[16th Ed.] National Income Accounting

[16th Ed.] National Income Accounting
[GDP and its four cousins] - C Ig G Xn [X-M] = GDP–Depreciation= [what is for sale] NDP +NFFIEUS–Indirect Business Taxes = NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP= [PI is what you can spend, save, or pay in taxes] PI – Personal Income Taxes = [DI is what you can spend or save ] [“Replacement capital”]

Gross Domestic Product
Gross Domestic Product – market value of all final legal output produced in a country in one year. Nominal (money) GDP =$6.00 Year one Nominal GDP measures current output valued at current prices. $2.00 $2.00 $2.00 The base year is the benchmark year to which other years are compared. Nominal (money) GDP =$6.10 Year Two [Recession - decrease in real output] $3.05 $3.05 Real GDP – measures only output. [measures current output at base-year prices ($4), not current prices ($6.10)].

GDP measures production in the U.S.
What is the difference between GDP and GNP? [GNP was used until 1991] GDP measures production in the U.S. GNP measures production by Americans.

The difference between GDP & GNP is about 2/10 of 1%.
GDP v. GNP GNP – Ownership All goods/services produced legally for pay by citizens of a country. [Citizenship mattered, not geography] China Europe Nike in Indonesia Plano, TX GDP - Location All goods/services produced legally for pay in a country’s borders. [Geography matters, not citizenship] in Chicago Provo,UT BMW in Waco Honda in Ohio Products born in the USA The difference between GDP & GNP is about 2/10 of 1%.

If U.S. Profits in the ROW are greater [$220] than
N.F.F.I. [U.S.A. Profits Overseas] Rest of World $220 bil. Foreign Profits in U.S.A. $209 billion N.F.F.I. = $11 billion If U.S. Profits in the ROW are greater [$220] than foreign profits in the U.S. [$209], add the difference.

If foreign profits in the U.S. [$209] are greater than
N.F.F.I. [U.S.A. Profits Overseas] Rest of World $200 bil. Foreign Profits in U.S.A. $209 bill. N.F.F.I.E.U.S. = -$9 billion If foreign profits in the U.S. [$209] are greater than U.S. profits in the ROW [$200], subtract the difference.

Yes, if there is Full Employment.
Can the economy grow too fast? Yes, if there is Full Employment. The speed limit for GDP growth is 4%. But, if the economy is in recession, There is no speed limit for GDP growth.

Economy’s Speed Limit at Full Employment is 4%, instead of 2.5%.
Can sustain a much greater increase in AD if the AS curve is also shifting to the right, due to increasing productivity. AD2 In the early 90’s, at FE, 2.5% was the speed limit. AS shifted slowly due to low productivity. AD1 AS1 AS2 PL2 PL3 PL1 So, at FE, the “goldilocks economy” has expanded. Increasing productivity of the late 90’s allowed more growth at FE GDP. Real GDP under 4% Y*1 Y2 Y3 Real GDP 17 increases 4% “Goldilocks Economy” [not too fast or slow]

GDP <10 years without a recession>
*Represents “GDP Speed Limit” at full employment

Real GDP and the Last Few Recessions
Billions of 1996 Dollars $10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 1970 1975 1980 1985 1990 1995 2000

Gross Domestic Product
Components of Gross Domestic Product [C + Ig + G + X - M]

GDP = C(66%) + Ig(18%) + G(17%) + Xn
Expenditures Approach Personal Consumption Expenditure ( C ) Durable Consumer Goods[12%] Nondurables[29%][soup & soap] Consumer Expenditures for Services[59%] Maytag produced here Ferrari produced here Spending by HH on all g/s except for new housing.

