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Measuring Domestic Output, National Income and the Price Level

Measuring Domestic Output, National Income and the Price Level. Chapter 7 Time period = 2-3 weeks. Assessing the Economy. National income accounts serve a purpose just as income statements do for a business Compare conditions with other countries

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Measuring Domestic Output, National Income and the Price Level

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  1. Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2-3 weeks

  2. Assessing the Economy • National income accounts serve a purpose just as income statements do for a business • Compare conditions with other countries • Provides a basis for public policies to improve economic performance

  3. Gross Domestic Product (GDP) • GDP = the total market value of all final goods and services produced within a country in one year • Measured in quarters (every 3 months) • 1st = January - March • 2nd = April - June • 3rd = July – September • 4th = October - December

  4. GDP • Includes only final goods = g & s that are purchased for final use by the consumer • Does not include intermediate goods = g & s that are resold or go on for further processing or manufacturing • This avoids multiple counting • Is the value of what has been produced, not what was actually sold

  5. GDP Excludes Nonproduction Transactions • Existing assets or property that is sold or transferred, including used items, is NOT counted • Public or private transfer payments --public = SS or welfare payments --private = student allowance or alimony --sale of stocks and bonds --broker services rendered ARE counted

  6. More Nonproduction Transactions • Secondhand sales • Unreported business activities done in cash (ie unreported tips) • Illegal activities • “Non-market” activities like volunteering or family work • US corporation’s production in overseas plants

  7. 2 ways to look at GDPExpenditures Approach • GDP has 4 components GDP = C + Ig + G + Xn • C = Personal Consumption • durable & nondurable finished g & s (but not houses)

  8. Expenditures Approach • Ig = Gross Private Domestic Investment (Gross Investment) • Purchases of machinery, equipment & tools • Factory equipment maintenance • All construction (including residential) • Unsold inventory of products

  9. Expenditures Approach • G = Government Spending • Government purchase of resources (mainly labor) • Again, it excludes transfer payments like SS

  10. Expenditures Approach • Xn = Net Exports (exports – imports) --All spending on g & s produced in the US must be included in the GDP, whether the purchase is made here or abroad --For decades, Xn has been a negative (= trade deficit)

  11. Expenditure Approach • C + Ig + G + Xn = GDP

  12. GDP to DI • Using the expenditure approach C + Ig + G + Xn = GDP • C = about 67% of GDP • If In is given, In+CFC=Ig

  13. GDP to DI • GDP to • NDP to • NI to • PI to • DI to • C and S

  14. GDP to DI • Start with GDP– consumption of fixed capital (CFC) or depreciation =now we have net domestic product (NDP) • Take NDP– indirect businesses taxes (sales, excise & property taxes, licenses, duties) Also – net foreign factor income (income earned by foreigners in the US – income earned by Americans abroad—also known as remittances) =now we have National Income (NI)

  15. GDP to DI • Take NI and subtract - social security contribution (a tax) - corporate income taxes paid - undistributed corporate profits (total profits – corporate taxes = profits not given out as dividends but kept for reinvestment at a later date) + back transfer payments (SS payments, unemployment compensation, disability pay) Now we have Personal Income (PI)

  16. GDP to DI • Take PI and – personal income taxes • Now we have DISPOSABLE INCOME (DI) Disposable income can only be used for consumption or savings (C or S)

  17. Income Approach to GDP • Compensation of Employees (Wages) --largest part of the GDP --includes wages, salaries, fringe benefits, health care and pension plans

  18. Income Approach • Rents • Tenant and lease payments

  19. Income Approach • Interests • Money paid by private businesses to suppliers of money capital • Includes interests households receive on savings and bond payments

  20. Income Approach • Proprietor’s Income and corporate profits (Profits) • Net income of unincorporated businesses • Corporate profits, corporate income tax, dividends and undistributed corporate profits

  21. Income Approach • Statistical Adjustments • Indirect business taxes (IBT) • General sales tax, business property tax, license fees and custom duties • Consumption of Fixed Capital (CFC) (depreciation)

  22. Statistical Adjustment continued • Net foreign factor income in US (NFF)

  23. Income Approach • W + R + I + P + SA = GDP

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