Chapter 24 - Measuring domestic output and national income. After reading this chapter, you should be able to: Explain how gross domestic product (GDP) is defined and measured; describe the relationships among GDP, net domestic product, national income, personal income, and disposable income; discuss the nature and function of a GDP price index, and describe the difference between nominal GDP and real GDP; list and explain some limitations of the GDP measure.
Chapter 24 Measuring Domestic Output and National Income McGrawHill/Irwin Copyright © 2009 by The McGrawHill Companies, Inc. All rights reserved 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 Expenditure Approach • Government purchases (G) – Expenditures for goods and services – Expenditures for social capital – Excludes transfer payments • Net exports (Xn) – Add exported goods – Subtract imported goods – NX = exports - imports • GDP = C+I +G+X 24-11 U.S Economy 2007 in Billions Receipts Expenditures Approach Allocations Income Approach Personal Consumption (C) $ 9734 Gross Private Domestic Compensation $ 7874 Investment (Ig) 2125 Interest Government Purchases (G) 2690 Proprietor’s Income 1043 Net Exports (Xn) -708 Corporate Profits 1627 Rents 65 603 Taxes on Production and Imports National Income 1009 $12,221 Net Foreign Factor Income (-) 96 Statistical Discrepancy (+) 29 Consumption of Fixed Capital (+) Gross Domestic Product $ 13,841 Gross Domestic Product 1687 $ 13,841 24-12 Comparative GDP Selected Nations GDPs, 2007 GDP in Trillions of Dollars 10 12 13 United States Japan Germany China United Kingdom France Italy Canada Spain Brazil Russia India South Korea Mexico Australia Source: World Bank 24-13 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 2007 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) $ 13,841 1687 $ 12,154 29 96 $ 12,221 1009 979 467 344 2237 $ 11,659 1482 $ 10,177 24-16 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 24-17 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) 24-18 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 24-19 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, EJournal 24-20 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 24-21 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 24-22 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 24-23 Next Chapter Preview… Economic Growth 24-24 ... personal income • disposable income • nominal GDP • real GDP • price index 2 4- 23 Next Chapter Preview… Economic Growth 2 4- 24 ... policy 2 4- 3 Gross Domestic Product • Measure of aggregate output • Monetary measure • Avoid multiple counting – Market value final goods – Ignore intermediate goods – Count value added 2 4- 4 Gross... Adjustments 2 4- 7 Expenditure Approach • Personal consumption expenditures (C) – Durable consumer goods – Nondurable consumer goods – Consumer expenditures for services – Domestic plus foreign produced 2 4- 8