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Chapter 7

Chapter 7. Measuring Domestic Output, National Income & Price Level. Assessing Economic Performance. National Income Accounting is done by the Dept of Commerce (Bureau of Economic Analysis) Consistent indicators which provide policy makers the information to manage the economy.

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Chapter 7

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  1. Chapter 7 Measuring Domestic Output, National Income & Price Level

  2. Assessing Economic Performance • National Income Accounting is done by the Dept of Commerce (Bureau of Economic Analysis) • Consistent indicators which provide policy makers the information to manage the economy

  3. GDP or Aggregate Output • GDP – total of goods and services produced in a given year • Monetary measure – Allows us to compare/ contrast different years • Only includes final products, cannot count products twice when figuring GDP • Excludes public transfers, private transfers, and stock market transactions

  4. Continuing w/ GDP • What is spent on a product equates to income for the people that helped to produce and sell that product • Income is crucial to the National Accounting Process • Two ways to examine – Expenditures & Income

  5. Expenditures Approach • Personal Consumption Expenditures (C) • Includes all purchases of durable, non-durable, and services by household • Gross Private Domestic Investment (Ig)– includes final purchase of capital equipment, construction, and changes in inventory

  6. Government Purchases (G) • All spending at all levels • All purchases of resources, mainly labor • Excludes transfer payments

  7. Net Exports (Xn) • Determining the amount of goods shipped overseas is also important to figuring GDP. • Xn = Exports (X) minus imports (n)

  8. GDP Summarized GDP = C + Ig + G + Xn

  9. Income Approach • Compensation or Wages • Rents • Interest Accumulated • Proprietors Income or Profits (Unincorporated Businesses) • Corporate Profits (Less taxes & dividends paid to shareholders) • The sum of these = National Income

  10. Modifications to Income Approach • In order to correctly arrive @ GDP we must also figure in Indirect Business Taxes, Net Consumption of Fixed Capital (Depreciation), and Net Foreign Factor Income • National Income (All Americans) vs. Domestic Income (All income paid within the U.S.)

  11. Other National Accounts • Net Domestic Product (NDP) = GDP - depreciation • National Income (NI) = NDP – Net Foreign Factor ($ earned in the USA by non-citizens) – Indirect taxes (fees, etc.)

  12. Figuring Personal Income • PI – Income received by households • National Income needs to be adjusted for taxes not received, and conversely, for income not accounted for by the National Income figure • In simple, subtract all taxes and add all transfer payments to National Income

  13. National Accounts Continued • Disposable Income (DI) = C + S (Savings) • Make sure you understand page and are familiar with the Circular Flow Model (Pg. 126)

  14. Real vs. Nominal GDP • Nominal – not adjusted for inflation • Real – After inflationary adjustments • Rates of inflation are inconsistent and this is why we must make these adjustments

  15. Price Indexes Used in figuring Real GDP by accounting for any inflation Consumer Price Index – 300 goods & services purchased by a typical consumer

  16. GDP and its Shortcomings Non–Market Transactions Leisure Improved Product Quality The Underground Economy GDP & The Environment

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