Households As Spenders COMPOSITION OF CONSUMER Spending, 2005
Total of $8,746 billion Services $5,155 billion (59%) Durable Goods $1,027 billion (12%) Nondurable Goods $2,564 billion (29%)

U.S. capital stock is over $30 trillion.
Expenditures Approach Personal Consumption Expenditure ( C ) Let’s say this Porsche is produced by a foreign co. in Plano, Texas. Gross Private Domestic Investment (IG) 3 Subcategories [*spending on output not consumed] A. Business spending on real capital - tools, machinery, & plants B. New construction investment – construction of new houses and apartments [can rent for financial return]. C. Unsold inventory investment – change in inventories [A net increase in inventories is investment; a net decrease in inventories is negative investment or disinvestment (disinvestment represents sale of output produced in a previous year) U.S. capital stock is over $30 trillion.

Expenditures Approach
Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( Ig ) Government Purchases (G) [state, local & federal] [“G” purchases of goods/svcs produced (not transfer payments) 3 Subcategories of Government A. Federal government [40%] B. 50 State governments C. 88,000 local governments [60% for state and local]

Expenditures Approach
Personal Consumption Expenditure (C) Gross Private Domestic Investment (Ig) Government Purchases ( G ) Net Exports( Xn) Net Exports (Xn)=Exports (X)–Imports (M) [M represents production outside a country]

GDP and Its Components (2001)
Government Purchases 18% Net Exports -3 % Investment 16% Consumption 69%

Capital and Investment
5 Gross Investment Pos. Net Investment 4 3 2 1 Initial Capital Deprec- iation Initial Capital [Ig(3)>D(2)] 5 Initial capital less deprec. Initial capital less deprec. 1/1/ During /31/07 Cal’s CD’s has a capital stock[5 machines] at the end of 2004 that equals its capital stock at the beginning of the year[4] + its net investment[+1]. Net investment is equal to Ig[3]-D[2]. Cal’s Ig is the 3 new machines bought during the year, and its depreciation is the 2 machines that Cal scrapped during the year. Capital – plant, equipment, buildings, & inventories of raw materials & semi-finished goods that are used to produce other goods/services. Investment-increases the capital stock (purchases of capital). Depreciation-decreases the capital stock(worn out/obsolete). Net Investment-change in a nation’s capital stock in one year. Investment[Ig(3)>depreciation(2)]; Disinvestment[Depreciation(2)>Ig(1)].

Capital and Disinvestment [D(2)>Ig(1)]
4 3 2 1 Initial Capital Deprec- iation Neg. Net Investment Initial Capital [D(2)>Ig(1)] Gross Investment Initial capital less deprec. Initial capital less deprec. 3 1/1/ During /31/07 Cal’s CD’s has a capital stock[5 machines] at the end of 2004 that equals its capital stock at the beginning of the year[4] + its net investment[+1]. Net investment is equal to Ig[3]-D[2]. Cal’s Ig is the 3 new machines bought during the year, and its depreciation is the 2 machines that Cal scrapped during the year. Capital – plant, equipment, buildings, & inventories of raw materials & semi-finished goods that are used to produce other goods/services. Investment-increases the capital stock (purchases of capital). Depreciation-decreases the capital stock(worn out/obsolete). Net Investment-change in a nation’s capital stock in one year. Investment[Ig(3)>depreciation(2)]; Disinvestment[Depreciation(2)>Ig(1)].

GDP 2006 [$13,487 Trillion] [2006] 9,429,300 $2,570 $2,186 $1.210 -5%
Consumption 9,429,300 [70%] Government purchases $2,570 [19%] Investment $2,186 [16%] Export Spending $1.210 -5% Import Spending $2.238

Average % Increases in Real GDP, 1890-2007
The key is to keep the economy growing. At 2.5% growth, the U.S. economy will expand to $23 trillion in 25 years. But – at 3%, it would reach $26 trillion, which is like another Germany, with Saudi Arabia thrown in. 5% 4.5% 3.5 3.8% 4% 3.3% 3.2% Long Term Growth 3% 2.8% 2.7% 2.6% 2% 1% 0.8% 1929 To 1940 1940 To 1950 1950 To 1960 1960 To 1970 1970 To 1980 1980 To 1990 1990 To 2000 1929 To 2000 1900 To 2007

Comparative GDPs in Trillions, 2007
GLOBAL PERSPECTIVE Comparative GDPs in Trillions, 2007 U.S. Japan Germany China U.K. France Italy Canada Spain Brazil S. Korea India Mexico Russia Australia 13.8 4.5 2.8 2.7 2.2 2.2 1.7 1.1 1.1 795 790 780 770 763 708

If California and Texas were countries where would they rank?

