Measuring National Output and National Income

1. Measuring National Output and National Income

2. National Incomeand Product Accounts • National income and product accounts NIPA are data collected and published by the government describing the various components of national income and output in the economy. • In Palestine NIPA are collected and summarized by the Palestinian Central Bureau of Statistics (PCBS).

3. What Is GDP? • 1. Gross Domestic Product (GDP) is the most basic measure of how an economy is performing. • 2. Gross Domestic Product is the total market value of a country’s output. It is the market value of all final goods and services produced in a country during a calendar year by factors of production located within that country.

4. Final Goods and Services • The term final goods and services in GDP refers to goods and services produced for final use. • Intermediate goods are goods produced by one firm for use in further processing by another firm.

5. Value Added In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales

6. Value Added • Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. • Value addedis the difference between a firm’s total revenue and what it pays other firms for intermediate goods. Value added includes wages and salaries, rent, interest, and profits.

7. Exclusions of Used Goodsand Paper Transactions • Exclusion ofUsed Goods and Paper Transactions: NIPA exclude purchases and sales of previously owned goods and paper asset transactions because GDP includes only newly produced goods and services. • 1. Previously owned goods were counted when they were first produced. • 2. Paper asset transactions (bonds and stocks) are not counted because they are not new goods or services.

8. Exclusion of Output Produced Abroadby Domestically Owned Factors of Production • GDP is the value of output produced by factors of production located within a country. • Gross National Product (GNP): Output produced by a country’s citizens, regardless of where the output is produced,

9. Calculating GDP GDP can be computed in two ways: • The expenditure approach: A method of computing GDP that measures the total amount spent on all final goods during a given period. • The income approach: A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods.

10. The Expenditure Approach • The expenditure approach calculates GDP by adding together the four components of spending. In equation form:

11. The Expenditure Approach Expenditure categories: • Personal consumption expenditures (C)—household spending on consumer goods. • Gross private domestic investment (I)—spending by firmsandhouseholds on new capital: plant, equipment, inventory, and new residential structures.

12. The Expenditure Approach • Government consumption and gross investment (G) Expenditure categories: • Net exports (EX – IM)—net spending by the rest of the world, or exports (EX) minus imports (IM)

13. Components of GDP, 1999:The Expenditure Approach

14. Personal Consumption Expenditures • Personal consumption expenditures (C) are expenditures by consumers on the following: • Durable goods: Goods that last a relatively long time, such as cars and appliances. • Nondurable goods: Goods that are used up fairly quickly, such as food and clothing. • Services: Things that do not involve the production of physical things, such as legal services, medical services, and education.

15. Gross Private Domestic Investment • Investment refers to the purchase of new capital. • Total investment by the private sector is called gross private domestic investment. It includes the purchase of new housing, plants, equipment, and inventory by the private sector.

16. Gross Private Domestic Investment • Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on. • Residential investment includes expenditures by households and firms on new houses and apartment buildings. • Change in inventories computes the amount by which firms’ inventories change during a given period. • Inventories includes: raw materials, intermediate goods, spare-parts for machines, and over-production of final goods. • Inventories are the goods that firms produce now but intend to sell later.

17. Gross Private Domestic Investment • Remember that GDP is not the market value of total sales during a period—it is the market value of total production. • The relationship between total production and total sales is: GDP = final sales + change in business inventories

18. Gross Investmentversus Net Investment • Gross investment is the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. • Depreciation is the amount by which an asset’s value falls in a given period. • Net investment equals gross investment minus depreciation. capitalend of period = capitalbeginning of period + net investment

19. Government Consumptionand Gross Investment • Government consumption and gross investment (G) counts expenditures by federal, state, and local governments for final goods and services.

20. Net Exports • Net exports (EX – IM) is the difference between exports and imports. The figure can be positive or negative. • Exports (EX) are sales to foreigners of U.S.-produced goods and services. • Imports (IM) are U.S. purchases of goods and services from abroad).

