Measuring Domestic Output, National Income and the Price Level

1
Measuring Domestic Output, National Income and
the Price Level

• Chapter 7
• Time period 3 weeks

2
Assessing the Economy

• National income accounts serve a purpose just as
  income statements do for a business
• Compare conditions with other countries
• Provides a basis for public policies to improve
  economic performance

3
Gross Domestic Product (GDP)

• GDP the total market value of all final goods
  and services produced within a country in one
  year
• Measured in quarters (every 3 months)
• 1st January - March
• 2nd April - June
• 3rd July September
• 4th October - December

4
GDP

• Includes only final goods g s that are
  purchased for final use by the consumer
• Does not include intermediate goods g s that
  are resold or go on for further processing or
  manufacturing
• This avoids multiple counting
• Is the value of what has been produced, not what
  was actually sold

5
GDP Excludes Nonproduction Transactions

• Existing assets or property that is sold or
  transferred, including used items, is NOT counted
• Public or private transfer payments
• --public SS or welfare payments
• --private student allowance or alimony
• --sale of stocks and bonds
• --broker services rendered ARE counted

6
More Nonproduction Transactions

• Secondhand sales
• Unreported business activities done in cash (ie
  unreported tips)
• Illegal activities
• Non-market activities like volunteering or
  family work
• US corporations production in overseas plants

7
2 ways to look at GDPExpenditures Approach

• GDP has 4 components
• GDP C Ig G Xn
• C Personal Consumption
• durable nondurable finished g s (but not
  houses)

8
Expenditures Approach

• Ig Gross Private Domestic Investment
  (Gross Investment)
• Purchases of machinery, equipment tools
• Factory equipment maintenance
• All construction (including residential)
• Unsold inventory of products

9
Expenditures Approach

• G Government Spending
• Government purchase of resources (mainly labor)
• Again, it excludes transfer payments like SS

10
Expenditures Approach

• Xn Net Exports (exports imports)
• --All spending on g s produced in the US must
  be included in the GDP, whether the purchase is
  made here or abroad
• --For decades, Xn has been a negative ( trade
  deficit)

11
Expenditures Approach

• C Ig G Xn
• GDP

12
GDP to DI

• Using the expenditure approach
• C Ig G Xn GDP
• C about 67 of GDP
• Xn mostly negative since WWII

13
GDP to DI

• Start with GDP consumption of fixed capital
  (CFC) or depreciation
• now we have net domestic product (NDP)
• Take NDP indirect businesses taxes (sales,
  excise property taxes, licenses, duties)
• Also net foreign factor income
• (income earned by foreigners in the US income
  earned by Americans abroad)
• now we have National Income (NI)

14
GDP to DI

• Take NI and subtract
• - social security contribution (a tax)
• - corporate income taxes paid
• - undistributed corporate profits
• (total profits corporate taxes profits
• not given out as dividends but kept for
• reinvestment at a later date)
• back transfer payments
• (SS payments, unemployment compensation,
  disability pay)
• Now we have Personal Income (PI)

15
GDP to DI

• Take PI and personal income taxes
• Now we have DISPOSABLE INCOME (DI)
• Disposable income can only be used for
  consumption or savings (C or S)

16
GDP to DI

• GDP to
• NDP to
• NI to
• PI to
• DI to
• C and S

17
Circular Flow

• GDP to DI flow worksheet

18
Classwork

• Page 134 9we will work this problem together
• Page 134 8you will do this on your and turn in
  your work

19
Income Approach

• W R I P SA GDP

20
Income Approach to GDP

• Compensation of Employees (Wages)
• --largest part of the GDP
• --includes wages, salaries, fringe benefits,
  health care and pension plans

21
Income Approach

• Rents
• Tenant payments
• Lease payments

22
Income Approach

• Interests
• Money paid by private businesses to suppliers of
  money capital
• Includes interests households receive on savings
  and bond payments

23
Income Approach

• Proprietors Income and corporate profits
  (Profits)
• Net income of unincorporated businesses
• Corporate profits corporate income tax,
  dividends and undistributed corporate profits

24
Income Approach

• Statistical Adjustments
• Indirect business taxes
• General sales tax, business property tax, license
  fees and custom duties
• Consumption of Fixed Capital (CFC) (depreciation)

25
Statistical Adjustment continued

• Net foreign factor income in US
• Income of foreign nationals must be
• Income of American income earned abroad must be
• GDP measures the output of geographical US
  regardless of the nationality of the contributors

26
Income Approach

• W R I P SA GDP