measuring domestic output, national income and the price level chapter 7 time period = 2 to 3 weeks
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Measuring Domestic Output, Measuring Domestic Output, National Income and the Price National Income and the Price
LevelLevel
Chapter 7Chapter 7
Time period = 2 to 3 weeksTime period = 2 to 3 weeks
Assessing the EconomyAssessing the Economy
National income accounts serve a purpose National income accounts serve a purpose just as income statements do for a just as income statements do for a businessbusiness
Compare conditions with other countriesCompare conditions with other countries
Provides a basis for public policies to Provides a basis for public policies to improve economic performanceimprove economic performance
Gross Domestic Product (GDP)Gross Domestic Product (GDP)
GDPGDP = the total market value of all final = the total market value of all final goods and services goods and services produced produced within a within a countrycountry in one year in one year
Measured in quarters (every 3 months)Measured in quarters (every 3 months)– 11stst = January - March = January - March– 22nd nd = April - June = April - June – 33rdrd = July – September = July – September– 44thth = October - December = October - December
GDPGDP
Includes only Includes only final goodsfinal goods = g & s that are = g & s that are purchased for final use by the consumerpurchased for final use by the consumer
Does Does notnot include include intermediate goodsintermediate goods = g & = g & s that are resold or go on for further s that are resold or go on for further processing or manufacturingprocessing or manufacturing– This avoids This avoids multiple countingmultiple counting
Is the value of what has been produced, Is the value of what has been produced, not what was actually soldnot what was actually sold
GDP GDP ExcludesExcludes Nonproduction Nonproduction TransactionsTransactions
Existing assets or property that is sold or Existing assets or property that is sold or transferred, including used items, is NOT transferred, including used items, is NOT countedcounted
Public or private transfer paymentsPublic or private transfer payments
--public = SS or welfare payments--public = SS or welfare payments
--private = student allowance or alimony--private = student allowance or alimony
--sale of stocks and bonds--sale of stocks and bonds
--broker services rendered ARE counted--broker services rendered ARE counted
More Nonproduction TransactionsMore Nonproduction Transactions
Secondhand salesSecondhand sales
Unreported business activities done in Unreported business activities done in cash (ie unreported tips)cash (ie unreported tips)
Illegal activitiesIllegal activities
““Non-market” activities like volunteering or Non-market” activities like volunteering or family workfamily work
US corporation’s production in overseas US corporation’s production in overseas plantsplants
2 ways to look at GDP2 ways to look at GDPExpenditures ApproachExpenditures Approach
GDP has 4 componentsGDP has 4 components
GDP = C + Ig + G + XnGDP = C + Ig + G + Xn
C = Personal ConsumptionC = Personal Consumption – durable & nondurable finished g & s (but durable & nondurable finished g & s (but
not houses)not houses)
Expenditures ApproachExpenditures Approach
Ig = Gross Private Domestic Ig = Gross Private Domestic Investment (Gross Investment (Gross
Investment)Investment)– Purchases of machinery, equipment & Purchases of machinery, equipment &
toolstools
– Factory equipment maintenanceFactory equipment maintenance
– All construction (including residential)All construction (including residential)
– Unsold inventory of productsUnsold inventory of products
Expenditures ApproachExpenditures Approach
G = Government SpendingG = Government Spending– Government purchase of resources Government purchase of resources
(mainly labor)(mainly labor)
– Again, it excludes transfer payments like Again, it excludes transfer payments like SSSS
Expenditures ApproachExpenditures Approach
Xn = Net Exports (exports – imports)Xn = Net Exports (exports – imports)
--All spending on g & s produced in the US --All spending on g & s produced in the US must be included in the GDP, whether the must be included in the GDP, whether the purchase is made here or abroadpurchase is made here or abroad
--For decades, --For decades, XnXn has been a negative has been a negative
