Chapter 24: Measuring Domestic Output and National Income

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 PerformanceLO124-*Gross Domestic ProductMeasure of aggregate outputMonetary measureAvoid multiple countingMarket value final goodsIgnore intermediate goodsCount value addedLO124-*Gross Domestic ProductExclude financial transactionsPublic transfer paymentsPrivate transfer paymentsStock (and bond) market transactionsExclude second hand salesSell used car to a friendLO124-*Two 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?LO224-*GDP==+Consumption byHouseholdsInvestment byBusinessesGovernmentPurchasesExpendituresBy Foreigners+++++WagesRentsInterestProfitsStatisticalAdjustments+Two Approaches to GDPExpenditures or Output ApproachIncome or Allocations ApproachLO224-*Expenditures ApproachPersonal consumption expenditures (C)Durable consumer goodsNondurable consumer goodsConsumer expenditures for servicesDomestic plus foreign goods producedLO224-*Expenditures ApproachGross private domestic investment (Ig)Machinery, equipment, and toolsAll constructionChanges in inventoriesCreation of new capital assetsNoninvestment transactions excludedLO224-*Expenditures 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 + XnLO224-*CompensationRentsInterestProprietor’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 2009LO224-*Comparative GDPLO224-*The Income ApproachCompensation of employeesRentsInterestProprietor’s incomeCorporate profitsCorporate income taxesDividendsUndistributed corporate profitsTaxes on production and importsLO224-*The 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)LO224-*U.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$ 10,924LO224-*Nominal vs. Real GDPGDP is a dollar measure of productionUsing dollar values creates problemsNominal GDPUse prevailing priceReal GDPReflect changes in priceUse base year priceLO324-*GDP 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)LO324-*Shortcomings of GDPNonmarket activitiesLeisureImproved product qualityThe underground economyGDP and the environmentComposition and distribution of the outputNoneconomic sources of well-beingLO424-*Underground EconomyLO424-*