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Gross Domestic Product [GDP]

National Income Accounting [NIA]. Gross Domestic Product [GDP]. & Its Four Cousins. [NDP, NI, PI, & DI]. Gross Domestic Product. Incidentally, applying “Preparation H” below the eyes, will take away puffiness under your eyes. What’s a Gross Domestic Product?.

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Gross Domestic Product [GDP]

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  1. National Income Accounting [NIA] Gross Domestic Product [GDP] & Its Four Cousins [NDP, NI, PI, & DI]

  2. Gross Domestic Product Incidentally, applying “Preparation H” below the eyes, will take away puffiness under your eyes. What’s a Gross Domestic Product? I was gonna say “Preparation H.” Broccoli? So – “gross” means broccoli, Preparation H, and the “entire sum of all products produced in a year” from apples to zucchini.

  3. What is the difference between Nominal GDP [prices of output in the current year] [measures “output and prices”] and Real GDP [base year prices of the year being measured] [measures “only output”]

  4. Importance of Real GDP in Determining aRecession Real GDP measures current output at base-year prices. Apple GDP Example A country produces 10 apples in base year x $1; Nominal [current] & Real [constant]GDP both=$10 Year 2: A country produces 10 apples x $1.25; Nominal GDP=$12.50 (no recession but worse off) [Real GDP would = $10 (10 apples x $1)] Or Year 2: Acountry produces 9 apples x $1.25; Nominal GDP=$11.25 but real is $9 (9 apples x $1) (recessionalthough nominal GDP is up)

  5. What is the difference between GDP and GNP? [GNP was used until 1991] GDP measures production in the U.S. GNP measures production by Americans.

  6. GDP v. GNP GNP – Ownership All goods/services produced legally for paybycitizens of a country. [Citizenship mattered, not geography] China Europe Nike in Indonesia Plano, TX in Chicago GDP - Location All goods/services produced legally for pay ina country’s borders. [Geography matters, not citizenship] Provo,UT BMW in Waco Honda in Ohio Products born in the USA The difference between GDP & GNP is about 2/10 of 1%.

  7. N.F.F.I. [U.S.A.Profits Overseas] Restof World $220bil. Foreign Profits inU.S.A. $209billion N.F.F.I. = $11 billion If U.S. Profits in the ROW are greater[$220]than foreign profits in the U.S.[$209],add the difference.

  8. N.F.F.I. [U.S.A. Profits Overseas] Rest of World $200bil. Foreign Profits inU.S.A. $209bill. N.F.F.I.E.U.S. = -$9 billion If foreign profits in the U.S. [$209] are greater than U.S. profits in the ROW [$200],subtract the difference.

  9. Components of Gross Domestic Product [C + Ig + G + X - M]

  10. GDP = C(70%) + Ig(16%) + G(19%) + Xn(-5%) Expenditures Approach Personal Consumption Expenditure ( C ) • Durable ConsumerGoods[11%] • Nondurables[29%][soup & soap] • Consumer Expenditures for Services[60%] Maytag produced here Spending by HH on all g/s except for new housing. Ferrari produced here

  11. Expenditures Approach Personal Consumption Expenditure ( C ) Let’s say this Porsche is produced by a foreign company in Plano, Texas. Gross Private Domestic Investment (Ig) 3 Subcategories[*spending on output not consumed] A. Businessspending on realcapital- tools, machinery, & plants B. New construction (Residential) investment – construction of new houses & apartments [can rent for financial return]. C. Unsold inventory output is “inventory investment.” Firms have pur- chased their unsold output. [Anet increase in inventories isinvestment; a net decrease in inventoriesisnegative investmentor disinvestment(disinvestmentrepresents sale ofoutput produced in a previous year) U.S. capital stock is over $30 trillion.