Comparative GDPs in Trillions, 2006
GLOBAL PERSPECTIVE Comparative GDPs in Trillions, 2006 U.S. Japan Germany China U.K. France Italy Canada Spain Brazil S. Korea India Mexico Russia Australia 13.8 4.5 2.8 2.7 2.2 2.2 1.7 Calif. 1.7 TX 1.1 1.1 1.1 795 .790 780 770 763 708

Per Capita GDP - 2007 Country Per Capita Country Per Capita
[Selected Countries] Country Per Capita Luxembourg 80,800 Qatar 75,900 Bermuda 60,000 Norway 55,600 Kuwait 55,300 U.A.E. 55,200 U.S $46,000 Ireland 45,600 Hong Kong 42,000 Switzerland 39,800 Iceland 39,400 Canada 38,200 Australia 37,500 Denmark 37,400 Country Per Capita Sweden 36,900 U.K. 35,300 Germany 34,400 France 33,800 Japan 33,800 Italy 31,000 Australia 24,000 Russia 14,600 Mexico 12,500 China ,300 Swaziland 4,800 Liberia Zimbabwe Congo, Rep of China and India are still poorer than he U.S. was in 1900. 75% of Africans live on less than $2 a day & it is getting worse.

[If GDP increases, per capita income increases]
GDP Over The Decades 13 tril. 12 tril. 10 tril. 9 tril. 8 tril. 7 tril. 6 tril. 5 tril. 4 tril. 3 tril. 2 tril. 1 tril. 13.8 tril. Per Capita $46,000 [If GDP increases, per capita income increases] 4,152 3,187 2,416 1,665 1,204 709 773

The World's Have-nots The Poorest Nations Nation Per Capita
$46,000 2007 There are 6.6 billion people on our planet; 5 billion are in the Third World. 2.5 billion live on less than $2 a day. The direst poverty is in Africa, home of the world’s 10 poorest countries. Over ½ the people of Sub-Sahara Africa live on less than $2 a day. 8 million people die each year because they are too poor to stay alive. ½ of the world’s population have yet to make their first phone call. $25,989 1996 The Poorest Nations Nation Per Capita Congo, Rep. of $300 Zimbabwe $500 Liberia $500 Somalia $600 Ethiopia $700 Niger $700 Cen. African Rep. $700 Gambia, The $800 Sierra Leone $800 Malawi $800 Djibouti $1,000 GDP Per Capita [in 1992 dollars] $15,931 1967 $6,538 1929

GDP – measures legal production in U.S. in one year.
What 8 Things Do Not Count In GDP GDP – measures legal production in U.S in one year. GDP measures all final goods/services produced by workers and capital located in the U.S., regardless of ownership. [Domestically located resources] Final goods are goods ready for consumption.

What Eight Things Do Not Count In GDP?
1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers.

Value Added – increase in the market value at each stage
Only Final Sales($20) Count [to prevent “multiple counting”($38)] Value Added – increase in the market value at each stage $20 “Wife-beater” Shirt from Kohls Final Good Retail Shirt $20 $8 Intermediate Good 8 Wholesale Shirt $12 $7 $7 Value Added ($) Value of Output($) 7 Cloth $5 $4 $4 $4 4 $1 Cotton $1 $1 $1 $1 1 Cotton Farmer Textile Mill Shirt Manufacturer Retail Store $20 = sum Sum = $38 So, to avoid “multiple counting”, we count the $20 final price, not $38.

