Lesson 6-1 Measuring Total Output and Income

1. Lesson 6-1 Measuring Total Output and Income

2. Measuring Total Output Gross Domestic Product (GDP) is a number that measures the total output of a country. GDP is calculated by adding all consumption spending to all investment spending to all government spending to pending for exports minus spending for imports Spending for exports - spending for imports is referred to as net exports The formula for GDP is GPD = C + I + G + NE

3. Personal Consumption The personal consumption component of GDP measures the value of goods and services that are purchased by households during a time period. Consumption accounts for more than 2/3 of total output. In the circular flow diagram, money flows from households to firms to pay for consumption, and goods and services flow to households in response. In the same circular flow diagram, money payments flow from firms to households to buy resources such as labor, and those resources flow to firms in response.

4. Private Investment Private investment includes the value of all goods produced by firms during a period for use by firms in the production of goods and services. Expenditures to obtain stocks or bonds are not counted as investment. Such an expenditures doesn't add anything to the capital stock of the nation.

5. Gross private domestic investment includes three flows that add to or maintain the nation’s capital stock. Expenditures by business firms on new buildings, plants, tools, and equipment that will be used in the production of goods and services. Expenditures on new residential housing. Changes in business inventories.

6. Final Goods and Value Added GDP is the total value of all final goods and services, which is significantly less than the total value of all goods and services produced during a period. Because some goods and services are produced and then used to make other goods and services, counting everything produced would double count some production. Taking only final goods prevents this. The value-added approach counts only the amount added in value at each stage of production. Value added is the amount by which the value of a firm’s products exceeds the value of the goods and services the firm purchases from other firms

7. GNP: An Alternate 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. GNP and GDP are highly correlated for most countries because the factors owned by the residents of a particular country are usually in that country. GDP + net income received from abroad by residents of a nation = GNP.

8. Measuring Total Income Gross domestic income (GDI) measures the total income generated in an economy by the production of goods and services during a particular period. GDP = GDI since the value of total output equals the total income generated in producing that output. The Components of GDI are Employee Compensation + Profits + Rental Income + Net Interest + Depreciation + Indirect Business Taxes

9. Depreciation is a measure of the amount of capital that wears out or becomes obsolete during a period. Depreciation represented 10.7 percent of GDI in 1998. Indirect business taxes are taxes imposed on the production or sale of goods and services or on other business activity. Indirect business taxes amounted to 6 percent of GDI in 1998.

10. Private investment plays a crucial role in the macroeconomy for two reasons Private investment adds to the economy’s capacity and shifts its production possibilities curve outward. Private investment is a relatively volatile component of GDP.

11. Private investment accounts for about 16 percent of GDP. Private investment is a demand placed on firms by firms. Private investment can be shown on the circular flow diagram by a flow of money and goods from firms to/from firms.

12. 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. Government purchases make up about 17 percent of GDP. Government purchases are only a part of total government spending.

13. Transfer payments do not require that the recipient produce a good or service in order to receive them. Government transfer payments such as Social Security, welfare, and unemployment compensation are not counted in government purchases. Government transfer payments account for roughly half of all federal government spending in the United States. Government purchases are represented on a circular flow diagram as flows of money from government to firms and goods and services from firms to government.

14. Net Exports Sales of a country’s goods and services to buyers in the rest of the world during a particular time period represent its exports. Imports are purchases of foreign-produced goods and services by a country’s residents during a period Net exports are the difference between exports and imports: Exports – Imports = Net Exports (X n ) Negative net exports represent a trade deficit.

15. Goods and services produced for export represent roughly 11 percent of GDP. In a circular flow diagram, net exports are spending from the rest of the world to firms or from firms to the rest of the world. Trade deficits mean spending flows from firms to the rest of the world. Trade surpluses mean spending flows from the rest of the world to firms.