  12. Expenditures Approach Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( Ig ) Government Purchases (G) [state, local & federal] [“G” purchases of goods/svcs produced (not transfer payments) 3 Subcategories of Government A. Federal government [40%] B. 50 State governments C. 88,000 local governments [60% for state and local]

  13. Expenditures Approach Personal Consumption Expenditure (C) Gross Private Domestic Investment (Ig) Government Purchases (G) Net Exports( Xn) Net Exports (Xn)=Exports (X)–Imports (M) [M represents productionoutside a country]

  14. GLOBAL PERSPECTIVE Comparative GDPs in Trillions, 2010 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 U.S. China Japan Germany France U.K Brazil Italy India Canada Russia Spain Mexico South Korea Australia 14.5 5.8 5.4 3.3 2.5 2.2 2.0 2.0 1.7 1.5 1.4 1.4 1.0 1.0 924 http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

  15. If California and Texas were countries, where would they rank?

  16. GLOBAL PERSPECTIVE Comparative GDPs in Trillions, 2010 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 U.S. China Japan Germany France U.K Brazil Italy India Canada Russia Spain Mexico South Korea Australia 14.5 5.8 5.4 3.3 2.5 2.2 2.0 2.0 Calif. 1.9 1.7 1.5 1.4 1.4 1.0 TX 1.1 1.0 924 http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

  17. [Selected Countries] Per Capita GDP - 2008 Country Per Capita Sweden 36,900 U.K. 35,300 Germany 34,400 France 33,800 Japan 33,800 Italy 31,000 Australia 24,000 Russia 14,600 Mexico 12,500 China 6,300 Swaziland 4,800 Liberia 500 Congo, Rep of 300 Zimbabwe 200 Country Per Capita Qatar 101,000 Luxembourg 85,100 Bermuda 69,900 Kuwait 60,800 Norway 57,500 U.S. $48,000 Ireland 45,600 Hong Kong 42,000 U.A.E. 40,000 Switzerland 39,800 Iceland 39,400 Canada 38,200 Australia 37,500 Denmark 37,400 China and India are still poorer than he U.S. was in 1900. 75% of Africans live on less than $2 a day & it is getting worse.

  18. $48,000 2009 The World's Have-nots There are 6.6 billion peopleon our planet; 5 billion are in the Third World. 2.5 billion live on less than $2 a day. The direst poverty is in Africa, home of the world’s 10poorest countries. Over ½ the people of Sub-Sahara Africa live on less than$2 a day. 8 million people die each year because they are too poor to stay alive. ½ of the world’s population have yet to make their first phone call. $25,989 1996 • The PoorestNations • Nation Per Capita • Congo, Rep. of $300 • Zimbabwe $500 • Liberia $500 • Somalia $600 • Ethiopia $700 • Niger $700 • Cen. African Rep. $700 • Gambia, The $800 • Sierra Leone $800 • Malawi $800 GDP Per Capita [in 1992 dollars] $15,931 1967 $6,538 1929

  19. GDP – measures legal production in U.S. in one year. To Be or Not To Be Counted in GDP What 8 Things Do Not Count In GDP

  20. What Eight Things Do Not Count In GDP? 1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers.

  21. GDP - what is not counted [#2] 2. 2nd Hand Sales – no current production. A. 1957 Chevy bought in 2007 This falls under the rule of “Do Not Double Count”. 57 Chevy [Gas was 30¢ gallon.] Salesman [It has not been produced again in 1963 & would not count.] The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 09. They also have not been produced again. Salesman’s commission would count. You are buying his services. Shoe salesman

  22. The next two slides are “Nonproduction Transactions”[ just “Financial Transactions”] They include:3. Stock Market Transactions 4. Public & Private Transfer Payments

  23. GDP - what is not counted [#3] 3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production. Ex: If 100 shares of Dell stock is bought Buying stock is not buying a product but buying ownership of the firm. Buying bonds is making a loan. I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another [swapping bits of paper]

  24. “Now that I’ve gotten my welfare check, I can get an iPhone 3G” GDP – what is not counted [#4]. 4. A. Public Transfer Payments–welfare, unemployment, social security. [There is nocontribution to final production] B. Private Transfer Payments, like your parents giving you $250 cash for Christmas, or - $100 for making an “A” in economics. [Just transferring funds from one private individual to another private individual]

  25. 5. Unreported “Legal” Business Activity Unreported“legal”business activity [tax avoidance[does not count. This is two-thirds of the “underground economy.” Before LASIK Surgery And what if the dentist doesn’t report $400 for teeth whitening? Then he has LASIK but the surgeon doesn’t report $500 of his $3,400 bill? And what if this waitress doesn’t report all tips?

  26. 6. Illegal business activity is also not counted. Illegal business activity, becauseit goes unreported, also does not count. Making up 1/3 of the “underground economy,” also called the [“black market”] it includes murder for hire, gambling, drugs, prostitution, and money laundering. “Give me the money in your purse, but at least it will not count in GDP.” Money Laundering Making money illegally (drug money) and making it look like it was legally earned (like buying a laundry mat or car wash that deal in cash) and report it as legally earned.

