Measuring Domestic Output,
National Income and the Price
Level
Chapter 7
Time period = 2 to 3 weeks
Assessing the Economy
National income accounts serve a purpose
just as income statements do for a
business
Compare conditions with other countries
Provides a basis for public policies to
improve economic performance
Gross Domestic Product (GDP)
GDP = the total market value of all final
goods and services produced within a
country in one year
Measured in quarters (every 3 months)
– 1st = January - March
– 2nd = April - June
– 3rd = July – September
– 4th = October - December
GDP
Includes only final goods = g & s that are
purchased for final use by the consumer
Does not include intermediate goods = g &
s that are resold or go on for further
processing or manufacturing
– This avoids multiple counting
Is the value of what has been produced,
not what was actually sold
GDP Excludes Nonproduction
Transactions
Existing assets or property that is sold or
transferred, including used items, is NOT
counted
Public or private transfer payments
--public = SS or welfare payments
--private = student allowance or alimony
--sale of stocks and bonds
--broker services rendered ARE counted
More Nonproduction Transactions
Secondhand sales
Unreported business activities done in
cash (ie unreported tips)
Illegal activities
“Non-market” activities like volunteering or
family work
US corporation’s production in overseas
plants
2 ways to look at GDP
Expenditures Approach
GDP has 4 components
GDP = C + Ig + G + Xn
C = Personal Consumption
– durable & nondurable finished g & s (but
not houses)
Expenditures Approach
Ig = Gross Private Domestic
Investment (Gross
Investment)
– Purchases of machinery, equipment &
tools
– Factory equipment maintenance
– All construction (including residential)
– Unsold inventory of products
Expenditures Approach
G = Government Spending
– Government purchase of resources
(mainly labor)
– Again, it excludes transfer payments like
SS
Expenditures Approach
Xn = Net Exports (exports – imports)
--All spending on g & s produced in the US
must be included in the GDP, whether the
purchase is made here or abroad
--For decades, Xn has been a negative
(= trade deficit)
Expenditures Approach
C + Ig + G + Xn
= GDP
GDP to DI
Using the expenditure approach
C + Ig + G + Xn = GDP
C = about 67% of GDP
Xn = mostly negative since WWII
Ig = In (net investment) + CFC
GDP to DI
Start with GDP – consumption of fixed capital
(CFC) or depreciation
=now we have net domestic product (NDP)
Take NDP – indirect businesses taxes (sales,
excise & property taxes, licenses, duties)
Also – net foreign factor income
(add US income earned overseas and sent back
home and subtract foreigner’s income earned in the
US and sent back home as remittances)
=now we have National Income (NI)
GDP to DI
Take NI and subtract
- social security contribution (a tax)
- corporate income taxes paid
- undistributed corporate profits
(total profits – corporate taxes = profits
not given out as dividends but kept for
reinvestment at a later date)
+ back transfer payments
(SS payments, unemployment
compensation, disability pay)
Now we have Personal Income (PI)
GDP to DI
Take PI and – personal income taxes
Now we have DISPOSABLE INCOME (DI)
Disposable income can only be used for
consumption or savings (C or S)
GDP to DI
GDP to
NDP to
NI to
PI to
DI to
C and S
Income Approach
W + R + I + P + SA =
GDP
Income Approach to GDP
Compensation of Employees
(Wages)
--largest part of the GDP
--includes wages, salaries, fringe
benefits, health care and pension
plans
Income Approach
Rents
–Tenant payments
–Lease payments
Income Approach
Interests
–Money paid by private businesses
to suppliers of money capital
–Includes interests households
receive on savings and bond
payments
Income Approach
Proprietor’s Income and corporate
profits (Profits)
–Net income of unincorporated
businesses
–Corporate profits: corporate income
tax, dividends and undistributed
corporate profits
Income Approach
Statistical Adjustments
– Indirect business taxes
General sales tax, business property tax, license
fees and custom duties
– Consumption of Fixed Capital (CFC)
(depreciation)
Statistical Adjustment continued
–Net foreign factor income in US
Income of foreign nationals must
be +
Income of American income
earned abroad must be –
–GDP measures the output of
geographical US regardless of the
nationality of the contributors
Income Approach
W + R + I + P + SA =
GDP