GDP

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Chapter 24
Measuring
Domestic Output
and National
Income
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
•
•
•
•
•
Define and measure GDP
GDP and income relationships
The GDP price index
Nominal GDP vs. real GDP
Limitations of the GDP measure
24-2
National Income Accounting
• Bureau of Economic Analysis
compiles National Income and
Product Accounts
–Assess health of economy
–Track long run course
–Formulate policy
24-3
Gross Domestic Product
• Measure of aggregate output
• Monetary measure
• Avoid multiple counting
–Market value final goods
–Ignore intermediate goods
–Count value added
24-4
Gross Domestic Product
• Exclude financial transactions
–Public transfer payments
–Private transfer payments
–Stock (and bond) market
transactions
• Second hand sales
–Sell used car to a friend
24-5
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?
24-6
Two Approaches to GDP
Consumption by
Households
Wages
Investment by
Businesses
Rents
+
+
Government
Purchases
+
Expenditures
By Foreigners
G
= D=
P
+
+
+
+
Interest
Profits
Statistical
Adjustments
24-7
Expenditure Approach
• Personal consumption
expenditures (C)
–Durable consumer goods
–Nondurable consumer goods
–Consumer expenditures for
services
–Domestic plus foreign produced
24-8
Expenditure Approach
• Gross private domestic
investment (I)
–Machinery, equipment, and tools
–All construction
–Changes in inventories
• Creation of new capital asset
• Noninvestment transactions
24-9
Expenditure Approach
-
Gross Investment
Depreciation
= Net Investment
Gross
Investment
Net
Investment
Depreciation
Increase
Stock of
Capital
Consumption
& Government
Spending
Stock of
Capital
January 1
Year’s GDP
December 31
24-10
Expenditure Approach
• Government purchases (G)
– Expenditures for goods and services
– Expenditures for social capital
– Excludes transfer payments
• Net exports (Xn)
– Add exported goods
– Subtract imported goods
– NX = exports - imports
• GDP = C+Ig+G+Xn
24-11
U.S. Economy 2007
in Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C) $ 9734
Compensation
Gross Private Domestic
Rents
Investment (Ig)
2125
$ 7874
65
Interest
603
Government Purchases (G) 2690
Proprietor’s Income
1043
Net Exports (Xn)
Corporate Profits
1627
-708
Taxes on Production and
Imports
National Income
1009
$12,221
Net Foreign Factor Income (-)
96
Statistical Discrepancy (+)
29
Consumption of Fixed
Capital (+)
Gross Domestic Product $ 13,841
Gross Domestic Product
1687
$ 13,841
24-12
Comparative GDP
Selected Nations GDPs, 2007
GDP in Trillions of Dollars
0
1
2
3
4
5
6
7
8
9
10
12
13
United States
Japan
Germany
China
United Kingdom
France
Italy
Canada
Spain
Brazil
Russia
India
South Korea
Mexico
Australia
Source: World Bank
24-13
Components of National Income
•
•
•
•
•
Compensation of employees
Rents
Interest
Proprietor’s income
Corporate profits
– Corporate income taxes
– Dividends
– Undistributed corporate profits
• Taxes on production and imports
24-14
Income Approach
• From national income to GDP
– 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)
– DI = C + S
24-15
U.S. Income Relationships 2007
Gross Domestic Product (GDP)
Less: Consumption of Fixed Capital
Equals: Net Domestic Product (NDP)
Less: Statistical Discrepancy
Plus: Net Foreign Factor Income
Equals: National Income (NI)
Less: Taxes on Production and Imports
Less: Social Security Contributions
Less: Corporate Income Taxes
Less: Undistributed Corporate Profits
Plus: Transfer Payments
Equals: Personal Income (PI)
Less: Personal Taxes
Equals: Disposable Income (DI)
$ 13,841
1687
$ 12,154
29
96
$ 12,221
1009
979
467
344
2237
$ 11,659
1482
$ 10,177
24-16
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
24-17
GDP Price Index
• Use price index to determine real
GDP
Price
Index
In Given
Year
Real
GDP
=
=
Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year
x 100
Nominal GDP
Price Index (in hundredths)
24-18
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
24-19
Underground Economy
As a percentage of GDP, Selected
Nations, 2007
Percentage of GDP
0
Mexico
South Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States
5
10
15
20
25
30
Source: Open Assessment, E-Journal
24-20
Sources of BEA Data
• Consumption
– Census Bureau’s Retail Trade Survey
– Census Bureau’s Survey of Manufacturers
– Census Bureau’s Service Survey
• Investment
– All Consumption data sources
– Census Bureau’s Housing Starts Survey and
Housing Sales Survey
– Retail Trade Survey
– Wholesale Trade Survey
– Survey of Manufacturing
24-21
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
24-22
Key Terms
• national income
accounting
• gross domestic product
• intermediate goods
• final goods
• multiple counting
• value added
• expenditures approach
• income approach
• personal consumption
expenditures
• gross and net private
domestic investment
• government
purchases
• net exports
• taxes on production
and imports
• national income
• consumption of fixed
capital
• net domestic product
• personal income
• disposable income
• nominal GDP
• real GDP
• price index
24-23
Next Chapter Preview…
Economic Growth
24-24
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