Transcript Gross Domestic Product Accounting

Chapter 20
Gross Domestic Product
Accounting
© 2005 Thomson
Economic Principles
The circular flow of resources,
goods, and services
The circular flow of money
The expenditure approach to
measuring GDP
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Economic Principles
The income approach to
measuring GDP
The relationship between GDP,
NDP, and national income
The limitations of GDP as a
measure of economic well-being
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Gross Domestic Product
Accounting
Circular flow of goods, services,
and resources
• The movement of goods and services from
firms to households, and of resources from
households to firms.
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EXHIBIT 1
THE CIRCULAR FLOW OF GOODS,
SERVICES, AND RESOURCES
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Exhibit 1: The Circular Flow of
Goods, Services, and Resources
1. What do households supply to
the resource market?
• Households supply their resources—labor,
capital, land, entrepreneurship—to the
firms in the resource market.
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Exhibit 1: The Circular Flow of
Goods, Services, and Resources
2. What do firms provide to
households in the product market?
• Firms provide households with goods and
services in the product market.
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Gross Domestic Product
Accounting
Circular flow of money
• The movement of income in the form of
resource payments from firms to
households, and of income in the form of
revenue from households to firms.
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EXHIBIT 2
THE CIRCULAR FLOW OF MONEY
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Exhibit 2: The Circular Flow
of Money
What do firms in the resource
market pay to households for
resources provided?
• Firms pay money in the form of wages,
interest, rent and profit to households
for resources supplied.
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Two Approaches to
Calculating GDP
• Economists calculate GDP in two
ways: the expenditure approach to
GDP and the income approach to
GDP.
• Regardless of which method is
used, the values should be
equivalent.
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The Expenditure Approach
Expenditure approach
• A method of calculating GDP that adds
all expenditures made for final goods and
services by households, firms and
government.
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The Expenditure Approach
When using the expenditure
approach to GDP, one must be
certain that only final goods and
services are counted. Otherwise,
goods may be double counted.
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The Expenditure Approach
Final goods
• Goods purchased for final use, not
for resale.
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The Expenditure Approach
Intermediate goods
• Goods used to produce other goods.
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The Expenditure Approach
Value added
• The difference between the value of a
good that a firm produces and the value of
the goods the firm uses to produce it.
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EXHIBIT 3
MARKET VALUE AND VALUE ADDED OF
GOODS PRODUCED
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Exhibit 3: Market Value and
Value Added Goods Produced
1. What is the total market value
of the wool sweater in Exhibit 3?
• The total market value is $94.
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Exhibit 3: Market Value and
Value Added Goods Produced
2. Why shouldn’t the total market
value be used when calculating
GDP?
• The total market value counts the original
resource multiple times.
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Exhibit 3: Market Value and
Value Added Goods Produced
2. Why shouldn’t the total market
value be used when calculating
GDP?
• For example, the $4 value for wool on the
sheep makes up part of the $13 value for
wool fabric and $50 value for a wool
sweater.
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The Expenditure Approach
There are four expenditure
categories of GDP:
1. Personal consumption
2. Gross private domestic investment
3. Government purchases
4. Net exports
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The Expenditure Approach
1. Personal consumption
expenditures (C)
• All goods and services bought by
households. These expenditures are grouped
into categories of durable goods, nondurable
goods, and services.
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The Expenditure Approach
1a. Durable goods
• Goods expected to last at least a year. For
example, refrigerators, automobiles, and
washing machines.
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The Expenditure Approach
1a. Durable goods
• During recessions, consumers tend to hang
on to their durable goods, so that sales of
new durable goods are relatively weak.
During times of prosperity, consumers are
more likely to discard old durables, and
sales of new durables are strong.
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The Expenditure Approach
1b. Nondurable goods
• Goods expected to last less than a year.
For example, food, clothing, gasoline and
toiletries. Households spend more on
nondurables than on durables.
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The Expenditure Approach
1c. Services
• Productive activities that are
instantaneously consumed. For example,
medical care, a lecture, and appliance
repair. Households spend more on services
than durable and nondurable goods
combined.
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The Expenditure Approach
2. Gross private domestic
investment (I)
• The purchase by firms of plant, equipment,
and inventory goods.
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The Expenditure Approach
2. Gross private domestic
investment (I)
• Plant (or new structure) and equipment
purchases may either replace worn out
plants and equipment or increase the
quantity of plants and equipment.
