Lecture Economics (6/e): Chapter 9 - Stephen L. Slavin
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Chapter 9
Gross Domestic Product
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
91
Chapter Objectives
•
•
•
•
What is GDP?
How is GDP measured?
What are the national income accounts?
What is the difference between GDP and
real GDP?
• How does our GDP compare to those of
other nations?
• How is per capita GDP calculated?
• What are the shortcomings of GDP as a
measure of national economic well
being?
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
92
What Is GDP?
• GDP is the nation’s expenditures on all
FINAL goods and services produced
during the year at market prices.
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
93
•
–
–
–
–
•
Durable goods …………$ 820
Nondurable goods …….. 2,010
Services ……………….. 3,929
Total C …………………………….$6,759
Investment
–
–
–
–
•
The Components of GDP,
2000 (in $ billions)
Consumption
Plant & Equipment …….$ 1,361
Residential Housing …… 416
Inventory change ………. 57
Total I ……………………………….1,834
Government Purchases
– Federal ………………….$ 595
– State and Local …………. .1,148
– Total G ……………………………..$1,743
•
Net Exports (Xn)
– Exports ………………….$ 1,099
– Imports ………………….. 1,466
– Xn …………………………………$ 370
•
GDP …… …………………………$9,966
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
94
•
Consumption
–
–
–
–
•
Investment
–
–
–
–
•
The Components of
GDP, 2000 (in $billions)
Durable goods …………$ 820
Nondurable goods …….. 2,010
Services ……………….. 3,929
Total C …………………………….$6,759
GDP = C + I + G + Xn
Plant & Equipment …….$ 1,361
GDP =6,759+1,834+1,743+(370)
Residential Housing …… 416
Inventory change ………. 57
GDP = 9,966
Total I ……………………………….1,834
Government Purchases
– Federal ………………….$ 595
– State and Local …………. .1,148
– Total G ……………………………..$1,743
•
Net Exports (Xn)
– Exports ………………….$ 1,099
– Imports ………………….. 1,466
– Xn …………………………………$ 370
•
GDP …… …………………………$9,966
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
95
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Households
Firms
Expenditures by Consumers, Investors, Government, and Net Exports
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
96
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Same As
Firms
Households
Expenditures by Consumers, Investors, Government, and Net Exports
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
97
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Value of what is
produced
Same As
Firms
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
98
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Flow of Income
Approach
Value of what is
produced
Same As
Firms
Expenditures
Approach
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
99
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Flow of Income
Approach
Firms
Value of what is
produced
Same As
Expenditures
Approach
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
(GDP = C + I + G + Xn )
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
910
C, I, and G as Percentages of GDP, 19792000
70
Consumption
C
60
50
40
30
Government purchases
20
G
Investment
I
10
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Consumption has consistently been between 60 and 70% of our GDP, with a slow upward
trend over this period. [C + I + G add up to more than 100% because Xn is negative.]
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
911
Global Breakdown of GDP Expenditures for Select
Countries, 2000
X n = 2.5
X n = 1.0
G =
9.6
G =
8.0
I = 19.0
I = 22.2
C = 68.9
C = 68.9
France
Germany
Xn = 2.0
G =
7.2
Xn = 6.2
G =
7.5
I = 20.3
I = 16.8
C = 70.5
C = 69.4
Italy
Sweden
Xn = Ð1.7
G =
7.4
Xn = Ð3.7
I = 17.6
G = 17.5
C = 76.7
I = 18.4
C = 67.8
United Kingdom
United States
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
912
The Flow of Income Approach
(Most Complex)
Consumption
+
Investment
+ Government Spending
+
Net Exports
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
913
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Why is NDP better than GDP?
Country
North Atlantis
GDP 500
South Atlantis
500
Depreciation 50 100
NDP 450 400
North Atlantis is better because it had a higher NDP! South Atlantis had a lower NDP
because it had to devote more of its resources to replacing worn out and obsolete
equipment. These resources could not go toward additional plant & equipment nor
could they even be used for more consumer goods.
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
914
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
Indirect business taxes and
DI (Domestic Income)
subsidies are mainly
general sales taxes on
specific items such as
gasoline, liquor and
cigarettes and subsidies
(such as government
payments to farmers).
915
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
DI (Domestic Income)
Distribution of Domestic Income (2000)
Wages, salaries & fringes ……….70.4%
Net Interest ……………………… 7.0%
Proprietor’s Income …………….. 8.8%
Corporate Profits ……………….. 12.0%
Rent …………………………….. 1.8%
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
916
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
DI (Domestic Income)
Earnings not received
+ Receipts not earned
PI (Personal Income)
Earnings not received are
almost all Social Security
taxes and corporate profits
that were not paid out as
dividends
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
917
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
DI (Domestic Income)
Earnings not received
+ Receipts not earned
PI (Personal Income)
Receipts not earned are
mainly Social Security
benefits and other
government transfer
payments, and interest
income
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
918
National Product and Income, 2000
9,966
8,717
8,282
8,002
6,990
GDP
NDP
National
Income
Personal
Income
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
Disposable
Personal
Income
919
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
DI (Domestic Income)
Earnings not received
+ Receipts not earned
PI (Personal Income)
Personal taxes are chiefly
personal income taxes
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
920
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
DI (Domestic Income)
Earnings not received
+ Receipts not earned
PI (Personal Income)
Disposable Personal Income is
ours to dispose of, to spend and
save as we see fit
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
921
The Flow of Income Approach
GDP (Gross Domestic Product)
Depreciation
NDP (Net Domestic Product)
Indirect business taxes and subsidies
DI (Domestic Income)
Earnings not received
+ Receipts not earned
The “red” indicates the three
main parts of the “Flow of
Income” approach to GDP
PI (Personal Income)
Personal taxes
DPI (Disposable Personal Income)
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
922
The Flow of Income Approach
GDP (Gross Domestic Product)
(+) Depreciation
NDP (Net Domestic Product)
(+) Indirect business taxes and subsidies
DI (Domestic Income)
(+) Earnings not received
() + Receipts not earned
PI (Personal Income)
If we start with “DPI” and
work up the signs have to
be changed!
(+) Personal taxes
DPI (Disposable Personal Income)
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
923
Two Things to Avoid when
Compiling GDP
• Multiple counting
– Only expenditures on final products – what
consumers, businesses, and government units buy
for their own use belong in GDP
• Intermediate goods are not counted
• Used goods are not counted
• Transfer payments
– Transfer payments are not payments for currently
produced goods and services
• When they are spent for final goods and services they will
go into GDP as consumer spending
• Financial transactions don’t go into GDP
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
924
The Valueadded Approach to
Measuring GDP
Production Generated Added
Farmer harvest wheat $100 $100
Miller makes into flour 200 100
Baker makes into bread 300 100
$600 $300
GDP counts only the $ value of the final
good
This is the same as the “valueadded.”
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
925
