Transcript unit 2 - Mr Clotzman

C H A P T E R 18: Measuring National Output and National Income
UNIT II. MACROECONOMIC ISSUES AND
MEASURING ECONOMIC PERFORMANCE
• Topic A: Measuring Domestic Output and
National Income Gross Domestic Product
• Includes: National income accounts,
Circular flow, Gross Domestic Product;
Components of gross domestic product;
Real versus nominal gross domestic
product
• Reading : Chapter 6, page 106-121
• Graphs: U.S. domestic output and the
flows of expenditure and income (p155)
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
National Income
and Product Accounts
• National income and product
accounts are data collected and
published by the government
describing the various components
of national income and output in the
economy.
• The U.S. Department of Commerce
is responsible for producing and
maintaining the “National Income
and Product Accounts” that keep
track of GDP.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Gross Domestic Product
• Gross domestic product
(GDP) is the total market value
of all final goods and services
produced within a given period
by factors of production located
within a country.
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C H A P T E R 18: Measuring National Output and National Income
Final Goods and Services
• The term final goods and
services in GDP refers to
goods and services produced
for final use.
• Intermediate goods are
goods produced by one firm for
use in further processing by
another firm.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Exclusions of Used Goods
and Paper Transactions
• GDP ignores all transactions in
which money or goods change
hands but in which no new
goods and services are
produced.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Exclusion of Output Produced Abroad
by Domestically Owned Factors of Production
• GDP is the value of output produced
by factors of production located
within a country. Output produced
by a country’s citizens, regardless of
where the output is produced, is
measured by gross national
product (GNP).
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Calculating GDP
GDP can be computed in two ways:
• The expenditure approach: A method of
computing GDP that measures the total
amount spent on all final goods during a
given period.
• The income approach: A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods.
(In the interest of time, we’ll focus only on the
expenditure approach.)
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
The Expenditure Approach
Expenditure categories:
• Personal consumption
expenditures (C)—household
spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
The Expenditure Approach
Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
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C H A P T E R 18: Measuring National Output and National Income
The Expenditure Approach
• The expenditure approach calculates
GDP by adding together the four
components of spending. In
equation form:
GDP  C  I  G  ( EX  IM )
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C H A P T E R 18: Measuring National Output and National Income
Components of GDP, 1999:
The Expenditure Approach
Components of GDP, 2002: The Expenditure Approach
Personal consumption expenditures (C)
Durable goods
Nondurable goods
Services
Gross private domestic investment (l)
Nonresidential
Residential
Change in business inventories
Government consumption and gross investment (G)
Federal
State and local
Net exports (EX – IM)
Exports (EX)
Imports (IM)
Total gross domestic product (GDP)
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
7303.7
871.9
2115.0
4316.8
1543.2
1117.4
471.9
3.9
1972.9
693.7
1279.2
 423.6
1014.9
1438.5
10446.2
69.9
8.3
20.2
41.3
14.8
10.7
4.5
0
18.9
6.6
12.2
 4.1
9.8
13.8
100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Personal Consumption Expenditures
• Personal consumption expenditures (C)
are expenditures by consumers on the
following:
• Durable goods: Goods that last a relatively
long time, such as cars and appliances.
• Nondurable goods: Goods that are used up
fairly quickly, such as food and clothing.
• Services: Things that do not involve the
production of physical things, such as legal
services, medical services, and education.
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C H A P T E R 18: Measuring National Output and National Income
Gross Private Domestic Investment
• Investment refers to the purchase of
new capital.
• Total investment by the private
sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private sector.
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C H A P T E R 18: Measuring National Output and National Income
Gross Private Domestic Investment
• Nonresidential investment includes
expenditures by firms for machines, tools,
plants, and so on.
• Residential investment includes
expenditures by households and firms on
new houses and apartment buildings.
• Change in inventories computes the
amount by which firms’ inventories change
during a given period. Inventories are the
goods that firms produce now but intend to
sell later.