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The Expenditure Approach
2a. Inventory investment
• Stocks of finished goods and raw
materials that firms keep in reserve to
facilitate production and sales.
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The Expenditure Approach
3. Government purchases (G)
• All goods and services bought by
government. For example, goods such as
national defense materials, interstate
highway, and post offices, and services
such as justice and education.
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The Expenditure Approach
4. Net exports (X - M)
• An economy’s exports to other economies,
minus its imports from other economies.
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The Expenditure Approach
All final goods and services that
make up GDP, then, can be
expressed in the form:
GDP = C + I + G + (X – M).
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EXHIBIT 4
EXPENDITURE APPROACH TO 2003 GDP
($ BILLIONS)
Source: Bureau of Economic Analysis, U.S. Department of Commerce, 2003.
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Exhibit 4: Expenditure Approach
to 2003 GDP ($ billions)
1. What was the largest category
of GDP expenditure in 2003?
• The largest category was personal
consumption expenditures at $7,598.6
billion.
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Exhibit 4: Expenditure Approach
to 2003 GDP ($ billions)
2. Why was the net exports
category of expenditure negative
in 2003?
• The category was negative (-$504.6
billion) because the value of U.S. imports
was greater than the value of U.S. exports.
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The Income Approach
Income approach
• A method of calculating GDP that adds all
the incomes earned in the production of
final goods and services.
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The Income Approach
National income
• The sum of all payments made to resource
owners for the use of their resources.
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The Income Approach
The income payments are
arranged into five categories: (1)
the compensation of employees,
(2) interest, (3) corporate profit,
(4) rental income, and (5)
proprietors’ income.
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The Income Approach
The compensation of employees is
divided into two categories: wages
and salaries and supplements.
Supplements (or fringe benefits)
include such things as bonuses,
paid vacations, and contributions
to employees’ Social Security.
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The Income Approach
Corporate profit represents the
return to owners of incorporated
firms. Corporate profit is divided
into three categories—dividends,
corporate reinvestment, and
corporate taxes. All three are
included in the income approach
to GDP.
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The Income Approach
Rent is the payment for use of
property. Although most people
don’t pay themselves rent for using
their own property, the rent is still
estimated in GDP accounting. Net
rental income is total rental income
minus depreciation.
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The Income Approach
Proprietors’ income is the income
earned by unincorporated firms
for the goods and services they
produce. Proprietors’ income is
the net income after paying such
expenses as rent, utilities, and
supplies.
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EXHIBIT 5
2003 NATIONAL INCOME ($ BILLIONS)
Source: Bureau of Economic Analysis, U.S. Department of Commerce, 2003.
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Exhibit 5: 2003 National
Income ($ billions)
What was the largest category of
income in the U.S. in 2003
according to Exhibit 5?
• Compensation of employees was by far
the largest category of income at $6,094.5
billion, or 70.7 percent of the national
income.
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Bringing GDP and National
Income into Accord
GDP, according to Exhibit 4, was
$10,802.7 billion in 2003. Yet
national income, according to
Exhibit 5, was only $8,618.0 billion.
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Bringing GDP and National
Income into Accord
In order to bring the two into
accord, first gross domestic product
is converted to gross national
product. Then depreciation of
capital and indirect business taxes
are subtracted from gross national
product.
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Bringing GDP and National
Income into Accord
Gross National Product (GNP)
• The market value of all final goods and
services in an economy produced by
resources owned by people of that economy,
regardless of where the resources are
located.
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Bringing GDP and National
Income into Accord
While GDP measures location,
GNP measures ownership. For
example, the value of goods
produced by a U.S.-owned firm in
Spain are not counted in our GDP,
but are counted in our GNP.
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Bringing GDP and National
Income into Accord
Capital depreciation
• The value of existing capital stock used
up in the process of producing goods and
services.
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Bringing GDP and National
Income into Accord
Net Domestic Product (NDP)
• GDP minus capital depreciation.
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EXHIBIT 6
INFLUENCE OF CAPITAL DEPRECIATION
ON THE GROWTH RATE OF NDP
($ BILLIONS)
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Exhibit 6: Influence of Capital
Depreciation on the Growth Rate
of NDP ($ billions)
How does the rate of NDP growth
compare to the rate of GDP
growth as capital depreciation
increases in Exhibit 6?
