Chapter 6

1. Chapter 6 Measuring Total Output and Income Hossain: MSMC

2. GDP and GNP • Gross national product (GNP) is the total value of final goods and services produced during a particular period • P with factors of production owned by the residents of a particular country GNP = GDP - Income earned by Foreign Factors + Income earned by Domestic Factors Net Factor Earning from abroad = GDP +

3. Expenditure Approach to GDP • Recall, GDP is the market value of outputs (goods and services) produced in an economy (within geographic boundary) in a particular time period (typically a year) • To measure this, BEA uses a shortcut. It counts expenditures of all major spenders in the economy on • Newly produced final goods and services • That are produced in that economy and in that year • We called this Expenditure Approach to GDP

4. Expenditure Approach to GDP • This approach assumes that Expenditure automatically captures the market value • In the Expenditure Approach major spenders are grouped under four categories. Do you remember them? • Consumers or Consumption (C) • Businesses or Investment (I) • Government or Government’s Purchase (G) • ROW or Net Export (Xn) • Therefore, under Expenditure Approach, • GDP = C + I + G + Xn

5. Income Approach to GDP • Recall, someone’s Expenditure must be someone else’s Income • Therefore, if Expenditure captures total market value, Income should also capture total market value in the economy • Under Income Approach, we will count the incomes of all major income earners in the economy • We will use a new identity called GDI or Gross Domestic Income

6. Income Approach to GDP • GDI is the total income generated in an economy by the production of final goods and services during a particular time period. • The major income earners include • Employee Compensation • Profit • Rental Income • Net Interest • Depreciation • Indirect Taxes

7. GDI to GDP (2008) GDI Components GDP Components Employee Compensation:8,089.8 Consumption (C): 10,169.5 Profit: 2,226.7 Investment (I): 2,013.6 Rental Income: 63.1 Government Expenditure and Investment (G): 2,943.9 Net Interest: 903.8 Depreciation: 1,899.7 Net Export (Xn): 706.5 Indirect Taxes: 1,076.9 Total GDI: 14,260.0 Total GDP: 14,420.5 Statistical Discrepancy: 160.5 Total GDP: 14,420.5

8. GDP to DPI Start with GDP + Net Factor Earning from Abroad = GNP Depreciation Net National Product (NNP) Statistical Discrepancy National Income (NI) Income Earned, But Not Received Personal Income Personal Income Taxes Disposable Personal Income (DPI)

9. Income Earned, But Not Received • Taxes on production and imports • Social security payroll taxes • Corporate profit taxes • Retained earnings • Transfer payments

10. Measurement Problems in Real GDP • There are two measurement problems, other than those associated with adjusting for price level changes, in using real GDP to assess domestic economic performance. • Revisions • The Service Sector

11. Conceptual Problems with Real GDP • A second set of limitation or real GDP stems from problems inherent in the indicator itself. • Household Production • Underground and Illegal Production • Leisure • The GDP Accounts Ignore “Bads” (e.g. crime spending, negative externalities, environmental pollution) • More GDP cannot necessarily be equated with more human happiness.

12. International Comparisons of Real GDP and GNP • Per capita real GNP or GDP is a country’s real GNP or GDP divided by its population. • Comparing one country’s output to another presents additional challenges. • When the data suggest huge disparities in levels of GNP per capita, we do observe real differences in living standards.