Transcript Document

Lesson 6-1
Measuring Total Output and Income
Measuring Total Output
Gross Domestic Product (GDP) is a number that
measures the total output of a country.
GDP is calculated by adding all consumption
spending to all investment spending to all
government spending to pending for exports
minus spending for imports
Spending for exports - spending for imports is
referred to as net exports
The formula for GDP is GPD = C + I + G + NE
Personal Consumption
The personal consumption component of GDP
measures the value of goods and services that are
purchased by households during a time period.
Consumption accounts for more than 2/3 of total
output.
In the circular flow diagram, money flows from
households to firms to pay for consumption, and
goods and services flow to households in response.
In the same circular flow diagram, money payments
flow from firms to households to buy resources such
as labor, and those resources flow to firms in
response.
Private Investment
Private investment includes the value of all
goods produced by firms during a period for
use by firms in the production of goods and
services.
Expenditures to obtain stocks or bonds are not
counted as investment. Such an expenditures
doesn't add anything to the capital stock of the
nation.
Gross private domestic investment includes three
flows that add to or maintain the nation’s capital stock.
Expenditures by business firms on new buildings,
plants, tools, and equipment that will be used in the
production of goods and services.
Expenditures on new residential housing.
Changes in business inventories.
Final Goods and Value Added
GDP is the total value of all final goods and services,
which is significantly less than the total value of all goods
and services produced during a period.
Because some goods and services are produced and
then used to make other goods and services, counting
everything produced would double count some
production. Taking only final goods prevents this.
The value-added approach counts only the amount
added in value at each stage of production.
Value added is the amount by which the value of a firm’s
products exceeds the value of the goods and services
the firm purchases from other firms
GNP: An Alternate Measure of Output
Gross National Product (GNP) is the total value of
final goods and services produced during a particular
period with factors of production owned by the
residents of a particular country.
GNP and GDP are highly correlated for most
countries because the factors owned by the residents
of a particular country are usually in that country.
GDP + net income received from abroad by residents
of a nation = GNP.
Measuring Total Income
Gross domestic income (GDI) measures the total
income generated in an economy by the production of
goods and services during a particular period.
GDP = GDI since the value of total output equals the
total income generated in producing that output.
The Components of GDI are Employee Compensation
+ Profits + Rental Income + Net Interest + Depreciation
+ Indirect Business Taxes
Depreciation is a measure of the amount of capital
that wears out or becomes obsolete during a period.
Depreciation represented 10.7 percent of GDI in
1998.
Indirect business taxes are taxes imposed on the
production or sale of goods and services or on other
business activity.
Indirect business taxes amounted to 6 percent of
GDI in 1998.
Private investment plays a crucial role in the
macroeconomy for two reasons
Private investment adds to the economy’s
capacity and shifts its production possibilities
curve outward.
Private investment is a relatively volatile
component of GDP.
Private investment accounts for about 16
percent of GDP.
Private investment is a demand placed on firms
by firms.
Private investment can be shown on the circular
flow diagram by a flow of money and goods from
firms to/from firms.
Government purchases are the sum of purchases
of goods and services from firms by government
agencies, plus the total value of output produced by
government agencies themselves during a time
period.
Government purchases make up about 17 percent
of GDP.
Government purchases are only a part of total
government spending.
Transfer payments do not require that the
recipient produce a good or service in order to
receive them.
Government transfer payments such as Social
Security, welfare, and unemployment
compensation are not counted in government
purchases.
Government transfer payments account for
roughly half of all federal government spending in
the United States.
Government purchases are represented on a
circular flow diagram as flows of money from
government to firms and goods and services from
firms to government.
Net Exports
Sales of a country’s goods and services to buyers in
the rest of the world during a particular time period
represent its exports.
Imports are purchases of foreign-produced goods
and services by a country’s residents during a period
Net exports are the difference between exports and
imports: Exports – Imports = Net Exports (X n )
Negative net exports represent a trade deficit.
Goods and services produced for export represent
roughly 11 percent of GDP.
In a circular flow diagram, net exports are spending
from the rest of the world to firms or from firms to the
rest of the world.
Trade deficits mean spending flows from firms to the
rest of the world. Trade surpluses mean spending
flows from the rest of the world to firms.