21. The Income Approach • National income is the total income earned by the factors of production owned by a country’s citizens. • The income approach to GDP breaks down GDP into four components: GDP = national income + depreciation + (indirect taxes – subsidies) + net factor payments to the rest of the world + other

22. The Income Approach • National income is the total income earned by the factors of production owned by a country’s citizens. National Income = Compensation of employees such as wages and salaries + Proprietors’ income + Net interests + corporate profits + rental income

23. The Income Approach

24. The Income Approach GNP= GDP + receipts of factor income from the rest of the world - payments of factor income to the rest of the world NNP = GNP - depreciation NI = NNP - Indirect Taxes + Subsidies PI = Wages Received + Interest Received + Rent Received + Dividends + Proprietors' Income + Transfer Payments by government PI = NI - Income Earned But Not Received + Income Received But Not Earned

25. The Income Approach PI = NI ـــ Social Security taxes ـــ corporate profits taxes ـــ undistributed corporate profits ـــ Pension premiums + Social Security payments to the households + Unemployment compensation payments + Welfare payments + interest on public bond + personal interest income received from the government and consumers + dividends

26. The Income Approach DPI (Disposable personal income) = PI – Personal tax

27. From GDP to Disposable Personal Income

28. From GDP to Disposable Personal Income • Net national product equals gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock. • Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes.

29. Disposable PersonalIncome and Personal Saving

30. Disposable Personal Income and Personal Saving • The personal saving rate is the percentage of disposable personal income that is saved. • If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.

31. Nominal Versus Real GDP • Nominal GDP is GDP measured in current dollars, or the current prices we pay for things. Nominal GDP includes all the components of GDP valued at their current prices. • When a variable is measured in current dollars, it is described in nominal terms.

32. Calculating Real GDP • A weight is the importance attached to an item within a group of items. • A base year is the year chosen for the weights in a fixed-weight procedure. • A fixed-weight procedure uses weights from a given base year.

33. Calculating Nominal GDP To understand the different between the nominal GDP and real GDP let’s suppose that we have 1 good produced in the economy (PIZZA).

34. Calculating Real GDP

35. Calculating Nominal and Real GDP

36. Calculating GDP Deflator and Inflation

37. Calculating GDP Deflator and Inflation

38. Real and Nominal GDP • Real GDP is calculated by tracking the volume or quantity of production after removing the rate of inflation. • Nominal GDP is calculated using changing prices, while Real GDP represent the change in the volume of total output after price changes are removed. • In general the nominal GDP is bigger than real GDP because the prices increase

39. Calculating the GDP Deflator • The GDP deflator is one measure of the overall price level. The GDP deflator is computed by the Bureau of Economic Analysis (BEA). • Overall price increases can be sensitive to the choice of the base year. For this reason, using fixed-price weights to compute real GDP has some problems.

40. The Problems of Fixed Weights The use of fixed price weights to estimate real GDP leads to problems because it ignores: • Structural changes in the economy. • Supply shifts, which cause large decreases in price and large increases in quantity supplied. • The substitution effect of price increases.

41. GDP and Social Welfare • Society is better off when crime decreases, however, a decrease in crime is not reflected in GDP. • An increase in leisure is an increase in social welfare, but not counted in GDP. • Nonmarket and household activities are not counted in GDP even though they amount to real production.

42. GDP and Social Welfare • GDP accounting rules do not adjust for production that pollutes the environment. • GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP. • GDP is neutral to the kinds of goods an economy produces.

43. The Underground Economy • The underground economy is the part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP. • Tax evasion is usually thought to be the major incentive for people to participate in the underground economy

44. Gross National Income per Capita • To make comparisons of GNP between countries, currency exchange rates must be taken into account. • Gross National Income (GNI) is a measure used to make international comparisons of output. GNI is GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation. • GNI divided by population equals gross national income per capita.

45. Gross National Income per Capita