macroeconomic mcgrowhill macro ch 7 19e use this one

McGraw-Hill/Irwin

Chapter 7
Measuring
Domestic Output
and National
Income
Copyright © 2009 by The McGraw-Hill Companies, Inc. All


Chapter Objectives
•
•
•
•
•

Define and measure GDP
GDP and income relationships
The GDP price index
Nominal GDP vs. real GDP
Limitations of the GDP measure

24-2


National Income Accounting
• Bureau of Economic Analysis
compiles National Income and
Product Accounts
– Assess health of economy

– Track long run course
– Formulate policy

24-3


Gross Domestic Product
• Measure of aggregate output
• Monetary measure
• Avoid multiple counting
– Market value final goods
– Ignore intermediate goods
– Count value added
24-4


Gross Domestic Product
• Exclude financial transactions
– Public transfer payments
– Private transfer payments
– Stock (and bond) market
transactions

• Second hand sales
– Sell used car to a friend
24-5


Two Approaches to GDP
• Income approach

– Count income derived from
production
– Wages, rental income, interest
income, profit

• Expenditure approach
– Count sum of money spent buying
the final goods
– Who buys the goods?
24-6


Two Approaches to GDP
Consumption by
Households

Wages

Investment by
Businesses

Rents

+
+

Government
Purchases

+

Expenditures
By Foreigners

G
= D=
P

+
+
+
+

Interest
Profits
Statistical
Adjustments
24-7


Expenditure Approach
• Personal consumption
expenditures (C)
– Durable consumer goods
– Nondurable consumer goods
– Consumer expenditures for
services
– Domestic plus foreign produced
24-8

Expenditure Approach
• Gross private domestic
investment (I)
– Machinery, equipment, and tools
– All construction
– Changes in inventories

• Creation of new capital asset
• Noninvestment transactions
24-9


Expenditure Approach

-

Gross Investment
Depreciation
= Net Investment

Gross
Investment

Net
Investment
Depreciation

Increase
Stock of

Capital

Consumption
& Government
Spending

January 1

Year’s GDP

Stock of
Capital
December 31
24-10


Expenditure Approach
• Government purchases (G)
– Expenditures for goods and services
– Expenditures for social capital
– Excludes transfer payments

• Net exports (Xn)
– Add exported goods
– Subtract imported goods
– NX = exports - imports

• GDP = C+Ig+G+Xn

24-11

U.S. Economy 2009
In Billions
Receipts
Expenditures Approach

Allocations
Income Approach

Personal Consumption (C) $10,089

Compensation

$ 7792

Gross Private Domestic

Rents

268
788

Investment (Ig)

1628

Interest

Government Purchases (G)

2931

Proprietor’s Income

1041

Net Exports (Xn)

-392

Corporate Profits

1309

Taxes on Production and
Imports
National Income

1090
$12,288

Net Foreign Factor Income (-)

105

Statistical Discrepancy (+)

209

Consumption of Fixed
Capital (+)
Gross Domestic Product $ 14,256
LO2

Gross Domestic Product

1864
$ 14,256
7-12


Comparative GDP

LO2

7-13


Components of National Income
•
•
•
•
•

Compensation of employees
Rents
Interest
Proprietor’s income

Corporate profits
– Corporate income taxes
– Dividends
– Undistributed corporate profits

• Taxes on production and imports

24-14


Income Approach
• From national income to GDP
– Net foreign factor income
– Statistical discrepancy
– Consumption of fixed capital

• Other national accounts
– Net domestic product (NDP)
– National income (NI)
– Personal income (PI)
– Disposable income (DI)
– DI = C + S

24-15


U.S. Income Relationships 2009
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

$ 14,256
1864
$ 12,392
209
105
$ 12,288
1090
967
315
418
2528
$ 12,026
1102
$ 10,924
7-16

Class Exercise
Form groups of 4 to 5 students.
Working together, and using the
data listed on the board solve for
GDP, NPD, NI, PI and DI (use
Expenditure Approach for GDP)
Each group should assign a
spokesperson to review the
solution with the class…….
24-17


•Transfer Payments $16 (Dollars in Billions)
•Government Purchases 80
•Personal Taxes 38
•Corporate Income tax 28
•Taxes on Production and Imports 15
•Social Security contributions 8
•Undistributed corporate profits 19
•Proprietor’s income 25
•Compensation of employees 258
•Personal consumption expenditures 322
•Consumption of fixed capital 4
•Rents 10
•U.S. Exports 14
•Corporate profits 70
•Interest 12
•Dividends 23
•Imports to U.S. 17
•Gross private domestic investment 63

•Net foreign factor income 10
•Statistical Discrepancy 35

24-18


Nominal vs. Real GDP
• GDP is a dollar measure of
production
• Using dollar values creates
problems
• Nominal GDP
– Use prevailing price

• Real GDP
– Reflect changes in price
– Use base year price

24-19


GDP Price Index
• Use price index to determine real
GDP
Price
Index
In Given =
Year

Real

GDP

=

Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year

x 100

Nominal GDP
Price Index (in hundredths)
24-20


NOMINAL GDP vs. REAL GDP

Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when prices fall
• Nominal GDP
• Calculating Real GDP
(4)
(2)
(3)
Unadjusted,
(5)
(1)
Price Price Index or Nominal, Adjusted,

Units of Pizza
Year 1 =
GDP,
Or Real,
Year Output Per Unit
100
GDP
(1)x(2)

1
2
3
4
5

5
7
8
10
11

$ 10
20
25
30
28

100
200
250

-

$ 50
140
200
-

$ 50
70
80
-

24-21


Shortcomings of GDP
•
•
•
•
•
•

Nonmarket activities
Leisure
Improved product quality
The underground economy
GDP and the environment
Composition and distribution of the
output

• Noneconomic sources of well-being
24-22


Underground Economy
As a percentage of GDP, Selected
Nations, 2007
0

Mexico
South Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States

5

Percentage of GDP
10

15

20

25

30

Source: Open Assessment, E-Journal

24-23


Sources of BEA Data
• Consumption
– Census Bureau’s Retail Trade Survey
– Census Bureau’s Survey of Manufacturers
– Census Bureau’s Service Survey

• Investment
– All Consumption data sources
– Census Bureau’s Housing Starts Survey and
Housing Sales Survey
– Retail Trade Survey
– Wholesale Trade Survey
– Survey of Manufacturing
24-24


Sources of BEA Data
• Government Purchases
– Office of Personnel Management

– Construction Surveys
– Census Bureau’s Survey of
Government Finance

• Net Exports
– U.S. Customs Service
– BEA Surveys and Analysis
24-25