McGraw-Hill/Irwin Chapter Measuring Domestic Output and National Income Copyright © 2009 by The McGraw-Hill Companies, Inc All Chapter Objectives • • • • • Define and measure GDP GDP and income relationships The GDP price index Nominal GDP vs real GDP Limitations of the GDP measure 24-2 National Income Accounting • Bureau of Economic Analysis compiles National Income and Product Accounts – Assess health of economy – Track long run course – Formulate policy 24-3 Gross Domestic Product • Measure of aggregate output • Monetary measure • Avoid multiple counting – Market value final goods – Ignore intermediate goods – Count value added 24-4 Gross Domestic Product • Exclude financial transactions – Public transfer payments – Private transfer payments – Stock (and bond) market transactions • Second hand sales – Sell used car to a friend 24-5 Two Approaches to GDP • 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? 24-6 Two Approaches to GDP Consumption by Households Wages Investment by Businesses Rents + + Government Purchases + Expenditures By Foreigners G = D= P + + + + Interest Profits Statistical Adjustments 24-7 Expenditure Approach • Personal consumption expenditures (C) – Durable consumer goods – Nondurable consumer goods – Consumer expenditures for services – Domestic plus foreign produced 24-8 Expenditure Approach • Gross private domestic investment (I) – Machinery, equipment, and tools – All construction – Changes in inventories • Creation of new capital asset • Noninvestment transactions 24-9 Expenditure Approach - Gross Investment Depreciation = Net Investment Gross Investment Net Investment Depreciation Increase Stock of Capital Consumption & Government Spending January Year’s GDP Stock of Capital December 31 24-10 U.S Economy 2009 In Billions Receipts Expenditures Approach Allocations Income Approach Personal Consumption (C) $10,089 Compensation $ 7792 Gross Private Domestic Rents 268 788 Investment (Ig) 1628 Interest Government Purchases (G) 2931 Proprietor’s Income 1041 Net Exports (Xn) -392 Corporate Profits 1309 Taxes on Production and Imports National Income 1090 $12,288 Net Foreign Factor Income (-) 105 Statistical Discrepancy (+) 209 Consumption of Fixed Capital (+) Gross Domestic Product $ 14,256 LO2 Gross Domestic Product 1864 $ 14,256 7-12 Comparative GDP LO2 7-13 Components of National Income • • • • • Compensation of employees Rents Interest Proprietor’s income Corporate profits – Corporate income taxes – Dividends – Undistributed corporate profits • Taxes on production and imports 24-14 Income Approach • From national income to GDP – 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) – DI = C + S 24-15 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 Income Equals: 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) LO2 $ 14,256 1864 $ 12,392 209 105 $ 12,288 1090 967 315 418 2528 $ 12,026 1102 $ 10,924 7-16 Class Exercise Form groups of to students Working together, and using the data listed on the board solve for GDP, NPD, NI, PI and DI (use Expenditure Approach for GDP) Each group should assign a spokesperson to review the solution with the class…… 24-17 •Transfer Payments $16 (Dollars in Billions) •Government Purchases 80 •Personal Taxes 38 •Corporate Income tax 28 •Taxes on Production and Imports 15 •Social Security contributions •Undistributed corporate profits 19 •Proprietor’s income 25 •Compensation of employees 258 •Personal consumption expenditures 322 •Consumption of fixed capital •Rents 10 •U.S Exports 14 •Corporate profits 70 •Interest 12 •Dividends 23 •Imports to U.S 17 •Gross private domestic investment 63 •Net foreign factor income 10 •Statistical Discrepancy 35 24-18 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 24-19 GDP Price Index • Use price index to determine real GDP Price Index In Given = Year Real GDP = Price of Market Basket In Specific Year Price of Same Basket In Base Year x 100 Nominal GDP Price Index (in hundredths) 24-20 NOMINAL GDP vs REAL GDP Nominal Values • Deflate GDP when prices rise • Inflate GDP when prices fall • Nominal GDP • Calculating Real GDP (4) (2) (3) Unadjusted, (5) (1) Price Price Index or Nominal, Adjusted, Units of Pizza Year = GDP, Or Real, Year Output Per Unit 100 GDP (1)x(2) 5 10 11 $ 10 20 25 30 28 100 200 250 - $ 50 140 200 - $ 50 70 80 - 24-21 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 24-22 Underground Economy As a percentage of GDP, Selected Nations, 2007 Mexico South Korea India Italy Spain China Sweden Germany France United Kingdom Japan Switzerland United States Percentage of GDP 10 15 20 25 30 Source: Open Assessment, E-Journal 24-23 Sources of BEA Data • Consumption – Census Bureau’s Retail Trade Survey – Census Bureau’s Survey of Manufacturers – Census Bureau’s Service Survey • Investment – All Consumption data sources – Census Bureau’s Housing Starts Survey and Housing Sales Survey – Retail Trade Survey – Wholesale Trade Survey – Survey of Manufacturing 24-24 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 24-25 Key Terms • national income accounting • gross domestic product • intermediate goods • final goods • multiple counting • value added • expenditures approach • income approach • personal consumption expenditures • gross and net private domestic investment • government purchases • net exports • taxes on production and imports • national income • consumption of fixed capital • net domestic product • personal income • disposable income • nominal GDP • real GDP • price index 24-26 ... Expenditures Approach Allocations Income Approach Personal Consumption (C) $10,089 Compensation $ 77 92 Gross Private Domestic Rents 268 78 8 Investment (Ig) 1628 Interest Government Purchases (G) 2931... Count sum of money spent buying the final goods – Who buys the goods? 24-6 Two Approaches to GDP Consumption by Households Wages Investment by Businesses Rents + + Government Purchases + Expenditures... sales – Sell used car to a friend 24-5 Two Approaches to GDP • Income approach – Count income derived from production – Wages, rental income, interest income, profit • Expenditure approach – Count