The higher the GDP per capita for a country the better off the country is • But there are some problems with using GDP per capita to measure a country's standard of living 17 Problems with using GDP to Measure the Standard of Living: non-market transactions are not included in GDP: GDP does not measure total output or total utility GDP doesn’t measure some very useful output because it is unpaid (homemakers’ services, parental child care, volunteer efforts, home improvement projects) Called non-market transactions leisure increases the standard of living but it isn't counted GDP doesn’t measure improved living conditions as a result of more leisure the underground economy produces goods and services but they are not included in GDP • GDP does not include output from the Underground Economy Illegal activities are not counted in GDP (estimated to be around 8% of U.S GDP) • Legal economic activity may also be part of the “underground,” usually in an effort to avoid taxation 18 Conclusion • Even though GDP does not measure all output, it still allows economists to assess the state of the economy, providing a solid foundation to predict its future course and to measure the results of public policies 19 ... + SVA • Value added from each of the main economic sectors: Agriculture, Industry, Services 12 2 /25 /21 GDPfc = GDPmp - Ti • NDP (Net Domestic Product) = GDP - De • NNP (Net National Product) =... alternatively, would focus on the income made by households as one of its components to derive GDP 2/ 25 /21 The income approach • GDP = De + W + R + i + Pr + Ti • Retained earnings • Dividents • W:.. .2/ 25 /21 The expenditures approach • G: Government expenditure: Government spending on goods and servives