Measuring
Domestic
Output,
and National
Income
7-1
Assessing the Economy’s
Performance
National Income Accounting:
•Health of the Economy
•Comparisons Over Time
•Formulation of Public Policy
7-2
National Income accounting:
measuring overall performance
of the economy
√ The idea was created by Simon Kuznets (1901-1985)
beginning in 1930 shortly after the beginning of the
Great Depression. He received the Nobel Prize in
Economics in 1971 for his effort.
√ The tools of collection of the data were developed by
the team led by Dr. Kuznets.
√ The Bureau of Economic Analysis (part of the
Commerce Department) compiles the numbers
(http://www.bea.gov/).
7-3
GROSS DOMESTIC PRODUCT
Defining…
Market Value of the total
goods and services
produced within the
boundaries of the US
whether by Americans or
foreigners in one year.
7-4
GROSS DOMESTIC PRODUCT
• uses monetary measure
√ attach a “price tag” to products
produced
√ use market value of FINAL goods
and services
• avoid multiple counting√ ignore transactions involving
intermediate goods.
7-5
GROSS DOMESTIC PRODUCT
• Excludes Non-productive Transactions
• Financial Transactions
•Public Transfer Payments
•Private Transfer Payments
•Security Transactions
• Secondhand Sales
7-6
GROSS DOMESTIC PRODUCT
Expenditures Approach
Consumption
by Households
Wages
+
Expenditures
+
Rents
+
Interest
+
Profits
+
Statistical
by Foreigners
Adjustments
+
Investment
G
by Businesses
=
=
D
+
Government
P
Purchases
7-7
Income Approach
GDP = C + G + Ig + Xn
Consumption Spending
Government Spending
Investment Spending
Net Export Spending
7-8
C for Consumption Spending
Largest portion of GDP — about 65%
√ Non durable consumption
(less than 3 yrs use)
√ Durables consumption
(more than 3 yrs use)
√ Services
7-9
G for Government Spending
Federal Spending
State and Local Spending
7 - 10
Ig for Investment Spending
1. new residential construction
2. new commercial construction
3. tools and machines
4. change in business
inventories
7 - 11
Gross Investment
— Depreciation
= Net Investment
Gross
Investment
Stock of
Capital
January 1
7 - 12
Net
Investment
Depreciation
Consumption
and
Government
Spending
Increased
Stock of
Capital
Year’s GDP December 31
Xn for Net Export Spending
Xn = Exports-Imports
√ Exports (goods and services from
America purchased by citizens of other
countries.
√ Imports (goods and services from
other countries purchased by American
citizens)
7 - 13
GLOBAL PERSPECTIVE
Comparative GDPs in Trillions, 2001
0
7 - 14
United States
Japan
Germany
United
Kingdom
France
China
Italy
Canada
Mexico
Spain
Brazil
India
Korea, Rep.
Netherlands
Australia
1
2
3
4
5
6
7
8
9
10
Source: World Bank
•
•
•
•
•
THE INCOME APPROACH
Compensation of Employees
Rents
Interest
Proprietors’ Incomes
Corporate Profits
• Corporate Income Taxes
• Dividends
• Undistributed Corporate Profits
7 - 15
THE INCOME APPROACH
From National Income to GDP
From National Income, subtract:
• Indirect Business Taxes
• Consumption of Fixed Capital
(Depreciation)
• Net Foreign Factor Income
7 - 16
Net Domestic Product
By subtracting DEPRECIATION
or Consumption of Fixed Capital
from the GDP, a figure for the true
amount of new goods and services
can be determined.
7 - 17
Personal Income
Subtracting losses to income (Social
Security contribution, corporate
profits and retained earnings) and
adding a source of income (transfer
payments) to the National Income, a
figure is determined that shows the
personal income available to the
nation.
7 - 18
Disposable Income
By subtracting from Personal Income,
the dollars lost to taxes, we have the
Disposable Income.
This is the “bottom” line of national
income accounting.
This figure of Disposable Income
gives us the funds available for
spending and/or saving.
7 - 19
U.S. GDP, NDP, NI, PI, & DI, 2002
Gross Domestic Product
Consumption of fixed capital
$10,446
-1,393
(GDP)
(NDP)
Net Domestic Product
Net foreign factor income earned
in the U.S.
Indirect business taxes
$9,053
National Income
Social security contributions
Corporate income taxes
Undistributed corporate profits
Transfer payments
$8,348
-748
-213
-141
+1,683
(NI)
Personal Income
Personal Taxes
$8,929
-1,113
(PI)
Disposable
Income
7 - 20
$7,816
(DI)
- 10
-695
NOMINAL GDP vs. REAL GDP
Nominal GDP
… reflects the current price level
of goods and services and ignores
the effect of inflation on the
growth of GDP.
… this measure is called Current
Dollar GDP.
7 - 21
NOMINAL GDP vs. REAL GDP
Real GDP
… measures the value of goods and services
adjusted for change in the price level. It will
reflect the real change in output.
… This measure is called the Constant Dollar
GDP.
… indicates what the GDP would be if the
purchasing power of the dollar has not changed
from what it was in a base year. The
government currently uses 2000 as its base year
for Real GDP measurement.
7 - 22
NOMINAL GDP vs. REAL GDP
Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when prices fall
Calculating Real GDP
(4)
(3)
(2)
(5)
Unadjusted,
(1)
Price Price Index or Nominal, Adjusted,
Year Units of Pizza
Year 1 =
Or Real,
GDP,
Output Per Unit
100
GDP
(1)x(2)
1
2
3
4
5
7 - 23
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
-
$ 50
140
200
-
$ 50
70
80
-
NOMINAL GDP vs. REAL GDP
GDP Price Index
Price Index
in a given =
year
Price of market basket
in specific year
Price of same market
basket in base year
Real GDP =
Nominal GDP
Price Index
(in hundredths)
An Alternative Method
Price Index
=
(in hundredths)
7 - 24
Nominal GDP
Real GDP
x 100
GDP Index Numbers
7 - 25
Year
GDP Index
2000
100.00
2001
102.402
2002
104.097
2003
106.003
2004 Q3
108.551