Transcript Lecture 4

Chapter 7:
Measuring Domestic Output,
National Income, and Price
Level
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National income accounting:
Used to measure the economy’s overall
performance

It inform us about:
1. Levels of production over time
2. Performance of the economy (growing,
constant, declining)
3. Formulate economic policies

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Definitions:
Gross Domestic Product (GDP):
The annual total output of goods and
services;
“the total market value1 of all final2 goods
and services produced in a given
year3”
 Within the country
1.
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Notes:

1. Monetary measure:
- The GDP is a monetary measure:
“Price of the good × Quantity of the good”
- Count only goods sold in the market but
estimate non-market goods
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2. Avoiding multiple counting:
The GDP uses only final goods; No
intermediate goods.
Intermediate goods: goods and services
used in the production process for
other goods and services.

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
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If we count both: final goods and
intermediate goods: Double Counting
The value of final goods already
includes the value of intermediate
goods.
Example of Multiple counting
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Production Stage Sales Value
Value Added
Firm A, ranch
120
120
Firm B, wool proc. 180
60
Firm C, manufact. 220
40
Firm D, wholesale 270
50
Firm E, retail
350
80
1140
350
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
Therefore, we can avoid double
counting by only counting the “value
added”: The market value of a firm’s
output – value of the inputs bought
from others.
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
3. Count goods produced in a given
year:
GDP2011 vs. GDP2010
- Secondhand sales?
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

-
Note that GDP excludes
nonproduction transactions:
Financial transactions and 2ndhand
sales:
Public transfer payments
Private transfer payments
Stock market transactions
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1. Public transfer payments

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Social security payments
Welfare payments
The recipients contribute noting to the
production process
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2. Private transfer payments

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Parents to their children
Cash gifts
They are transfers of funds, no
production process
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3. Stock market transactions

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Buying and selling of stocks
(secondary market)
Add nothing to the production process
Payments to brokers and dealers are
included
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