  27. U.S. Underground Economy Illegal $300 B Legal $600 B Drugs $120 Self Employed$255 Bribery $35 Gambling and Loan Sharking $10 Other Legal $25 Rents & Royalties $30 Pornography $20 Fraud $30 Corporate Profits $50 Other Illegal $20 Prostitution $30 Interest $55 Stolen Goods $35 Wages and Salaries $185 What gets reported is the “Above Ground” What doesn’t get reported is the “Underground”

  28. Underground Economy [as a Percentage of GDP for Select Nations] Percentage of GDP 0 5 10 15 20 25 30 Mexico S. Korea India Italy Spain China Sweden Germany France United Kingdom Japan Switzerland United States Source: Journal of Economic Literature

  29. 7. Non-market Transactions Are Not Counted Work in your own household or volunteer workin the community does not count because there was no payment. You need to do some of this housework.

  30. 7. Non-market Transactions Are Not Counted Work in your own household or volunteer workin the community does not count because there was no payment. So, don’t marry your maid, yardman, or fitness instructor, or you will hurt GDP.

  31. 8. U.S. Corporations Producing Goods Overseas Nike in Indonesia GM in France IfU. S. corporationsproduce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S.

  32. Eight Things Not Counted in GDP [no production] • Second Hand Sales[no production] • Public/Private Transfer Payments • Purely Financial Transactions • Intermediate Goods 5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity

  33. Do These Count in GDP? -When Outback buys potatoes for baked potatoes • When a tattoo business buys ink for tattoos • When Tom Thumb buys spam to sell it to you • When the popsicle maker buys the sticks • Dell buys a computer monitor frame • Ice cream that Braums buys for sundaes • A bakery buys an apple to put in its pies • When Ford buys a windshield wiperfor a car • When hooker, J-Lo Ho, is paid $200.00

  34. Is It Counted In GDP? On the next slide, read each sentence and determine, “To Be or Not To Be Counted?” That is the question. If “Yes”, put “Y” and tell if it is “C”, “Ig”, “G”, or “X”. If “No”, put “N” and give the number from below on why it is not counted in GDP. GDP DOES NOT INCLUDE 1. Second hand sales [no current production] [but the salesman’s commission counts] 2. Public/Private transfer payments [no current production] 3. Purely financial transactions [no current production] [broker’s fees do count] 4. Intermediate goods [component of final good] 5. U.S. corporations producing overseas. 6. Non-market transactions [ household or volunteer work. Underground Economy [not reported] 7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.] 8. Unreported legal business activity [“off the books”] Example: C Y ___ ___ 1. New Toyota Tundra truck manufactured in San Antonio and sold to your economics teacherthe year it was produced. ___ ___ 2. You buy a new Wii at GameStop in 2008. Does it count if you resell it on eBay in March of 2009? 1 N

  35. THE MIX OF OUTPUT IN 1900 THE MIX OF OUTPUT IN 2000 Construction and Mining 6% Construction and Mining 9% Government 18% Manufacturing 22% Farming 2% Services 22% Farming 37% Manufacturing 20% Services 54% Government 10% A Century of GDP Changes

  36. 1. GDP is the monetary value of all final domestic goods/services produced (by/within) a nation in one year. 2. If N.F.F.I. is positive, which means U.S. profits are greater in the ROWthan foreign profits in the U.S., then (GDP/GNP) is larger. 3. Double or multiple countingcan be avoided by counting only (intermediate/final) goods. 4. (Final/Intermediate) goods and services refer to products purchased by the ultimate users. 5. Transfer payments[when you take tax money from those who are working & give it to those who are not working] (do/do not) count in GDP because they (do/do not) reflect current production. 6. (The purchase of 100 shares of Playboy stock/ The purchase of a drill press) is not consideredreal investment. 7. NDP is (GDP-indirect business taxes/GDP-Depreciation). NIA NS 1-8 8. Real GDP and nominal GDP differ because real GDP has been adjusted for changes in (depreciation/inflation).

