National Income & GDP

1. National Income & GDP

2. National Income Accounting • Measures the Economy’s overall performance • Like a personal accountant….. But for the economy • Bureau of Economic Accounting (BEA) • Complies the National Income and Product Accounts • Assess economic health • Track the long-run of the economy • Develop policies to improve economy

3. The GDP • Gross Domestic Product • Total market value of all final goods and services in a given year Included or excluded?? • Fords produced by an American-owned factory in Detroit • Hondas produced by a Japanese-owned factory in Ohio Both Included! GDP includes all goods and services produced within the country

4. Gives a Monetary Measure Year 1: Produce 3 iPods and 2 Zunes Year 2: Produce 2 iPods and 3 Zunes Which year has a greater output? Need a price tag! GDP is based on a monetary measure to gain an accurate measure of economic output

5. 2 Rules of GDP • Avoid Multiple Counting: • Only accounts for Final Goods Final Goods/Services: example: Any retail good Intermediate G/S: example: Peanuts sold from Bob the farmer to Jiffy to make peanut butter If both transactions were counted in the GDP we would have multiple counting

6. 2 Rules of GDP Excluded Nonproduction Transactions Financial Transactions Second Hand Sales • Public Transfer Payments • SS, Welfare • Private Transfer Payments • Cash for B-day • Stocks/Bonds • Do not create production • In reality…. They are just slips of paper! • Sell your ‘03 Toyota Camry to your best friend ……..Just don’t tell them about the brakes……

7. Two ‘Faces’ of GDP Expenditure Approach Income Approach • a.k.a. Output approach • Sum of all money spent • a.k.a. Allocations approach • Sum of income created during production • In general, buying (spending money) and selling (receiving income) are two aspects of the same transactions

8. Expenditures Approach GDP= C + Ig + G + Xn

9. GDP= C+ ……… Personal Consumption • Durable consumer goods • Cars, appliances, electronics • Nondurable consumer goods • Bread, milk, pencils, toothpaste • Consumer Expenditures for Services • Lawyers, doctors, barbers

10. GDP=. . . Ig+. . . Gross Private Domestic Investment • Final purchases of machinery, equipment, tools • All construction • Both residential and nonresidential construction Why is residential construction not counted in consumption? • Houses could berented to bring in an income return • Changes in inventory • Including unsold goods… “unconsumed output”

11. . . . More about Investment • Not counted in investment • Stocks/bonds • Resale of tangible goods (houses) So how does a Realtors Commission fit in? Is it included in GDP? • counted as CONSUMPTION (service) • Overall…. Investment deals with the creation of new capital

12. GDP=. . . G+. . . • Government purchases • “Government consumption expenditures” • All government expenditures on final goods • Service- costs for public goods • Social capital- highways, schools What is not counted in G? • Transfer payments

13. GDP= . . . Xn • Net Exports (International Trade) • Net Exports (Xn)= Exports (X) – Imports (M)

14. GDP Jan. 29th, 2011

15. Nominal 2009 GDP in USD