Chapter 6 Measuring Total Output and Income

1. Chapter 6 Measuring Total Output and Income

2. 1. MEASURING TOTAL OUTPUT Learning Objectives • Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model. • Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production. • Distinguish between gross domestic product and gross national product.

3. 1.1 The Components of GDP • A flow variable is a variable that is measured over a specific period of time. • A stock variable is a variable that is independent of time. GDP = consumption (C) + private investment (I) + government purchases (G) + net exports (Xn) Or GDP = C + I + G + Xn

4. 1.1 The Components of GDP • Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period. Personal consumption Consumer goods and services Households Firms Factors of production (labor, capital, and natural resources) Factor incomes (wages, interest, profit, and rent)

5. 1.1 The Components of GDP • Gross private domestic investment is the value of all goods produced during a period for use in the production of other goods and services. Personal consumption Private investment Households Firms Factor incomes

6. 1.1 The Components of GDP • Government purchases are the sum of purchases of goods and services from firms by government agencies plus the total value of output produced by government agencies themselves during a time period. • Transfer payments are payments that do not require the recipient to produce a good or service in order to receive them.

7. 1.1 The Components of GDP Personal consumption Private investment Households Firms Government purchases Factor incomes Government agencies

8. 1.1 The Components of GDP • Exports are the sales of a country’s goods and services to buyers in the rest of the world during a particular time period. • Imports are purchases of foreign-produces goods and services by a country’s residents during a period. • Net Exports are exports minus imports.Exports (X) – imports (M) = net exports (Xn) • A trade deficit occurs when there are negative net exports. • A trade surplus occurs when there are positive net exports.

9. 1.1 The Components of GDP Personal consumption Private investment Households Firms Government purchases Net Exports Factor incomes Rest of the world Government agencies

10. 1.1 The Components of GDP

11. 1.2 Final Goods and Value Added • The Value added is the amount by which the value of a firm’s output exceeds the value of the goods and services the firm purchases from other firms.

12. 1.3 GNP: An Alternative Measure of Output • Gross national product (GNP) is the total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country. GDP + net income received from abroad by residents of a nation = GNP

13. 2. MEASURING TOTAL INCOME Learning Objectives • Define gross domestic income and explain its relationship to gross domestic product. • Discuss the components of gross domestic income. • Define disposable personal income and explain how to calculate it from GDP.

14. 2.1 The Components of GDI • Gross domestic income (GDI) is the total income generated in an economy by the production of final goods and services during a particular period. • Employee compensation • Profits • Rental income • Net interest • Depreciation • Indirect taxes

15. 2.1 The Components of GDI GDP and GDI, 2008

16. 2.2 Tracing Income from the Economy to Households • Disposable personal income is the income households have available to spend on goods and services. From GDP to Disposable Personal Income

17. 3. GDP AND ECONOMIC WELL-BEING Learning Objectives • Discuss and give examples of measurement and conceptual problems in using real GDP as a measure of economic performance and of economic well-being. • Explain the use of per capita real GNP or GDP to compare economic performance across countries and discuss its limitations.

18. 3.1 Measurement Problems in Real GDP • There are two measurement problems, other than those associated with adjusting for price level changes, in using real GDP to assess domestic economic performance. • Revisions • The Service Sector

19. 3.2 Conceptual Problems with Real GDP • A second set of limitation or real GDP stems from problems inherent in the indicator itself. • Household Production • Underground and Illegal Production • Leisure • The GDP Accounts Ignore “Bads” (e.g. crime spending, negative externalities, environmental pollution) • More GDP cannot necessarily be equated with more human happiness.

20. 3.3 International Comparisons of Real GDP and GNP • Per capita real GNP or GDP is a country’s real GNP or GDP divided by its population. • Comparing one country’s output to another presents additional challenges. That said, when the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences in living standards.