Transcript CHAPTER 7_20e

7
Measuring Domestic Output and National
Income
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Assessing the Economy’s Performance
• National Income Accounting
• Assess health of economy
• Compares levels of production
• Track long run course
• Grown, constant, or declined
• Formulate policy
• Safeguard and improve economy’s health
LO1
Gross Domestic Product
• Gross Domestic Product (GDP) -Total value of final goods and
services produced in a country in a
given year. (Aggregate Output)
• As long as a company is within a
country’s border, their numbers go
into the country’s GDP (even if they
are foreign-owned).
2-3
Gross Domestic Product (GDP)
• Gross Domestic Product (GDP): Total
market value of all final goods and
services produced within a country
within a year
LO1
Gross National Product (GNP)
Total value of final goods
and services produced by
a country in a given year.
2-5
Gross Domestic Product
• Monetary measure
• Avoids multiple counting
• Excludes intermediate goods
• Counts market value of final goods
• Value added counted
LO1
Gross Domestic Product
• Intermediate Goods
• Purchased for resale
• Further processing
• Manufacturing
• Final Goods
• Purchased by end user
LO1
Gross Domestic Product
• Value added counted
• Sum of value added = GDP
LO1
Excludes Non-Production Transactions
• Excludes financial transactions
• Public transfer payments
• Private transfer payments
• Stock (and bond) market transactions
• Excludes second hand sales
LO1
Gross Domestic Product
GDP 2014: $17.4T
•Source: World Development Indicators database,
World Bank, 1 July 2015
2-10
Two Approaches to GDP
• Income approach (earnings or allocation)
• Count income derived from
•
LO2
production
Expenditure approach (output)
• Count sum of money spent buying
the final goods
Two Approaches to GDP
• GDP, output, and income all refer to
the same thing and can be used
interchangeably.
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Income or Allocations Approach
Wages
Plus
Rents
Plus
Interest
Plus
Profits
Plus
Statistical Adjustments
LO2
Expenditures Approach
LO2
Expenditures or Output Approach
Consumption Expenditures by Households (C)
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Expenditures Approach
• Personal consumption expenditures (C)
• Durable goods (3 years +, 10%)
• Nondurable goods (< 3 years, 30%)
• Services (60%)
• Spending on houses is not included
• Largest component of GDP
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses (G)
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners
LO2
Expenditures Approach
• Gross private domestic investment (Ig)
• Machinery, equipment, and tools
• All construction (includes residential)
•R & D
• Creation of music, art, film,
software, etc.
• Changes in inventories
LO2
Changes in Inventories
Changes in inventories represent the
difference between what was
produced during the year, and what
was purchased.
LO2
Positive and Negative
Changes in Inventories
LO2
Changes in Inventories
• If inventories increase, more was
produced than purchased, so the
increase in inventories must be added
to Ig and GDP. (unconsumed output)
• Vice versa if inventories fell.
LO2
Net Investment (In)
LO2
Net Investment
• Net Investment includes only added
capital during the year. (Gross Investment
minus Depreciation)
• In = Ig – Depreciation
• Depreciation (Consumption of Fixed
Capital - CFC) = amount of capital
goods used during the year.
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Net Investment
• Ig > CFC; therefore In > 0 and
economy is growing.
• Ig = CFC; therefore In = 0 and
economy is stagnant.
• Ig < CFC; therefore In < 0 and
economy is experiencing negative
growth (disinvesting).
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services (G)
Plus
Expenditures by Foreigners
LO2
Expenditures Approach
• Government purchases (G)
1. Goods and services to provide public
services
2. Publicly owned capital
3. R&D + other to increase economy
know-how
• Excludes transfer payments
LO2
Expenditures or Output Approach
Consumption Expenditures by Households
Plus
Investment Expenditures by Businesses
Plus
Government Purchases of Goods and Services
Plus
Expenditures by Foreigners (Net Exports = Xn)
LO2
Expenditures Approach
• Net exports (Xn)
• Add exported goods (X)
• Subtract imported goods (M)
• Xn = exports (X) – imports (M)
LO2
Expenditures or Output Approach
Consumption Expenditures by Households (C)
Plus
Investment Expenditures by Businesses (Ig)
Plus
Government Purchases of Goods and Services (G)
Plus
Expenditures by Foreigners (Xn)
LO2
Expenditures Approach
GDP = C+Ig+G+Xn
LO2
U.S. Economy 2012
in Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)$11,150
Compensation
Gross Private Domestic
Rents
541
Interest
440
Investment (Ig)
2,475
$ 8,612
Government Purchases (G) 3,167
Proprietor’s Income
1,225
Net Exports (Xn)
Corporate Profits
2,031
-547
Taxes on Production and
Imports
1,123
National Income
$13,972
Net Foreign Factor Income (-)
Consumption of Fixed
253
2,543
Capital (+)
Statistical Discrepancy (+)
Gross Domestic Product $ 16,245
Gross Domestic Product
-17
$ 16,245
Source: Bureau of Economic Analysis, www.bea.gov
LO2
Comparative GDP
LO2
Other National Accounts
• Net Domestic Product (NDP)
• Measures what has been added to
the stock of capital and the new
output = replacement of capital
goods used up in production of
output.
• NDP = GDP – consumption of
fixed capital
LO2
Other National Accounts
• National Income (NI)
• Includes all income earned by
U.S.-owned resources whether
they are located in the United
States or abroad
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Other National Accounts
• Personal Income (PI)
• Includes all income received
whether it was earned or unearned
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Other National Accounts
• Disposable Income (DI)
• Income that households receive
(personal income minus taxes)
• and able to spend as they desire
(consumption or savings)
DI = C + S
LO2
U.S. Income Relationships 2012
Gross Domestic Product (GDP)
Less: Consumption of Fixed Capital
Equals: Net Domestic Product (NDP)
Less: Statistical Discrepancy
Plus: Net Foreign Factor Income
Equals: National Income (NI)
Less: Taxes on Production and Imports
Less: Social Security Contributions
Less: Corporate Income Taxes
Less: Undistributed Corporate Profits
Plus: Transfer Payments
Equals: Personal Income (PI)
Less: Personal Taxes
Equals: Disposable Income (DI)
LO2
$ 16,245
2,543
$ 13,702
-17
253
$ 13,972
1,066
951
435
542
2,766
$ 13,744
1,498
$ 12,246
Nominal vs. Real GDP
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Nominal vs. Real GDP
• Nominal GDP
• Uses current prices year produced
• Real GDP
• Adjusted for inflation
• Use base year’s prices
LO3
CPI Market Basket
GDP Price Index
• Use price index to determine real
GDP
Price
Index
In Given
Year
Real
GDP
LO3
Price Good in Specific Year
=Price of Good In Base Year x 100
=
Nominal GDP
Price Index (in hundredths)
Real-World Considerations
• More complicated than the “one-good
•
•
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scenario
Assigns a “weight” to several
categories of goods and services
based on the relative proportion of
each category in total output
The U.S. GDP PI is “chain-typeannual-weights price index”
Shortcomings of GDP
• Nonmarket activities
• Leisure
• Improved product quality
• The underground economy
LO4
Underground Economy
LO4
Shortcomings of GDP
• Nonmarket activities
• Leisure
• Improved product quality
• The underground economy
• GDP and the environment
• Composition and distribution of the
•
LO4
output
Noneconomic sources of well-being