GDP - what is not counted [#2]
2. 2nd Hand Sales – no current production. A Chevy bought in 2007 Salesman 57 Chevy [It has not been produced again in 1963 & would not count.] The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 07. They also have not been produced again. Salesman’s commission would count. You are buying his services. Shoe salesman

GDP - what is not counted [#3]
3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production. Ex: If 100 shares of Dell stock is bought Buying stock is not buying a product but buying ownership of the firm. I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another

GDP – what is not counted [#4].
4. Transfer Payments –welfare, unemployment, social security. [There is no contribution to final production] “Now that I’ve gotten my welfare check, I can get an iPhone”

5. Unreported “Legal” Business Activity
Unreported “legal” business activity does not count. This is two-thirds of the “underground economy.” Before LASIK Surgery Then he has LASIK but the surgeon doesn’t report $500 of his $3,400 bill? And what if the dentist doesn’t report $400 for teeth whitening? And what if this waitress doesn’t report all tips?

6. Illegal business activity is also not counted.
Illegal business activity, because it goes unreported, also does not count. Making up 1/3 of the “underground economy,” it includes murder for hire, gambling, drugs, and prostitution. “I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.” And, what about “Jane Ho”?

U.S. Underground Economy What doesn’t get reported
Illegal $300 B Legal $600 B Drugs $120 Bribery $35 Self Employed $255 Gambling and Loan Sharking $10 Other Legal $25 Rents & Royalties $30 Pornography $20 Fraud $30 Corporate Profits $50 Other Illegal $20 Prostitution $30 Interest $55 Stolen Goods $35 Wages and Salaries $185 What gets reported is the “Above Ground” What doesn’t get reported is the “Underground”

U.S. Underground Economy
Underground Economy [compared to “above ground”] Unreported exchanges that take place - legal and Illegal [Hidden – “off the books”] Total illegal activities - $300 billion Total legal activities - $600 billion Total legal and illegal - $900 billion Underground Economy 1. Illegal business activities (1/3) – gambling, narcotics trade, prostitution, loan sharking, etc. 2. Unreported legal business activities (2/3) a. waitresses not reporting all of her tips b. Cabdriver not reporting all of his income c. Self employed cheat the most. Off-the-books cash transactions d. $300 billion *IRS estimates that about $300 billion in income taxes from the underground economy escapes federal taxes each year. $300 B

[as a Percentage of GDP for Select Nations]
Underground Economy [as a Percentage of GDP for Select Nations] Percentage of GDP Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland Source: Journal of Economic Literature

7. Non-market Transactions Are Not Counted
Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework.

fitness instructor, or you will hurt GDP.
7. Non-market Transactions Are Not Counted Work in your own household or volunteer work in the community does not count because there was no payment. So, don’t marry your maid, gardener, or fitness instructor, or you will hurt GDP.

8. U.S. Corporations Producing Goods Overseas
GM in France Nike in Indonesia If U. S. corporations produce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S.

Eight Things Not Counted in GDP
[no production] Second Hand Sales[no production] Public/Private Transfer Payments Purely Financial Transactions Intermediate Goods 5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity

- When Outback buys potatoes for baked potatoes
Do These Count in GDP? - When Outback buys potatoes for baked potatoes When a tattoo business buys ink for tattoos When Tom Thumb buys spam to sell it to you When the popsicle maker buys the sticks Dell buys a computer monitor frame Ice cream that Braums buys for sundaes A bakery buys an apple to put in its pies When Ford buys a windshield wiper for a car When hooker, J-Lo Ho, is paid $200.00

Is It Counted In GDP? On the next slide, read each sentence and determine, “To Be or Not To Be Counted?” That is the question. If “Yes”, put “Y” and tell if it is “C”, “Ig”, “G”, or “X”. If “No”, put “N” and give the number from below on why it is not counted in GDP. GDP DOES NOT INCLUDE 1. Second hand sales [no current production] [but the salesman’s commission counts] 2. Public/Private transfer payments [no current production] 3. Purely financial transactions [no current production] [broker’s fees do count] 4. Intermediate goods [component of final good] 5. U.S. corporations producing overseas. 6. Non-market transactions [ household or volunteer work. Underground Economy [not reported] 7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.] 8. Unreported legal business activity [“off the books”] Example: ___ ___ 1. New Toyota Tundra truck manufactured in San Antonio and sold to your economics teacher the year it was produced. ___ ___ 2. You buy a new Wii at GameStop in Does it count if you resell it on eBay in March of 2008? C Y 1 N

