Measuring Total Output and Income

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• Measuring Total Output and Income
• Read Chapter 6 pages 124-142
• I Measuring Total GDP
• The Components of GDP
• Basic Terminology
• A flow variable is a variable that is measured
  over a specific period of time.
• b) A stock variable is a variable that is
  independent of time.

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• B) The distribution of output into its
  components.
• 1) GDP C I G Xn
• 2) Defining each term
• Personal consumption (C) measures the value of
  goods and services purchased by households during
  a time period.
• (About 66 of GDP. In the following diagram
  purple arrows represent currency flows and green
  arrows goods flows.)

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• b) Private Investment is the value of all goods
  produced during a period for use in the
  production of other goods and services.
• c) The official measure of private investment in
  the economy is called gross private domestic
  investment (I). (16 of GDP) It includes
• (i) expenditures by firms on new machines and
  factories(ii) expenditures on new residential
  housing
• (iii) changes in inventories.

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• (Note there is a typo in Exhibit 6-2 in the
  book. The purple arrows are pointed the wrong
  way. The other diagrams are o.k.)
• d) Government purchases are the sum of purchases
  of goods and services from firms by government
  agencies plus the total value of output produced
  by government agencies themselves during a time
  period. (17 of GDP)
• e) Transfer payments are payments that do not
  require the recipient to produce a good or
  service.

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• f) Sales of a countrys goods and services to
  buyers in the rest of the world during a
  particular time period represents its exports.
  (13 of GDP.)
• g) Imports are purchases of foreign-produced
  goods and services by a countrys residents.
• h) Net exports (Xn) is exports imports.
• i) Negative values of net exports constitute a
  trade deficit.
• j) Positive values of net exports constitute a
  trade surplus.

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• C) Final Goods and Value Added
• Value Added, the amount by which the value of a
  firms products exceeds the value of the goods
  and services the firm purchases from other firms.
• D) GNP An alternative measure of output.
• 1) Gross national product (GNP) is the total
  value of final goods and services produced during
  a particular period with factors of production
  owned by the residents of a particular country.

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• II Measuring Total Income
• Gross domestic income (GDI) equals the total
  income generated in an economy by the production
  of final goods and services during a particular
  period.

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• B) The Components of GDI
• Employee Compensation wages, salaries and
  benefits (57 of GDI)
• 2) Profits (16.5 of GDI)
• 3) Rental Income (1.6)
• 4) Net Interest (5.0)
• 5) Depreciation is a measure of the amount of
  capital that wears out or becomes obsolete during
  a particular period. (12.2)
• 6) Indirect business taxes are taxes impos ed on
  the production or sale of goods and services or
  on other business activity. (7.9)

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• C) Tracing Income from the Economy to Households
• Disposable personal income is income households
  have available to spend on goods and services.
• 2) GNPGDPnet factor earnings from abroad
• 3) Net national income GNP-depreciation
• 4) National Income net national income
  indirect business taxes

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• 5) Personal Income national income income not
  received (e.g., social security taxes) transfer
  payments and other income (e.g., social security
  payments).
• 6) Disposable income personal income personal
  income taxes.

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• III GDP and Economic Well-being
• GDP is the measure most often used to assess the
  economic well-being of a country.
• B) Problems in the Interpretation of Real GDP
• 1) Measurement problems.
• i) Early releases of the data often need to be
  revised.
• ii) Service sector assumes constant productivity.

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• 2) Conceptual problems
• i) Omits household production.
• ii) Underground and illegal production.
• iii) Does not count leisure.
• iv) GDP accounts often ignore bads (opposite of
  goods) such as crowding or pollution.
• 3) Conclusion GDP and Human Happiness
• Despite its weakness, it is the most
  objective comparison we have.

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• C) International Comparisons of real GDP and GNP
• Per capita real GDP is real GDP divided by a
  countries population.
• International comparisons are based on per capita
  GDP. Using this basis for comparison the U.S. has
  one of the highest standards of living.
  Luxembourg is the highest.
• 3) Higher GDP is correlated with other measures
  of well being such as life expectancy.