Measuring Domestic Output,

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Chapter 7
Measuring Domestic Output, National Income,
and the Price Level
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The Importance of Macroeconomic Measurement
National Income Accounting

• Economic Pulse of the Nation

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The Importance of Macroeconomic Measurement
National Income Accounting

• Economic Pulse of the Nation
• Comparisons Over Time

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The Importance of Macroeconomic Measurement
National Income Accounting

• Economic Pulse of the Nation
• Comparisons Over Time
• Basis For Public Policy

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The Importance of Macroeconomic Measurement
National Income Accounting

• Economic Pulse of the Nation
• Comparisons Over Time
• Basis For Public Policy

What Are These Accounting Measures?
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GROSS DOMESTIC PRODUCT....
the total market value of all final goods and
services produced in the economy in one year
within the boundaries of the country.
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GROSS DOMESTIC PRODUCT....
the total market value of all final goods and
services produced in the economy in one year
within the boundaries of the country.
GROSS NATIONAL PRODUCT. the total market value
of all final goods and services produced in the
economy in one year by all US-owned resources.
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GROSS DOMESTIC PRODUCT....
the total market value of all final goods and
services produced in the economy in one year

• A Monetary Measure

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GROSS DOMESTIC PRODUCT
the total market value of all final goods and
services produced in the economy in one year

• A Monetary Measure
• Avoid Double Counting

• Final Goods

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GROSS DOMESTIC PRODUCT
the total market value of all final goods and
services produced in the economy in one year

• A Monetary Measure
• Avoid Double Counting

• Final Goods
• Intermediate Goods

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GROSS DOMESTIC PRODUCT
the total market value of all final goods and
services produced in the economy in one year

• A Monetary Measure
• Avoid Double Counting
• Excludes Nonproductive Transactions

Financial Transactions
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Exclude Nonproductive Transactions
Financial Transactions
1. Public Transfer Payments 2. Private Transfer
Payments 3. Security Transactions --buying
and selling bonds 4. Secondhand Sales
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Reminder
The circular flow of output and income indicates
that expenditures on GDP in the product markets
are distributed as income in the resource markets.
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Expenditures Approach
Personal Consumption Expenditure ( C )

• Durables
• Nondurables
• Services

Note Consumer spending does not include
purchases of homes.
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Why All The Modifiers

• Private-- spending by private businesses as
  opposed to government agencies.
• Domestic-- the investment is in America as
  opposed to abroad.
• Gross-- includes the production of all
  investment goods.

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Gross Private Domestic Investment ( I )
g

• Machinery, Equipment, Tools
• All Construction
• Changes in Inventories
• Doesnt include noninvestment
• transactions

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Net Investment Gross Private Domestic
Investment - Consumption of Fixed Capital
(Depreciation).
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• Ig gt CFC therefore In gt 0 and economy is
  growing.
• Ig CFC therefore In 0 and economy is
  stagnant.
• Ig lt CFC therefore In lt 0 and economy is
  experiencing negative growth.

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Expenditures Approach
Government Purchases ( G )

• Includes all government (federal, state and
  local) spending on goods and services.
• Includes direct government purchase of
  resources--labor in particular.

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Expenditures Approach
Xn Exports (X) - Imports (M)

• Exports are goods and services produced
  domestically but sold abroad.
• Imports are goods and services purchased in the
  United States, but produced abroad.

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Summary
GDP C Ig G Xn
GDP1997,4 5,489 1,238 1,454 (-97)
8,084
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Next The Income Approach
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EXPENDITURES BECOME INCOME

• Compensation of Employees
• Wages and Salaries
• Includes payments to pension,
• health, welfare accounts

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EXPENDITURES BECOME INCOME

• Rent
• Payments received by suppliers of
• property resources.
• Net Rental Income rent minus
• depreciation of rental property.

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EXPENDITURES BECOME INCOME

• Interest
• Payments flowing from private
• businesses to suppliers of money
• capital.

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EXPENDITURES BECOME INCOME

• Proprietors Income
• Net income of owners of
• unincorporated businesses (sole
• proprietorships partnerships).

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EXPENDITURES BECOME INCOME

• Corporate Profits
• Collected as corporate income taxes
• May be distributed as dividends
• Retained as undistributed corporate
• profits.

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EXPENDITURES BECOME INCOME
National Income Sum of Employee
Compensation Rent
Interest Proprietors Income
Corporate Profits
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EXPENDITURES BECOME INCOME

• Three adjustments National Income (NI)
• to get GDP using income approach.
• Indirect Business Taxes
• Depreciation
• Net Foreign Factor Income

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EXPENDITURES BECOME INCOME
Indirect Business Taxes Taxes on a good are
included in the final market value, but not
distributed as income. Government did not
contribute to the production of the good.
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EXPENDITURES BECOME INCOME
Depreciation Avoid under/over stating
GDP. Total value of good is allocated over their
lives.
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EXPENDITURES BECOME INCOME

• Depreciation
• Cost of production
• Does not add to anyones income
• Decreases profit

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EXPENDITURES BECOME INCOME

• Net Foreign Factor Income
• How much more did foreign-owned resources earn
  in the US than US-owned resources earn abroad?
• The difference is added to GDP.

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Other Social Accounts....
Net Domestic Product (NDP)
NDP makes allowances for the amount of capital
goods that were used up in producing the current
year's output.
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NI National Income
NI is income earned, but not necessarily
received, by resource suppliers for the use of
their land, labor, capital, and entrepreneurial
ability.
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PI Personal Income
PI is income received by household but not
necessarily earned. Transfer payments are
included in PI.
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DI Disposable Income
DI is personal income less personal
taxes. Household can dispose of the DI in two
ways consume it or save it. Saving is
non-consumption DI C S
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THE UNDERGROUND ECONOMY AS A PERCENT OF GDP
0 5 10 15 20 25 30
Greece Spain Italy Portugal Belgium Sweden Germany
France Holland Britain United States Japan Switze
rland
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THE UNDERGROUND ECONOMY AS A PERCENT OF GDP
0 5 10 15 20 25 30
Greece Spain Italy Portugal Belgium Sweden Germany
France Holland Britain United States Japan Switze
rland