Is It Counted In GDP? C Y 6 N 6 N 3 N 6 N 1 N C Y 6 N 8 N 7 N 6 N 6 N
___ ___ 1. You buy a purple “Tinky Winky” from Wal-Mart. ___ ___ 2. You and your family paint your house. [labor involved] ___ ___ 3. You marry your housemaid. [“working-for-love”] [her services] ___ ___ 4. You buy 100 shares of Microsoft Corporation. ___ ___ 5. You volunteer to babysit your little sister to help your parents while they work. ___ ___ 6. Bob buys a 1965 ford Mustang convertible which is in mint condition. ___ ___ 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2008. ___ ___ 8. You and your friend volunteer to cook at the senior class picnic. ___ ___ 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it. Does the $500 the dentist keeps and doesn’t report count? ___ ___ 10. You are given s suitcase full of $100 bills from the sale of smuggled drugs. ___ ___ 11. Your mother is teaching you to read [and not having much success]. ___ ___ 12. Your dad bakes you a home-baked loaf of bread. [his labor] ___ ___ 13. You buy a loaf of bread from Kroger’s Grocery Store. ___ ___ 14. The U.S. government purchases 5 more B-2 Bombers for $2 billion each. ___ __ 15. Ford buys a ton of sheet metal used in making car doors. ___ ___ 16. You buy a new “iPod Video” from the Apple store, ___ ___ 17. You send in a $90 check to your dentist for cleaning your teeth. ___ ___ 18. Your family buys a new house which sits next to the mansion of Bill Gates. ___ ___ additional teachers are hired by the Frisco ISD. ___ ___ 20. GM invest in $500 million worth of robots to assemble their cars. ___ ___ 21. You volunteer 10 hours a week of your time to work for senior citizens. ___ ___ 22. Ford produces 25,000 new F150s which are not sold by the end of the year. ___ ___ 23. Russia buys 3,000 Dell computers as they become Rusky Dell Dudes. ___ ___ 24. A man’s wife does all his cooking and sewing, working for him 16 hours per day. ___ ___ 25. Nike produces $10 million worth of Nike Air Jordan’s in Vietnam. C Y 6 N 6 N 3 N 6 N 1 N C Y 6 N 8 N 7 N 6 N 6 N C Y G Y 4 N C Y C Y Ig Y G Y Ig Y 6 N Ig Y X Y 6 N 5 N

[This will be worth 10 points on your next test]
Know How To Figure NIA. [This will be worth 10 points on your next test]

16th Ed. National Incoming Accounting – 2002 [$10,446]
$7,304 [“C”] Consumption [66%] -Depreciation $1,393 “U Can See Thunderducks” +N.F.F.I. $10 -$141 Undis Cor Pro -$213 Corp Inc Tax -$748 Soc Sec Con Y earned/not received $9,053 [Replacement capital] [births-deaths] “Available for sale” -Indirect bus. Tax $695 +$1,683 Trans Pay Y received/not earned $8,929 PI is what we can spend, save, or pay in taxes. “Income received by households, whether earned or unearned” Personnel Taxes -$1,113 $8,018 [“indirect” tax] (Tax on the G/S, not on profits) [sales, property, excise, tariffs, & license fees] “Income earned by U.S. resources” ROW[$220] U.S. [$230] NFFI = -$10 Gross Private Domestic Investment $1,593 $7,816 DI is what we can SPEND or SAVE. For NI Subtract NI N = NFFI I = Indirect business taxes Government Purchases $1,973 Xn(X-M) -$424 GDP NDP NI PI DI

