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Measuring Domestic Output and National Income

Measuring Domestic Output and National Income. National Income Accounting Assess health of economy Track long run course Formulate policy Gross Domestic Product (GDP): Total market value of all final goods and services produced within a country within a year.

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Measuring Domestic Output and National Income

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  1. Measuring Domestic Output and National Income

  2. National Income Accounting Assess health of economy Track long run course Formulate policy Gross Domestic Product (GDP): Total market value of all final goods and services produced within a country within a year Assessing the Economy’s Performance LO1

  3. Gross Domestic Product Monetary measure Avoid multiple counting Market value final goods Exclude intermediate goods Value added counted LO1

  4. Gross Domestic Product Exclude financial transactions Public transfer payments Private transfer payments Stock (and bond) market transactions Exclude second hand sales LO1

  5. Circular Flow • RESOURCE • MARKET • Households sell • Businesses buy Costs Rent, Wages, Interest, Profits Land, Labor, Capital, Entrepreneur Land, Labor, Capital, Entrepreneur • BUSINESSES • buy resources • sell products • HOUSEHOLDS • sell resources • buy products Goods and Services Goods and Services • PRODUCT • MARKET • Businesses sell • Households buy Consumption Expenditures Revenues LO1

  6. Circular Flow Revisited LO2

  7. Two Approaches to GDP Income approach Count income derived from production Expenditure approach Count sum of money spent buying the final goods LO2

  8. Two Approaches to GDP GDP, output, and income all refer to the same thing and can be used interchangeably. LO2

  9. Expenditures Approach Personal consumption expenditures (C) Durable goods Nondurable goods Services Spending on houses is not included Largest component of GDP LO2

  10. Expenditures Approach Gross private domestic investment (Ig) Machinery, equipment, and tools All construction Changes in inventories LO2

  11. Changes in Inventories Changes in inventories represent the difference between what was produced during the year, and what was purchased. LO2

  12. Changes in Inventories If inventories increase, more was produced than purchased, so the increase in inventories must be added to Ig and GDP. Vice versa if inventories fell. LO2

  13. Net Investment Net Investment includes only added capital during the year. In = Ig – Depreciation Consumption of Fixed Capital (Depreciation) – amount of capital goods used during the year. LO2

  14. Net Investment Ig > CFC; therefore In > 0 and economy is growing. Ig = CFC; therefore In = 0 and economy is stagnant. Ig < CFC; therefore In < 0 and economy is experiencing negative growth. LO2

  15. Expenditures Approach Government purchases (G) Goods and services Publicly owned capital Excludes transfer payments Net exports (Xn) Add exported goods Subtract imported goods Xn = exports - imports GDP = C+Ig+G+Xn LO2

  16. U.S. Economy 2015 $12,272 3,021 3,183 -529 $ 17,947 in Billions Receipts Expenditures Approach Allocations Income Approach Personal Consumption (C) Gross Private Domestic Investment (Ig) Government Purchases (G) Net Exports (Xn) Gross Domestic Product Compensation Rents Interest Proprietor’s Income Corporate Profits Taxes on Production and Imports National Income Net Foreign Factor Income (-) Consumption of Fixed Capital (+) Statistical Discrepancy (+) Gross Domestic Product $ 9,655 657 524 1,388 2,009 1,302 $15,535 214 2,821 -195 $ 17,947 Source: Bureau of Economic Analysis, www.bea.gov LO2

  17. Comparative GDP LO2

  18. Other National Accounts Net Domestic Product (NDP) Measures what has been added to the stock of capital and the new output National Income (NI) Includes all income earned by U.S.-owned resources whether they are located in the United States or abroad LO2

  19. Other National Accounts Personal Income (PI) Includes all income received whether it was earned or unearned Disposable Income (DI) Income that households receive and able to spend as they desire DI = C + S LO2

  20. U.S. Income Relationships 2015 $ 17,947 2,821 $ 15,126 -195 214 $ 15,535 1,177 1,203 530 591 3,306 $ 15,340 1,945 $ 13,395 Gross Domestic Product (GDP) Less: Consumption of Fixed Capital Equals: Net Domestic Product (NDP) Less: Statistical Discrepancy Plus: Net Foreign Factor Income Equals: National Income (NI) Less: Taxes on Production and Imports Less: Social Security Contributions Less: Corporate Income Taxes Less: Undistributed Corporate Profits Plus: Transfer Payments Equals: Personal Income (PI) Less: Personal Taxes Equals: Disposable Income (DI) LO2

  21. Nominal vs. Real GDP Nominal GDP Uses current prices Real GDP Adjusted for inflation Use base year’s prices LO3

  22. GDP Price Index Use price index to determine real GDP Price Good in Specific Year Price Index In Given Year = x 100 Price of Good In Base Year Nominal GDP Real GDP = Price Index (in hundredths) LO3

  23. Shortcomings of GDP Nonmarket activities Leisure Improved product quality The underground economy GDP and the environment Composition and distribution of the output Noneconomic sources of well-being LO4

  24. Underground Economy LO4

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