Chapter 07: Measuring Domestic Output and National Income

Assessing the Economy’s Performance National Income Accounting measures economy’s overall performance Bureau of Economic Analysis compiles National Income and Product Accounts Assess health of economy Track long run course Formulate policy

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Measuring Domestic Output and National IncomeMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.National Income Accounting measures economy’s overall performanceBureau of Economic Analysis compiles National Income and Product AccountsAssess health of economyTrack long run courseFormulate policyAssessing the Economy’s PerformanceLO1Gross Domestic ProductMeasure of aggregate outputMonetary measureAvoid multiple countingMarket value final goodsIgnore intermediate goodsCount value addedLO1Gross Domestic ProductExclude financial transactionsPublic transfer paymentsPrivate transfer paymentsStock (and bond) market transactionsExclude second hand salesSell used car to a friendLO1Two Approaches to GDPIncome approachCount income derived from productionWages, rental income, interest income, profitExpenditure approachCount sum of money spent buying the final goodsWho buys the goods?LO2GDP==+Consumption byHouseholdsInvestment byBusinessesGovernmentPurchasesExpendituresBy Foreigners+++++WagesRentsInterestProfitsStatisticalAdjustments+Two Approaches to GDPExpenditures or Output ApproachIncome or Allocations ApproachLO2Expenditures ApproachPersonal consumption expenditures (C)Durable consumer goodsNondurable consumer goodsConsumer expenditures for servicesDomestic plus foreign goods producedLO2Expenditures ApproachGross private domestic investment (Ig)Machinery, equipment, and toolsAll constructionChanges in inventoriesCreation of new capital assetsNoninvestment transactions excludedLO2Expenditures ApproachGovernment purchases (G)Expenditures for goods and servicesExpenditures for publicly owned capitalExcludes transfer paymentsNet exports (Xn)Add exported goodsSubtract imported goodsXn = exports – importsGDP = C + Ig + G + XnLO2CompensationRentsInterestProprietor’s IncomeCorporate ProfitsTaxes on Production and ImportsNational IncomeNet Foreign Factor Income (-)Statistical Discrepancy (+)Consumption of Fixed Capital (+)Gross Domestic Product$ 7792268788104113091090 $12,2881052091864$ 14,256Personal Consumption (C)Gross Private Domestic Investment (Ig)Government Purchases (G)Net Exports (Xn)Gross Domestic ProductIn Billions ReceiptsExpenditures ApproachAllocationsIncome Approach$10,08916282931-392$ 14,256U.S. Economy 2009LO2Comparative GDPLO2The Income ApproachCompensation of employeesRentsInterestProprietor’s incomeCorporate profitsCorporate income taxesDividendsUndistributed corporate profitsTaxes on production and importsLO2The Income ApproachFrom national income to GDPSubtract net foreign factor incomeStatistical discrepancyConsumption of fixed capitalOther national accountsNet domestic product (NDP)National income (NI)Personal income (PI)Disposable income (DI)LO2U.S. Income Relationships 2009Gross Domestic Product (GDP)Less: Consumption of Fixed CapitalEquals: Net Domestic Product (NDP)Less: Statistical DiscrepancyPlus: Net Foreign Factor IncomeEquals: National Income (NI)Less: Taxes on Production and ImportsLess: Social Security ContributionsLess: Corporate Income TaxesLess: Undistributed Corporate ProfitsPlus: Transfer PaymentsEquals: Personal Income (PI)Less: Personal TaxesEquals: Disposable Income (DI)$ 14,2561864$ 12,392209105$ 12,28810909673154182528$ 12,0261102$ 10,924LO2Nominal vs. Real GDPGDP is a dollar measure of productionUsing dollar values creates problemsNominal GDPUse prevailing priceReal GDPReflect changes in priceUse base year priceLO3GDP Price IndexUse price index to determine real GDPPriceIndexin GivenYear=x100Price of Market Basketin Specific YearPrice of Same Basketin Base YearRealGDP=Nominal GDPPrice Index (in hundredths)LO3Shortcomings of GDPNonmarket activitiesLeisureImproved product qualityThe underground economyGDP and the environmentComposition and distribution of the outputNoneconomic sources of well-beingLO4Underground EconomyLO4