• Regardless of the value of capital
depreciation, the rate of GDP growth
remains unchanged.
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Exhibit 6: Influence of Capital
Depreciation on the Growth Rate
of NDP ($ billions)
How does the rate of NDP growth
compare to the rate of GDP
growth as capital depreciation
increases in Exhibit 6?
• The rate of NDP growth declines, however, as
capital depreciation increases from
$900 to $1100 billion.
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Bringing GDP and National
Income into Accord
Indirect business taxes include
general sales taxes, excise taxes,
customs duties and license fees.
They are indirect because they are
taxes levied not on the firms
directly, but on the goods and
services.
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EXHIBIT 7
THE RELATIONSHIP BETWEEN GROSS
DOMESTIC PRODUCT, GROSS NATIONAL
PRODUCT, NET NATIONAL PRODUCT, AND
NATIONAL INCOME: 2003 ($ BILLIONS)
Note: Net domestic product = $8,767.7 billion. The use of NNP instead of NDP to derive national incomes conforms to the derivation of national
income used by government sources. Note also that because GDP and GNP are almost identical, NDP and NNP are almost identical.
Source: Bureau of Economic Analysis, U.S. Department of Commerce, 2003.
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Exhibit 7: The Relationship Between
GDP, GNP, Net National Product, and
National Income: 2003
How is national income derived
from gross domestic product?
• First, GDP is converted to GNP. This is
done by subtracting factor payments to the
rest of the world and adding factor
payments from the rest of the world.
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Exhibit 7: The Relationship Between
GDP, GNP, Net National Product, and
National Income: 2003
How is national income derived
from gross domestic product?
• Second, capital depreciation is subtracted
from GNP. The result is net national
product.
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Exhibit 7: The Relationship Between
GDP, GNP, Net National Product, and
National Income: 2003
How is national income derived
from gross domestic product?
• Third, indirect business taxes are
subtracted from net national product. The
result is national income.
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Personal Income and Personal
Disposable Income
Personal income
• National income, plus income received
but not earned, minus income earned but
not received.
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Personal Income and Personal
Disposable Income
Transfer payments
• Income received but not earned. For
example, government-supplied income from
retirement benefits, veteran benefits,
unemployment insurance benefits, disability
payments and subsidies to farmers.
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Personal Income and Personal
Disposable Income
Transfer payments
• The government transfers income from
taxpayers (who earned the income in the
first place) to those receiving benefits.
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Personal Income and Personal
Disposable Income
Disposable personal income
• Personal income minus direct taxes.
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How Comprehensive Is GDP?
GDP tries to measure everything
that appears on the market. Yet,
not everything produced in the
economy gets onto the market,
and some things that contribute to
our economic well-being aren’t
even produced.
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How Comprehensive Is GDP?
The value of housework is one
example of an important service
that is usually not included in
GDP. The work is only included if
it is performed by someone
outside the household, such as a
housekeeper, nanny, or cook.
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How Comprehensive Is GDP?
Underground economy
• The unreported or illegal production of
goods and services in the economy that is
not counted in GDP.
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How Comprehensive Is GDP?
Illegal unreported activities may
include drug trafficking, money
laundering, bribery, prostitution,
illegal gambling, fraud and
burglary.
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How Comprehensive Is GDP?
Tax avoidance is the main reason
why legal activities may go
unreported. Swapping services or
simply understating the value of
income earned are two ways to
avoid paying taxes.
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How Comprehensive Is GDP?
Finally, legal and illegal
immigrants may work for less
than minimum wage at off-thebooks entry-level jobs.
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How Comprehensive Is GDP?
The quality of goods and services
produced may not be included in
GDP. For example, a good may be
of higher quality, but cost less,
than a similar good. The economic
value of the improved quality
good is not recorded.
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How Comprehensive Is GDP?
The costs of environmental
damage are another factor not
taken into account in GDP.
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How Comprehensive Is GDP?
While the expense associated with
cleaning up the pollution we
create contributes to GDP, the
actual pollution created is not
subtracted from GDP.
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How Comprehensive Is GDP?
Many economists agree that
despite the exclusion of some
forms of economic value, our
measure of GDP is sufficiently
comprehensive to be a reliable
indicator of changes in the overall
performance of the economy.
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