  37. National Income Accounting

  38. [18th Ed.] National Income Accounting [GDP and its four cousins] - C + Ig + G + Xn [X-M] = GDP–Depreciation= [what is for sale] NDP+NFFIEUS–Statistical discrepancy = NI–corporate and other taxes and costs= [PIis what you canspend,save,orpay in taxes] PI – Personal Income Taxes = [DI iswhat you can spendorsave] [“Replacement capital”]

  39. If this is Pat then this is “The End”.

  40. More Fun With NIA

  41. Practice NIA (Not The Ones We Will Do In Class)

  42. [18th Edition] Personal taxes 50 -Undistributed corp. profits23 Exports 109-Social Security contrib. 40 Imports 89 Personal consumption 358 +Transfer payments41Gross private domes invest. 130 -Corporate income taxes 38Government purchases 165 -Taxes on prod. & imports 21Depreciation [capital consumption] 45 Statistical Discrepancy 8 N.F.F.I.E. in the U.S. -23 NIA #3 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. and imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 358 130 165 +20 $673 -45 $628 -23 -8 $597 -23 -38 -40 -21 +41 $516 -50 $466 ROW $100 $123 NFFI = -$23

  43. [18th Edition] Personal taxes 60 -Undistributed corp. profits16 Exports 37-Social Security contrib. 32 Imports 23 Personal consumption 312 +Transfer payments50Gross Investment 104 -Corporate income taxes 42Government purchases 110 -Taxes on prod. & imports 34N.F.F.I.E. in the U.S. -30 Depreciation[cap. Consumption] 24 Statistical Discrepancy 14 NIA #4 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. and imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 312 104 110 +14 $540 -24 $516 -30 -14 $472 -16 -42 -32 -34 +50 $398 -60 $338 A “streaker” ROW $100 $130 NFFI = -$30

  44. [18th Edition] Exports 34-Undistributed corp. profits35 Imports 32-Social Security contrib. 25 +Transfer payments 42Personal consumption 260 -Corporate Income Taxes 40Gross private domes invest. 75 -Taxes on prod. & imports 30Government purchases 100 Personal Taxes50 Depreciation [capital consumption] 15 Statistical discrepancy 30 N.F.F.I.20 NIA #5 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Capital Consumption Net Domestic Product (NDP) +Net Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production and imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 260 75 100 +2 $437 -15 $422 +20 -30 $412 -35 -40 -25 -30 +42 $324 -50 $274 ROW $120 $100 NFFI = $20

  45. [18th Edition] Exports 97 -Undistributed corp. profits16 Imports 117-Social Security contrib. 32 +Transfer payments 36Personal consumption 340 -Corporate Income Taxes 28Gross private domes invest. 116 -Taxes on prod. & imports 24Government purchases 170 Personal taxes58 Depreciation [capital consumption] 25 Statistical discrepancy 24N.F.F.I. 15 NIA #6 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Capital Consumption Net Domestic Product (NDP) +Net Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production and imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 340 116 170 -20 $606 -25 $581 +15 -24 $572 -16 -28 -32 -24 +36 $508 -58 $450 ROW $115 $100 NFFI = $15

  46. [17th Edition] Personal taxes 1,210 -Undistributed corp. profits 460 Exports 1,101 -Social Security contrib. 871 Imports 1,828Personal consumption 8,746 +Transfer payments 1,970Gross private domes invest. 2,105 -Corporate income taxes 378Government purchases 2,363 -Taxes on prod. & imports 917Depreciation [capital consumption] 1,574 Statistical Discrepancy 43 N.F.F.I.34 NIA for 2005 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Capital Consumption Net Domestic Product (NDP) +Net Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production & imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 8,746 2,105 2,363 -727 $12,487 -1,574 $10,913 34 -43 $10,904 -460 -378 -871 -917 +1,970 $10,248 -1,210 $9,038 ROW $244 $210 NFFI = 34

  47. [18th Edition] Personal taxes 1,482 -Undistributed corp. profits 344 Exports 1,625 -Social Security contrib. 979 Imports 2,333Personal consumption 9,734 +Transfer payments 2,237Gross private domes invest. 2,125 -Corporate income taxes 467Government purchases 2,690 -Taxes on prod. & imports 1,009Depreciation [capital consumption]1,687 Statistical Discrepancy 29N.F.F.I.96 NIA for 2007 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Capital Consumption Net Domestic Product (NDP) +Net Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production & imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 9,734 2,125 2,690 -708 $13,841 -1,687 $12,154 96 -29 $12,221 -344 -467 -979 -1,009 +2,237 $11,659 -1,482 $10,177 ROW $286 $190 NFFI = 96

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