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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Measuring Domestic Output and National Income

• National Income Accounting measures economy’s overall performance

• Bureau of Economic Analysis compiles National Income and Product Accounts

• Assess health of economy

• Track long run course

• Formulate policy

Assessing the Economy’s Performance

LO1

Gross Domestic Product

• Measure of aggregate output

• Monetary measure

• Avoid multiple counting

• Market value final goods

• Ignore intermediate goods

• Count value added

LO1

Gross Domestic Product

(1)

Stage of Production

(2)

Sales Value

Of Materials

Or Product$ 0

Firm A, sheep ranch 120

Firm B, wool producer 180

Firm C, coat manufacturer 220

Firm D, clothing manufacturer 270

Firm E, retail clothier 350

Total Sales Value $1140

Value Added (total income)

(3)

Value

Added

]--------$120 (= $120 - $ 0)

]-------- 60 (= 180 - 120)

]-------- 40 (= 220 - 180)

]-------- 50 (= 270- 220)

]-------- 80 (= 350 – 270)

$350

LO1

Gross Domestic Product

• Exclude financial transactions

• Public transfer payments

• Private transfer payments

• Stock (and bond) market transactions

• Exclude second hand sales

• Sell used car to a friend

LO1

Two Approaches to GDP

• Income approach

• Count income derived from production

• Wages, rental income, interest income, profit

• Expenditure approach

• Count sum of money spent buying the final goods

• Who buys the goods?LO2

GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

+

+

+++

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

Two Approaches to GDPExpenditures or

Output ApproachIncome or

Allocations Approach

LO2

Expenditures Approach

• Personal consumption expenditures (C)

• Durable consumer goods

• Nondurable consumer goods

• Consumer expenditures for services

• Domestic plus foreign goods produced

LO2

Expenditures Approach

• Gross private domestic investment (Ig)

• Machinery, equipment, and tools

• All construction

• Changes in inventories

• Creation of new capital assets

• Noninvestment transactions excluded

LO2

Expenditures Approach

January 1 Year’s GDP December 31

Consumption& Government

Spending

Depreciation

NetInvestment

GrossInvestment

Stock ofCapital

Increase

Stock ofCapital

Gross InvestmentDepreciationNet Investment

-=

LO2

Expenditures Approach

• Government purchases (G)• Expenditures for goods and services

• Expenditures for publicly owned capital

• Excludes transfer payments

• Net exports (Xn)

• Add exported goods

• Subtract imported goods

• Xn = exports – imports

• GDP = C + Ig + G + XnLO2

Compensation

Rents

Interest

Proprietor’s Income

Corporate Profits

Taxes on Production and

Imports

National Income

Net Foreign Factor Income (-)

Statistical Discrepancy (+)

Consumption of Fixed

Capital (+)

Gross Domestic Product

$ 7792

268

788

1041

1309

1090

$12,288

105

209

1864

$ 14,256

Personal Consumption (C)

Gross Private Domestic

Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Gross Domestic Product

In Billions ReceiptsExpenditures Approach

AllocationsIncome Approach

$10,089

1628

2931

-392

$ 14,256

U.S. Economy 2009

LO2

Comparative GDP

LO2

The Income Approach

• Compensation of employees

• Rents

• Interest

• Proprietor’s income

• Corporate profits

• Corporate income taxes

• Dividends

• Undistributed corporate profits

• Taxes on production and importsLO2

The Income Approach

• From national income to GDP

• Subtract net foreign factor income

• Statistical discrepancy

• Consumption of fixed capital

• Other national accounts

• Net domestic product (NDP)

• National income (NI)

• Personal income (PI)

• Disposable income (DI)LO2

U.S. Income Relationships 2009

Gross Domestic Product (GDP)Less: Consumption of Fixed CapitalEquals: Net Domestic Product (NDP)Less: Statistical DiscrepancyPlus: Net Foreign Factor IncomeEquals: National Income (NI)Less: Taxes on Production and ImportsLess: Social Security ContributionsLess: Corporate Income TaxesLess: Undistributed Corporate ProfitsPlus: Transfer PaymentsEquals: Personal Income (PI)Less: Personal TaxesEquals: Disposable Income (DI)

$ 14,2561864

$ 12,392209105

$ 12,2881090

967315418

2528$ 12,026

1102$ 10,924

LO2

Circular Flow Revisited

LO2

Nominal vs. Real GDP

• GDP is a dollar measure of production

• Using dollar values creates problems

• Nominal GDP

• Use prevailing price

• Real GDP

• Reflect changes in price

• Use base year price

LO3

GDP Price Index

• Use price index to determine real GDP

PriceIndexIn GivenYear

= x100Price of Market Basket

In Specific Year

Price of Same BasketIn Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

LO3

GDP Price Index

• Calculating Real GDP (Base Year = Yr 1)

Year

(1)

Units of

Output

(2)

Price of

Pizza

Per Unit

(3)

Price Index

(Year 1 = 100)

(4) Unadjusted, or Nominal,

GDP

(1) X (2)

(5)

Adjusted, or

Real, GDP

1 5 $10 100 $ 50 $50

2 7 20 200 140 70

3 8 25 250 200 80

4 10 30 --- --- ---

5 11 28 --- --- ---

LO3

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

Underground Economy

LO4

Sources of BEA Data

• Consumption

• The U.S. Census Bureau’s Retail Trade Survey

• The U.S. Census Bureau’s Survey of Manufacturers

• The U.S. Census Bureau’s Service Survey

• Industry Trade Sources

LO4

Sources of BEA Data

• Investment

• All consumption data sources

• The U.S. Census Bureau’s Housing Starts Survey and Housing Sales Survey

• Retail Trade Survey

• Wholesale Trade Survey

• Survey of Manufacturing

LO4

Sources of BEA Data

• Government Purchases

• Office of Personnel Management

• Construction Surveys

• Census Bureau’s Survey of Government Finance

• Net Exports

• U.S. Customs Service

• BEA Surveys and Analysis

LO4