Depreciation, Investment & Disinvestment
Negative Net Investment Depreciation exceeds Ig Positive Net Investment Ig exceeds Depreciation Investment of $531 bil. Ig $2,105 Trillion Depreciation 1933 $7.6 billion [in current dollars] Disinvestment of $6 billion Great Depression [1933] Declining productive capacity Expanding productive capacity Depreciation 2005 $1,574 Trillion Ig $1.6 billion Ig($1.6) - D($7.6) = (Disinv. of $6) (Disinvest. of $6) + D($7.6)=($1.6) Ig($1.6)–Disinv.($6)=(Depr. of $7.6) Ig($2,105) - D($1,574) = (In of $531) In($531) + D($1,574) = (Ig of $2,105) Ig($2,105)-In($531)=(Depr. of $1,574)

A Century of GDP Changes
Manufacturing 22% Government 10% THE MIX OF OUTPUT IN 1900 Construction and Mining 9% Farming 37% Services 22% Services 54% Government 18% Manufacturing 20% Construction and Mining 6% THE MIX OF OUTPUT IN 2000 Farming 2%

If U.S. profits in the ROW [$220] are greater than
N.F.F.I. [U.S.A. Profits Overseas] Rest of World $220 bil. Foreign Profits in U.S.A. $210 billion N.F.F.I. = -$10 billion If U.S. profits in the ROW [$220] are greater than foreign profits in the U.S. [$210], add the difference.

If foreign profits in the U.S. [$212] are greater than
N.F.F.I.E.U.S. [U.S.A. Profits Overseas] Rest of World $200 bil. Foreign Profits in U.S.A. $212 bill. N.F.F.I.E.U.S. = $12 billion If foreign profits in the U.S. [$212] are greater than U.S. profits in the ROW [$200], subtract the difference.

[GDP and its four cousins]
[16th Ed.] National Income Accounting [GDP and its four cousins] iPod Videos are imports because they are produced in China. - C Ig G + Xn[X-M] = GDP–Depreciation= [what is for sale] NDP +NFFIEUS–Indirect Business Taxes = NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP= [PI is what you can spend, save, or pay in taxes] PI – Personal Income Taxes = [DI is what you can spend or save ] [“Replacement capital”]

Elaborate Circular Flow Showing NIA
D P PI DI NDP NI

$112 ROW $100 NFFI = $12 -307 -12 -231 -46 -303 -88 -169 +283 -403
16th Ed. NIA Practice – “How To Do It” Personal taxes Undistributed corp. profits 46 Imports Social Security contrib. 169 +Transfer payments Personal consumption ,316 -Corporate Income Taxes Gross private domes invest Indirect business taxes Government purchases Exports Depreciation [Capital consumption] 307 N.F.F.I.E. in the U.S I’m going through an academic recession. C = $_______ Ig = $_______ G = $_______ Xn = $_______ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) -Net For. Factor Inc. Earn. U.S. -Indirect business taxes National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) ______ $_____ $______ _______ 2,316 Report Card English C Accounting C American History D Economics F 503 673 ROW $100 +103 3,595 -307 3,288 -12 -231 $112 3,045 -46 -303 -88 NFFI = $12 -169 +283 3,025 -403 2,622

$112 ROW $100 NFFI = -$12 -307 -12 -10 -46 -88 -534 -169 -231 +283
[17th Edition] NIA Practice – “How To Do It” Personal taxes Undistributed corp. profits Imports Social Security contrib +Transfer payments Personal consumption ,316 -Corporate Income Taxes Gross private domes invest -Taxes on prod. & imports Government purchases Exports Depreciation [Capital consumption] 307 Statistical Discrepancy N.F.F.I.E. in the U.S C = $_______ Ig = $_______ G = $_______ Xn = $_______ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. & imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) I’m going through an academic recession. 2,316 $_____ ______ $______ English C Accounting C American History D Economics F 503 673 +103 ROW $100 3,595 -307 3,288 -12 -10 $112 3,266 -46 -88 -534 -169 NFFI = -$12 -231 +283 3,015 -403 2,612

