Measuring National Output
Chapter 5
Economic goals



Economic growth
Full employment
Low inflation
90
80
70
60

An economy grows
because of increases in
available resources and
improvements in
technology.
 Economic growth is not
smooth
US
Asia
Europe
50
40
30
20
10
0
1980
2000
Output

The value of goods
and services
produced is the
single most
important measure
of the nation’s
output.
Output

Output of goods and
services is diverse,
running the gamut
 One way to
measure output is to
classify the goods
and services
produced according
to who is purchasing
output
Four Sectors of Output
 Consumption
 Business  Investment
 Government  Government
 Foreign Sector  Net exports
 Households
Gross Domestic Output (GDP)

The market value of the final goods and
services produced in the economy within
some time period, usually one quarter or one
year
 Key terms



Market value – price paid
Final goods – goods to ultimate consumer
Intermediate goods – goods used to make other
goods
Expenditure Approach
 Method
of computing GDP that sums
consumption, gross investment,
government purchases, and net
exports.
 GDP = C + I + G + NX
Consumption

Purchasing by
households
 70% of GDP
 Durable goods
 Nondurable goods
Investment

Spending now in order to increase output or
productivity later; includes spending on
capital, new housing, and changes in
business inventories
 16% of GDP
 Purchases by firms on capital such as new
factories and machines
 Consumers’ purchases of new housing, a
form of consumer capital
 The market value of change in business
inventories
Change in Inventories

Increase in
inventories: part of
firms production is
not sold, economy
slows down
 Decrease in
inventories: firm’s
production falls
short of sales,
economy speeds up
Investment

Gross investment


Net investment


The total amount of
investment
Gross investment
minus depreciation
Depreciation

Reduction in value of
an asset due to its
use

Net investment is
positive then
economy growing
 Net investment is
negative then
economy falling
Government

Federal, state and
local levels
 19% of GDP
 Purchases goods
and services
 Transfer payments
such as social
security are not
included
Net Exports




Exports – foreign
purchase of domestic
products
Imports – domestic
purchases of foreign
products
Net Exports = Exports
minus Imports
-4.6% of GDP
Income Approach

Method of computing GDP that sums various
forms of income
Compensation of employees
+
+
+
+
+
+
+
Proprietor’s income
Rental income of persons
Corporate profits
Net interest
Capital consumption allowance
Indirect business taxes
Net income of foreigners
GDP as value added
added – the difference between
the revenue and the cost of purchased
inputs.
 Value
Contrasting GDP to GNP

Gross National
Product

Differs in that the
value added to
production by
resources located
outside the US but
owned by US
citizens is counted in
GNP

GNP excludes value
added within the US
by foreign owned
resources.
Shortcomings to GDP

Underground economy

Market transactions that go unreported to
government

Household production
 Environmental issues
Measure of Economic Welfare - Tobin
Nominal Vs. Real GDP
45
40
35
30
25
20
15
10
5
0
Real
4th Qtr
3rd Qtr
Nomin
al
2nd Qtr
GDP = P X Q
 Nominal GDP –
GDP that is stated
without adjusting for
inflation
 Real GDP – the
value of GDP after
nominal GDP is
adjusted for inflation
1st Qtr

GDP Price Index
 Is
an index of prices that measures
price changes over time, linking each
year with the next.
 Real GDP = Nominal GDP X 100
GDP price index
Real GDP across countries

Nations of the world compute the value of
real GDP for their economics
 The size of a nation’s real GDP is probably
the best indicator of the size of a country’s
economy
Country
Real GDP
US
9196.4
Canada
741.6
Germany
2708
Japan
5725.5
Mexico
375.
Business Cycle
 Refers
to the expansions and
contractions in economic activity that
take place over time.
REAL GDP
Peak
Recession
Expansion
Trough
Time
Business Cycle

Expansion






Economic growth
GDP 
Income (Y) ,
C ,
GDP ,
u

Recession







Contraction
Sustained decrease
in real GDP
GDP 
Income 
C
GDP 
U
Business Cycle
Peak – highest level
of economic activity
 Full employment
 Potential GDP is
reached

Trough – lowest
level of economic
activity
 Highest level of
unemployment


Overall economic
trend is to grow
Leading Indicators
 Statistics
that are expected to change
direction before the economy of large
does, thereby indicating where the
economy is headed
 Business inventories
 Housing starts
 Durable goods production
National Income Accounting
GDP
Less: Depreciation
Net Domestic Production
-indirect business taxes
-business transfer payments
National income – payments to owners of capital
-corporate profits
-net interest
-social security taxes
Personal income =
-personal taxes
Disposable income = Consumption + Savings