CH 7
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 Total market value of all final goods and services produced within a country in one year

 What are goods?
 What are services?

 Final goods: purchased by final use by the purchaser and not for resale or manufacturing
 Intermediate goods: purchased for resale or manufacturing
 Which is counted in GDP?

1.
Use product’s final sale price
2.
Value added: market value of firm’s output less the value of inputs which it has purchased from others

 Make a list of all the final goods and services you used from the time you woke up yesterday until you went to bed last night.
 Combine all information in your group to one list, but do not repeat information.

Expenditures Approach
1.
Personal Consumption Expenditures (C)
• Represents largest category of spending
• 2/3 of all spending in the US
• Consumer Goods
• Durable
• Non-Durable
• Payment for Services
*

2. Gross Private Domestic Investment: (Ig)
 Final purchases of capital by firms
 Construction: residential and business building
 Changes in inventories: produced this year even though not sold this year
 Only private business in the nation, not abroad
 Gross = production of all investment goods
 Net (investment in added capital) = gross investment-depreciation (capital used up)

3.
Government Purchases include: (G)
 Direct purchases of consumption and capital goods
 Labor
 Excludes:
 Government transfers

 4. Net Exports (Xn): exports minus imports

 C + Ig + G + Xn = GDP

 Financial Transactions:
 Public Transfer Payments: recipients make no contribution to current production in return for these payments
 Private Transfer Payments: monetary gifts
 Security Transactions: buying and selling stocks and bonds
 Secondhand Sales: used products

 Price of Market Basket in Given Year
100
Price of Market Basket in Base Period
X
Page 123 Example

 GDP Price index
 = Nominal GDP / Price index
(decimal/hundredths form)

3
4
5
1
2
Year Units of
Output
Price Price Index (Year 1
=100)
5
7
8
10
11
$10
$20
$25
$30
$28
100
200
250
300
280
Price in Year y
100
Price in Year 1
X
Unadjusted, Nominal,
Current GDP
$50
$140
$200
$300
$308
Price in Year y X output in
Year y
Adjusted,
Real,
Constant
GDP
$50
$70
$80
Nom GDP/
Price Index (in hundredths)

 Some transactions not included in GDP
 Homemakers’ services
 Self-Repairs

 GDP does not recognize well-being produced by leisure
 Workweek: 53 hours in early 1900s  36 hours today
 Ignores “psychic income” generated by work

 GDP measures quantity, not quality

 GDP measures dollar value of goods not what these goods are (i.e., guns and encyclopedias which cost the same are evaluated equally)
 GDP ignores income distribution

 GDP should be divided by the population

 Increased production and consumption leads to more pollution

 GDP does not measure illegal activities:
 Prostitution, drugs, loan-sharking, gambling
 Underreporting income or tips to IRS

 Page 128 #1-13

1.
Compensation of Employees:
-Wages and salaries paid by businesses and government to suppliers of labor
-Wage and salary supplements (payments by employers into social insurance and pension, health and welfare funds
2.
Net Rents
-income payments received from property resources:
-gross rental minus depreciation
3.
Interests
-money-income payments from firms to suppliers of money capital

4.
Proprietors’ Income: net income of sole proprietorships and partnerships
5.
Corporate Profits:
-Corporate income tax
-Dividends
-Undistributed corporate profits
(Adjustments) add:
-Indirect business taxes: sales, excise, business property, license taxes, and custom duties
-Depreciation (consumption of fixed capital)
-Net foreign factor income: income U.S. citizens gain from supplying resources abroad and the income foreigners gain by supplying resources in the USA

 GDP minus consumption of fixed capital
 Subtract from GDP the amount of depreciation of machinery and equipment which was consumed in producing the
GDP and which had to be replaced

National Income : All income earned by
U.S. owned resources at home and abroad
1. Subtract net foreign factor income earned in the United States from NDP
-All factor income earned in the USA by foreigners and add factor income earned by US citizens abroad
2. Subtract indirect business taxes from
NDP

 All income received whether earned or unearned
 From national income:
-Subtract incomes which are earned but not received (social security contributions, corporate income taxes, undistributed corporate profits)
-Add income received but not currently earned (transfer payments)

 Personal Income
 minus personal taxes (personal income taxes, personal property taxes, and inheritance taxes)
 Income which households have to dispose of as they see fit
= consumption plus savings

Gross domestic product (GDP)…………………….$8084
Consumption of fixed capital………………-868
Net domestic product (NDP)………………….…...$7216
Net foreign factor income earned in U.S…….-21
Indirect business taxes……………………...-545
National Income (NI)……………………………….$6650
Social security contributions………………..-732
Corporate income taxes……………………..-319
Undistributed corporate profits……………...-149
Transfer payments…………………………+1424
Personal income (PI)………………………………...$6874
Personal taxes……………………………………...-987
Disposable income (DI)……………………………...$5887