$100 16th Ed. NIA #1 ROW $110 NFFI = $10 -Consumption of fixed capital
Personal taxes Undistributed corp. profits 65 Imports Social Security contrib. 158 +Transfer payments Personal consumption ,820 -Corporate Income Taxes Gross private domes invest Indirect business taxes Government purchases Exports Depreciation [capital consumption] 317 N.F.F.I.E. in the U.S 16th Ed. NIA #1 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Indirect business taxes National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 1,820 447 587 +29 $2,883 -317 $2,566 +10 -265 $2,311 -65 -98 -158 +330 $2,320 -382 $1,938 ROW $110 $100 NFFI = $10

$100 NIA #1 ROW $110 NFFI = $10 -Consumption of fixed capital
[17th Edition] Personal taxes Undistributed corp. profits 65 Statistical Discrepancy Social Security contrib +Transfer payments Personal consumption ,820 -Corporate Income Taxes Gross private domes invest -Taxes on prod. & imports 265 Government purchases Exports Depreciation [capital consumption] Imports N.F.F.I.E. in the U.S NIA #1 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. & imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 1,820 447 587 +29 $2,883 -317 $2,566 +10 -12 $2,564 -65 -98 -158 -265 +330 $2,308 -370 $1,938 ROW $110 $100 NFFI = $10

$118 NIA #2 ROW $100 NFFI = -$18 -Consumption of fixed capital
[16th Ed.] Personal taxes Undistributed corp. profits 37 Imports Social Security contrib. 25 +Transfer payments Personal consumption -Corporate Income Taxes Gross private domes invest Indirect business taxes Government purchases Exports N.F.F.I.E Depreciation [Cap. Con.] 25 NIA #2 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Indirect business taxes National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 310 85 130 +20 $545 -25 $520 -18 -15 $487 -37 -55 +24 $394 -60 $334 ROW $100 $118 NFFI = -$18

$118 NIA #2 ROW $100 NFFI = -$18 $545 -Consumption of fixed capital
[17th Edition] Exports Undistributed corp. profits 37 Imports Social Security contrib. 25 +Transfer payments Personal consumption -Corporate Income Taxes Gross private domes invest -Taxes on prod. & imports Government purchases Personal taxes N.F.F.I.E Statistical Discrepancy Depreciation NIA #2 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. & imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 310 85 130 +20 $545 -25 $520 -18 -15 $487 -37 -55 +39 $394 -60 $334 ROW $100 $118 NFFI = -$18

$123 NIA #3 ROW NFFI = -$23 $100 -Consumption of fixed capital
Personal taxes Undistributed corp. profits 23 Exports Social Security contrib. 40 Imports Personal consumption +Transfer payments Gross private domes invest -Corporate income taxes Government purchases Indirect business taxes Depreciation [capital consumption] 45 N.F.F.I.E. in the U.S NIA #3 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Indirect business taxes National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 358 130 165 +20 $673 -45 $628 -23 -21 $584 -38 -40 +41 $524 -58 $466 ROW $100 $123 NFFI = -$23

$123 NIA #3 ROW NFFI = -$23 $100 -Consumption of fixed capital
[17th Edition] Personal taxes Undistributed corp. profits Exports Social Security contrib Imports Personal consumption +Transfer payments Gross private domes invest -Corporate income taxes 38 Government purchases -Taxes on prod. & imports 21 Depreciation [capital consumption] 45 Statistical Discrepancy N.F.F.I.E. in the U.S NIA #3 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Indirect business taxes National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. and imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 358 130 165 +20 $673 -45 $628 -23 -8 $597 -38 -40 -21 +41 $516 -50 $466 ROW $100 $123 NFFI = -$23

$130 NIA #4 ROW $100 NFFI = -$30 -Consumption of fixed capital
Personal taxes Undistributed corp. profits 16 Exports Social Security contrib. 32 Imports Personal consumption +Transfer payments Ig -Corporate income taxes Government purchases Indirect business taxes N.F.F.I.E. in the U.S Depreciation NIA #4 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Indirect business taxes National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 312 104 110 +14 $540 -24 $516 -30 $462 -16 -42 -32 +26 $398 -60 $338 ROW $100 $130 NFFI = -$30

