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Measuring Domestic Output, National Income and the Price Level

This chapter delves into the intricacies of measuring economic performance through GDP and national income accounts. Learn how GDP is calculated, its components, and exclusion criteria to avoid double counting, ultimately forming the basis for economic policies. A comparison with other countries provides valuable insights.

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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 = 1 week

  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 houses) • 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. Expenditures Approach • C + Ig + G + Xn = GDP

  12. GDP to DI • Using the expenditure approach C + Ig + G + Xn = GDP • C = about 67% of GDP • Xn = mostly negative since WWII

  13. GDP to NDP • 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) =now we have National Income (NI)

  14. 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)

  15. 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)

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

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

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

  19. Income Approach • Rents • Tenant payments • Lease payments

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

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

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

  23. Statistical Adjustment continued • Net foreign factor income in US • Income of foreign nationals must be + • Income of American income earned abroad must be – • GDP measures the output of geographical US regardless of the nationality of the contributors

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

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