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National Income Accounting

Chapter 5. National Income Accounting. Measures of Output:. Help us understand how the economy works or how well (or poorly) it is performing. Provide a useful perspective on the way the economy works. Gross Domestic Product (GDP).

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National Income Accounting

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  1. Chapter 5 National Income Accounting

  2. Measures of Output: • Help us understand how the economy works or how well (or poorly) it is performing. • Provide a useful perspective on the way the economy works. Chapter 5

  3. Gross Domestic Product (GDP) • The total dollar value of final output produced within a nation’s borders in a given time period. Chapter 5

  4. The Circular Flow • Four different groups purchase things in our economy: • Consumers • Business firms • Government • Foreigners Chapter 5

  5. GDP as Consumption • GDP = C + I + G + X • Consumption • Investment • Government Spending • Net Exports • Exports - Imports Chapter 5

  6. U.S. GDP in 2008 • GDP = $14.41 trillion • Consumption = $10.13 trillion • Investment = $2.14 trillion • Government Spending = $2.88 trillion • Federal = $1.08 trillion • State & local = $1.80 trillion • Net Exports = -707.8 billion • Exports = $1.83 trillion • Imports = $2.54 trillion Source: www.bea.gov table 1.1.5 Chapter 5

  7. GDP as Income • GDP= (wages + interest + rent + profit) – (net factor income from abroad + depreciation + indirect taxes) • Indirect business taxes • Sales tax, excise tax, property tax, licensing fees, custom duties Chapter 5

  8. GDP Comparisons: 2011 GDPs • 1. U.S. $15.2 Trillion • 2. China $6.5 Trillion • 3. Japan $5.8 Trillion • 4. Germany $3.5 Trillion • 6. Britain $2.5 Trillion • 9. California $1.9 Trillion • 10. Canada $1.7 Trillion • 14. Mexico $1.2 Trillion • 20. Saudi Arabia $578 Billion • 27. Virginia $408 Billion • 132. Haiti $7.7 Billion Source: International Monetary Fund www.imf.org Chapter 5

  9. Per Capita GDP • The dollar value of GDP divided by total population. • How much output the average person would get if all output were divided up evenly among the population. • Commonly used as a measure of a country’s standard of living. Chapter 5

  10. Per Capita GDP: 2008 • U.S. $46,859 • Japan $38,559 • Canada $45,428 • Saudi Arabia $19,345 • Mexico $10,234 • China $3,315 • India $1,016 • World Average $7,350 • Haiti $791 Source: International Monetary Fund www.imf.org Chapter 5

  11. Measurement Problems • Non-Market (unpaid) Activities • Stay-at-home moms • Second hand sales • Used cars • Financial Transactions • Gifts, SS payments • Unreported Income • Underground economy • Paid in cash • Illegal activity Chapter 5

  12. Two Ways to Calculate GDP as Income • Compute the value of the final output. • Cake • Count only the value addedat each stage of production. • Intermediate goods: • Ingredients: Eggs, flour, sugar • Dough • Baked cake • Decorated cake • Boxed cake Chapter 5

  13. Value Added • Flour, eggs, water = $1.00 • Labor = $2.00 • Electricity = 25¢ • Box = 25¢ • Delivery to store = $1.00 • Shelf space & sales person = $3.00 • All this leads to a $7.50 cake Chapter 5

  14. GDP Growth • Economic growth is the increase in output (real GDP) • an expansion of production possibilities. • On average, U.S. output has grown by roughly 3 percent per year. Chapter 5

  15. GDP Growth Chapter 5

  16. Poor Nations • The populations of rich countries are growing slowly so that gains in per capita GDP are easily achieved. • The populations of the poorest countries are still growing rapidly, making it difficult to raise living standards. Chapter 5

  17. The U.S. Mix of Output • 75% services, not goods. • 24% is Manufacturing, mining and construction • < 2% is Agriculture Data Source: www.bea.gov publication BEA 08-45 Chapter 5

  18. The Four Major Uses of Total Output: • Consumption 70.1% • Investment 14.8% • Government services • State & local 12.5% • Federal 7.5% • Net exports -4.9% Source: www.bea.gov table 1.1.5 Chapter 5

  19. Net Exports • Exports are goods and services sold to foreign buyers. • Imports are goods and services purchased from foreign sources. • Net Exports= Exports - Imports. Chapter 5

  20. U.S. Exports to: (2008) • Total: $1.3 Trillion • 8% of world Exports • Canada $261 billion • Mexico $152 billion • China $ 71 billion • Japan $ 67 billion • Germany $ 55 billion • United Kingdom $ 54 billion • Rest of the world $640 billion Source: International Monetary Fund www.imf.org Chapter 5

  21. U.S. Imports from: (2008) • Total: $2.1 Trillion • 13.5% of world Imports • China $338 billion • Canada $336billion • Mexico $216 billion • Japan $139 billion • Germany $ 98 billion • United Kingdom $ 59 billion • Rest of the world $914 billion Source: International Monetary Fund www.imf.org Chapter 5

  22. Comparative Advantage • The motivation for international trade • quest for more output. Chapter 5

  23. Comparative Advantage • The ability of a country to produce a specific good at a lower opportunity cost than its trading partners. • Small nations are most in need of specialization because they lack the ability to produce the whole array of goods and services consumers want. Chapter 5

  24. Real Versus Nominal GDP • Nominal GDPis the value of final output produced in a given period, measured in the prices of that period. • GDP in current prices • Real GDPis the value of final output produced in a given period, adjusted for changing prices. • GDP in constant prices Chapter 5

  25. Real GDP AS AD Real GDP Chapter 3

  26. Real GDP • Shows work that was done, not money that was made. Chapter 5

  27. Computing Real GDP • The base periodis the time period used for comparative analysis. • It is the basis for the indexing of price changes. Chapter 5

  28. Computing Real GDP • Real GDP = Nominal GDP Price index Chapter 5

  29. Inflation • The increase in the average level of prices of goods and services. • Tends to obscure actual declines in real output. Chapter 5

  30. Changes in GDP: Nominal Versus Real • 2011 • Make 1,000 • Price = $5 • Revenue = $5,000 • 2012 • Make 1,000 • Price = $6 • Revenue = $6,000 • Change is nominal: • Gain came only from price change • No extra items were produced. • No extra jobs were created. Chapter 5

  31. Changes in GDP: Nominal Versus Real • 2011 • Make 1,000 • Price = $5 • Revenue = $5,000 • 2012 • Make 1,100 • Price = $5 • Revenue = $5,500 • Change is real: • Gain came from more stuff being made. • More items were produced. • More jobs may be created. (more work done) Chapter 5

  32. Changes in GDP: Nominal Versus Real • 2011 • Make 1,000 • Price = $5 • Revenue = $5,000 • 2012 • Make 800 • Price = $6.25 • Revenue = $5,000 • Revenue doesn’t change: • Lower production hidden by higher price. • fewer items were produced. • Jobs may be lost. (less work done) Chapter 5

  33. Changes in GDP: Nominal Versus Real • 2011 • Make 1,000 • Price = $5 • Revenue = $5,000 • 2012 • Make 800 • Price = $7 • Revenue = $5,600 • Revenue gain is nominal Real production is lower: • Extreme price increase hides lower production. • Less items were produced. • Jobs may be Lost. (less work done) Chapter 5

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