measuring domestic output, national income and the price level chapter 7 time period = 2 to 3 weeks

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Measuring Domestic Measuring Domestic Output, National Income Output, National Income and the Price Level and the Price Level Chapter 7 Chapter 7 Time period = 2 to 3 weeks Time period = 2 to 3 weeks

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Page 1: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 2: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time 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

Page 3: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 4: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 5: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 6: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 7: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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)

Page 8: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 9: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 10: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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)

Page 11: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

Expenditures ApproachExpenditures Approach

C + Ig + G + XnC + Ig + G + Xn

= GDP= GDP

Page 12: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 13: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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)

Page 14: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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)

Page 15: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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)

Page 16: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 17: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

Income ApproachIncome Approach

W + R + I + P + SA = W + R + I + P + SA = GDPGDP

Page 18: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 19: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

Income ApproachIncome Approach

RentsRents–Tenant payments Tenant payments

–Lease payments Lease payments

Page 20: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 21: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 22: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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)

Page 23: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

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

Page 24: Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks

Income ApproachIncome Approach

W + R + I + P + SA = W + R + I + P + SA = GDPGDP