(= trade deficit)(= trade deficit)
Expenditures ApproachExpenditures Approach
C + Ig + G + XnC + Ig + G + Xn
= GDP= GDP
GDP to DIGDP to DI
Using the expenditure approachUsing the expenditure approach C + Ig + G + Xn = GDPC + Ig + G + Xn = GDP
C = about 67% of GDPC = about 67% of GDP
Xn = mostly negative since WWIIXn = mostly negative since WWII
Ig = In (net investment) + CFCIg = In (net investment) + CFC
GDP to DIGDP to DI
Start with Start with GDPGDP – – consumption of fixed capital consumption of fixed capital (CFC) or depreciation(CFC) or depreciation=now we have net domestic product (NDP)=now we have net domestic product (NDP)
Take Take NDPNDP – – indirect businesses taxes indirect businesses taxes (sales, (sales, excise & property taxes, licenses, duties)excise & property taxes, licenses, duties)Also Also –– net foreign factor income net foreign factor income
(add US income earned overseas and sent back (add US income earned overseas and sent back home and subtract foreigner’s income earned in the home and subtract foreigner’s income earned in the US and sent back home as remittances)US and sent back home as remittances)
=now we have National Income (NI)=now we have National Income (NI)
GDP to DIGDP to DITake Take NINI and subtract and subtract-- social security contribution (a tax) social security contribution (a tax)-- corporate income taxes paid corporate income taxes paid- - undistributed corporate profitsundistributed corporate profits(total profits – corporate taxes = profits (total profits – corporate taxes = profits
not given out as dividends but kept fornot given out as dividends but kept for reinvestment at a later date)reinvestment at a later date)
++ back transfer payments back transfer payments (SS payments, unemployment (SS payments, unemployment compensation, disability pay)compensation, disability pay)
Now we have Personal Income (PI)Now we have Personal Income (PI)
GDP to DIGDP to DI
Take Take PIPI and and –– personal income taxes personal income taxes
Now we have DISPOSABLE INCOME (Now we have DISPOSABLE INCOME (DIDI))
Disposable income can only be used for Disposable income can only be used for consumption or savings (C or S)consumption or savings (C or S)
GDP to DIGDP to DI
GDP toGDP to
NDP toNDP to
NI toNI to
PI toPI to
DI toDI to
C and SC and S
Income ApproachIncome Approach
W + R + I + P + SA = W + R + I + P + SA = GDPGDP
Income Approach to GDPIncome Approach to GDP
Compensation of Employees Compensation of Employees
(Wages)(Wages)--largest part of the GDP--largest part of the GDP
--includes wages, salaries, fringe --includes wages, salaries, fringe benefits, health care and pension benefits, health care and pension plansplans
Income ApproachIncome Approach
RentsRents–Tenant payments Tenant payments
–Lease payments Lease payments
Income ApproachIncome Approach
InterestsInterests–Money paid by private businesses Money paid by private businesses
to suppliers of money capitalto suppliers of money capital
– Includes interests households Includes interests households receive on savings and bond receive on savings and bond paymentspayments
Income ApproachIncome Approach
Proprietor’s Income and corporate Proprietor’s Income and corporate
profits profits (Profits)(Profits)–Net income of unincorporated Net income of unincorporated
businessesbusinesses
–Corporate profits: corporate income Corporate profits: corporate income tax, dividends and undistributed tax, dividends and undistributed corporate profitscorporate profits
Income ApproachIncome Approach
Statistical AdjustmentsStatistical Adjustments– Indirect business taxes Indirect business taxes
General sales tax, business property tax, license General sales tax, business property tax, license fees and custom dutiesfees and custom duties
– Consumption of Fixed Capital (CFC) Consumption of Fixed Capital (CFC) (depreciation)(depreciation)
Statistical Adjustment continuedStatistical Adjustment continued
–Net foreign factor income in USNet foreign factor income in USIncome of foreign nationals must Income of foreign nationals must be +be +
Income of American income Income of American income earned abroad must be –earned abroad must be ––GDP measures the output of GDP measures the output of
geographical US regardless of the geographical US regardless of the nationality of the contributorsnationality of the contributors
Income ApproachIncome Approach
W + R + I + P + SA = W + R + I + P + SA = GDPGDP