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C H A P T E R 18: Measuring National Output and National Income
Gross Private Domestic Investment
• Remember that GDP is not the
market value of total sales during a
period—it is the market value of total
production.
• The relationship between total
production and total sales is:
GDP = final sales + change in business inventories
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C H A P T E R 18: Measuring National Output and National Income
Gross Investment
versus Net Investment
• Gross investment is the total value of all
newly produced capital goods (plant,
equipment, housing, and inventory)
produced in a given period.
• Depreciation is the amount by which an
asset’s value falls in a given period.
• Net investment equals gross investment
minus depreciation.
capitalend of period = capitalbeginning of period + net investment
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C H A P T E R 18: Measuring National Output and National Income
Government Consumption
and Gross Investment
• Government
consumption and gross
investment (G) counts
expenditures by federal,
state, and local
governments for final
goods and services.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Net Exports
• Net exports (EX – IM) is the
difference between exports and
imports. The figure can be positive
or negative.
• Exports (EX) are sales to foreigners of
U.S.-produced goods and services.
• Imports (IM) are U.S. purchases of
goods and services from abroad).
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Nominal Versus Real GDP
• Nominal GDP is GDP measured in
current dollars, or the current prices
we pay for things. Nominal GDP
includes all the components of GDP
valued at their current prices.
• When a variable is measured in
current dollars, it is described in
nominal terms.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Calculating Real GDP
• A weight is the importance attached
to an item within a group of items.
• A base year is the year chosen for
the weights in a fixed-weight
procedure.
• A fixed-weight procedure uses
weights from a given base year.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
Calculating Real GDP
A Three-Good Economy
(1)
(2)
PRODUCTION
YEAR 1
YEAR 2
Q1
Q2
(3)
(4)
PRICE PER UNIT
YEAR 1
YEAR 2
P1
P2
(5)
(6)
(7)
(8)
GDP IN
YEAR 1
IN
YEAR 1
PRICES
P 1 x Q1
GDP IN
YEAR 2
IN
YEAR 1
PRICES
P 1 x Q2
GDP IN
YEAR 1
IN
YEAR 2
PRICES
P 2 x Q1
GDP IN
YEAR 2
IN
YEAR 2
PRICES
P 2 X Q2
Good A
6
11
$.50
$ .40
$3.00
$5.50
$2.40
$4.40
Good B
7
4
.30
1.00
2.10
1.20
7.00
4.00
Good C
10
12
.70
.90
7.00
8.40
9.00
10.80
$12.10
$15.10
$18.40
$19.20
Total
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Nominal
GDP
in year 1
Principles of Economics, 7/e
Nominal
GDP
in year 2
Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
The Problems of Fixed Weights
The use of fixed price weights to
estimate real GDP leads to problems
because it ignores:
1. Structural changes in the economy.
2. Supply shifts, which cause large
decreases in price and large
increases in quantity supplied.
3. The substitution effect of price
increases.
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C H A P T E R 18: Measuring National Output and National Income
GDP and Social Welfare
• Society is better off when crime
decreases, however, a decrease in
crime is not reflected in GDP.
• An increase in leisure is an increase
in social welfare, but not counted in
GDP.
• Nonmarket and household activities
are not counted in GDP even though
they amount to real production.
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Karl Case, Ray Fair
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C H A P T E R 18: Measuring National Output and National Income
GDP and Social Welfare
• GDP accounting rules do not adjust
for production that pollutes the
environment.
• GDP has nothing to say about the
distribution of output. Redistributive
income policies have no direct
impact on GDP.
• GDP is neutral to the kinds of goods
an economy produces.
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Principles of Economics, 7/e
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C H A P T E R 18: Measuring National Output and National Income
The Underground Economy
• The underground economy is
the part of an economy in
which transactions take place
and in which income is
generated that is unreported
and therefore not counted in
GDP.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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