Lecture Three

1
Lecture Three

• Measuring National Output and National Income

2
GDP

• GDP is the market value of all final goods and
  services produced within a given period of time
  by factors of production located within a country.

3
Expenditure Approach

• The expenditure approach is a method of computing
  GDP that measures the amount spent on all final
  goods during a given time period.

4
Expenditure Approach
GDP C I G (EX - IM)
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Consumption - C

• Durable goods goods that last a relatively long
  time
• Nondurable goods goods which are perishable
• Services goods which do not involve the
  production of physical things

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Investment - I

• Nonresidential expenditures by firms on
  machines, factories, tools, etc.
• Residential expenditures by households on new
  houses and apartment buildings
• Business inventories goods that firms produce
  now with the intent to sell later

7
Government Purchases - G

• Expenditures by federal, state and local
  governments on final goods
• Does not include transfer payments (social
  security, unemployment benefits, etc.)

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Net Exports - (EX-IM)

• Exports sales to foreigners of U.S. produced
  goods
• Imports purchases by U.S. citizens of foreign
  produced goods
• Net Exports Exports - Imports

9
Income Approach

• A method of computing GDP that measures the
  incomes - wages, rents, interest, and profits -
  received by all factors of production in
  producing final goods.

10
National Income

• Compensation of employees wages, salaries, etc.,
  paid to households
• Proprietors income income of unincorporated
  businesses
• Corporate profits income of corporations
• Net interest interest paid by businesses
• Rental income income received by property owners

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Depreciation

• Depreciation is the decline in value of capital
  assets as they wear out or become obsolete.

12
Indirect Taxes and Subsidies

• Indirect Taxes sales taxes, custom duties,
  license fees, etc.
• Subsidies payments made by the government for
  which it receives goods or services

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Net Factor Payments to Rest of World

• Payments of factor income to the rest of the
  world minus the receipt of factor income from the
  rest of the world

14
Gross National Product

• Add to GDP any income earned abroad by US firms
  or residents
• Subtract any income earned in the US by foreign
  firms or residents.

15
Net National Product - NNP
NNP GDP - depreciation
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National Income - NI
NI NNP - indirect taxes subsidies
17
Personal Income - PI
PI NI - (corporate profits - dividends) -
social insurance payments
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Disposable Personal Income - DPI
DPI PI - personal income taxes
19
Nominal GDP

• Nominal GDP is GDP measured in current dollars
• Current dollars the current prices that one
  pays for goods and services

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Real GDP

• Real GDP is measured in constant year prices
• Real GDP is adjusted for inflation
• Constant year an arbitrary base year from which
  prices are derived

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Real GDP

• GDP adjusted for inflation.
• Base year will be year 1.

22
GDP Deflator

• A measure of the prices of all goods and services
  produced
• (Nominal GDP/Real GDP) 100

23
Rate of Inflation

• Rate of change in price level

GDP deflator (year 2) - GDP deflator (year 1)
Inflation (year 2)
GDP deflator (year 1)
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Limitations of the GDP Concept

• Social Welfare
• Underground Economy
• Per Capita GDP

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Review Terms Concepts

• Base year
• Business inventories
• Compensation of employees
• Corporate profits
• Current dollars
• Depreciation
• Disposable personal income

• Durable goods
• Expenditure approach
• Final goods services
• Fixed-weight procedure
• Government consumption investment
• Gross Domestic Product (GDP)
• Gross investment

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Review Terms Concepts (cont.)

• Gross National Product (GNP)
• Gross private investment
• Income approach
• Indirect taxes
• Intermediate goods
• National income
• Net exports

• Net factor payments
• Net interest
• Net investment
• Net National Product (NNP)
• Nominal GDP
• Nondurable goods
• Nonresidential investment

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Review Terms Concepts (cont.)

• Per capita GDP
• Personal consumption expenditures
• Personal income
• Personal saving
• Personal saving rate
• Proprietors income

• Rental income
• Residential investment
• Services
• Subsidies
• Underground economy
• Value added
• Weight