Lecture Economics (18th edition): Chapter 24 - McConnell, Brue, Flynn''s

Chapter 24
Measuring
Domestic Output
and National
Income
McGraw­Hill/Irwin

        Copyright © 2009 by The McGraw­Hill Companies, Inc. All rights reserved.


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+I +G+X

24-11

U.S. Economy 2007
in Billions

Receipts
Expenditures Approach

Allocations
Income Approach

Personal Consumption (C) $ 9734
Gross Private Domestic

Compensation

$ 7874

Investment (Ig)

2125

Interest

Government Purchases (G)

2690

Proprietor’s Income

1043

Net Exports (Xn)

-708

Corporate Profits

1627

Rents

65
603

Taxes on Production and
Imports
National Income

1009
$12,221

Net Foreign Factor Income (-)

96

Statistical Discrepancy (+)

29

Consumption of Fixed
Capital (+)
Gross Domestic Product $ 13,841

Gross Domestic Product

1687
$ 13,841
24-12


Comparative GDP
Selected Nations GDPs, 2007
0

1

GDP in Trillions of Dollars
2

3

4

5

6

7

8

9

10

12

13

United States
Japan
Germany
China
United Kingdom
France
Italy
Canada
Spain
Brazil
Russia
India
South Korea
Mexico
Australia
Source: World Bank

24-13

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 2007
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)

$ 13,841
1687
$ 12,154
29
96
$ 12,221
1009

979
467
344
2237
$ 11,659
1482
$ 10,177

24-16


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

24-17


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)
24-18


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
24-19


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, E­Journal

24-20


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

24-21


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
24-22


Key Terms
• national income
accounting
• gross domestic product
• intermediate goods
• final goods
• multiple counting
• value added
• expenditures approach
• income approach
• personal consumption
expenditures
• gross and net private
domestic investment

• government
purchases
• net exports
• taxes on production
and imports
• national income
• consumption of fixed
capital
• net domestic product
• personal income
• disposable income
• nominal GDP
• real GDP
• price index

24-23


Next Chapter Preview…

Economic Growth

24-24