micro economics chapter 07

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

•

LO1

• Assess health of economy
• Track long run course
• Formulate policy
Gross Domestic Product (GDP): Total
market value of all final goods and
services produced within a country within
a year


Gross Domestic Product

• Monetary measure
• Avoid multiple counting

• Market value final goods
• Exclude intermediate goods
• Value added counted

LO1


Gross Domestic Product

• Exclude financial transactions
• Public transfer payments
• Private transfer payments
• Stock (and bond) market
•

LO1

transactions
Exclude second hand sales


Circular Flow
RESOURCE
MARKET
•Households sell
•Businesses buy

BUSINESSES
• buy
resources

• sell products

HOUSEHOLDS
• sell
resources
• buy products

PRODUCT
MARKET
•Businesses sell
•Households buy

LO1


Circular Flow Revisited

LO2


Two Approaches to GDP

• Income approach
• Count income derived from
•

LO2

production
Expenditure approach

• 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 Approach

• Personal consumption expenditures

•
LO2

(C)
• Durable goods
• Nondurable goods
• Services
• Spending on houses is not included
Largest component of GDP


Expenditures Approach

• Gross private domestic investment (Ig)
• Machinery, equipment, and tools
• All construction
• 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


Changes in Inventories

• If inventories increase, more was
produced than purchased, so the
increase in inventories must be added
to Ig and GDP.

• Vice versa if inventories fell.

LO2


Net Investment

• Net Investment includes only added capital
during the year.
• In = Ig – Depreciation
• Consumption of Fixed Capital (Depreciation) –
amount of capital
goods used during the year.

LO2


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.

LO2


Expenditures Approach

• Government purchases (G)
• Goods and services
• Publicly owned capital
• Excludes transfer payments
• Net exports (Xn)
• Add exported goods
• Subtract imported goods

• Xn = exports - imports
• GDP = C+Ig+G+Xn
LO2


U.S. Economy 2015
in Billions
Receipts
Expenditures Approach

Allocations
Income Approach

Personal Consumption (C)$12,272

Compensation

Gross Private Domestic

Rents

657

Interest

524

Investment (Ig)

3,021

Government Purchases (G) 3,183
-529
Net Exports (Xn)

$ 9,655

Proprietor’s Income

1,388

Corporate Profits

2,009

Taxes on Production and
Imports

1,302

National Income

$15,535

Net Foreign Factor Income (-)
Consumption of Fixed

214
2,821

Capital (+)
Statistical Discrepancy (+)
Gross Domestic Product $ 17,947

Gross Domestic Product

-195
$ 17,947

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
•

LO2

the stock of capital and the new
output
National Income (NI)
• Includes all income earned by

U.S.-owned resources whether
they are located in the United
States or abroad


Other National Accounts

• Personal Income (PI)
• Includes all income received
•

LO2

whether it was earned or unearned
Disposable Income (DI)
• Income that households receive
and able to spend as they desire
DI = C + S


U.S. Income Relationships 2015
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

$ 17,947
2,821
$ 15,126
-195
214
$ 15,535
1,177
1,203
530
591
3,306
$ 15,340
1,945
$ 13,395


Nominal vs. Real GDP

• Nominal GDP
• Uses current prices
• Real GDP
• Adjusted for inflation
• Use base year’s prices

LO3


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)


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

LO4


Underground Economy

LO4