$130 NIA #4 ROW $100 NFFI = -$30 A “streaker”
[17th Edition] Personal taxes Undistributed corp. profits 16 Exports Social Security contrib Imports Personal consumption +Transfer payments Gross Investment -Corporate income taxes Government purchases -Taxes on prod. & imports N.F.F.I.E. in the U.S Depreciation [cap. Consumption] 24 Statistical Discrepancy NIA #4 C = $ Ig = $ G = $ Xn = $ Gross Domestic Product (GDP) -Consumption of fixed capital Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National Income (NI) -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on prod. and imports +Transfer payments Personal Income (PI) -Personal Taxes Disposable Income (DI) 312 104 110 +14 $540 -24 $516 -30 -14 $472 -16 -42 -32 -34 +50 $398 -60 $338 A “streaker” ROW $100 $130 NFFI = -$30

GDP Expenditure approach [C+Ig+G+Xn]
GDP can be measured either by total spending on U.S. production or by total income received from that production. Expenditure approach [C+Ig+G+Xn] Adds up the aggregate expenditure on all final goods and services produced during that year Gross Domestic Production Income approach [R+I+P+SA+W (RIP SAW)] Adds up the aggregate income earned during the year by those who produce that output Gross Domestic Income[sales]

+ + + + + + + G D P = = Two Approaches to GDP Expenditure Approach
Gross Domestic Production Income Approach Gross Domestic Sales Consumption by Households Rents + + Interest + Investment by Businesses G D P + Profits + = = Government Purchases Statistical Adjustments [corporate income taxes, Dividends, undistributed Corporate profits] + + Expenditures By Foreigners Wages

The Circular-Flow Diagram
Resource Market 1 2 $ $ Goods/services? Consumer expenditures? Land, labor, capital and entrepreneurial ability? Rent, wages, interest, and profits? Businesses Households $ $ 3 4 Product Market 5

THE INCOME APPROACH [RIP SAW]
Compensation of Employees Rents Interest Profits [Proprietors’ Income] SA [statistical adjustments] Corporate Income Taxes Dividends Undistributed Corporate Profits Wages

Expenditure and Income Approach to GDP [2005]
Receipts: Expenditures Approach C $8746 Ig G Xn GDP $12,487 Expenditure and Income Approach to GDP [2005] Allocations: Income Approach____ Compensation of employees $7125 Rents Interest Proprietor’s income Corporate Profits 1352 Taxes on production & imports 917 National Income $10,904 Net Foreign Factor Inc Statistical Discrepancy Consumption of fixed capital 1574 GDP $12,487

3. [8 pts] Indicate whether each of the following is counted in
the U.S. GDP for the year Explain each of your answers. (a) The value of used textbook sold through online auction in 2006. FRQ 2007 Answer: No, it was counted the year it was produced. Because it was not produced again, it would not be counted. That would be double counting. [2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006] b. Rent paid in 2006 by residents in an apartment building built in 2000 Answer: Yes, rents consist of the income received by the households and businesses that supply property resources. The properties have to be maintained or “serviced” each year. It is included in the income approach to GDP. [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services] c. Commissions earned in 2006 by a stockbroker Answer: Yes, payment is being made for productive services of the broker. So the purchase of stocks would not count but his work would. [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services] d. The value of autos produced in 2006 entirely in South Korea by a firm fully owned by U.S. citizens Answer: No, GDP measures production inside the U.S. regardless of ownership. These autos were produced in South Korea. [2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]

Nominal GDP Real GDP and What is the difference between
[prices of output in the current year] [measures “output and prices”] and Real GDP [base year prices of the year being measured] [measures “only output”]

Importance of Real GDP in Determining a Recession
Real GDP measures current output at base-year prices. Apple GDP Example A country produces 10 apples in base year x $1; Nominal and Real GDP both = $10 Year 2: A country produces 10 apples x $1.25; Nominal GDP=$12.50 (no recession but worse off) [Real GDP would = $10 (10 apples x $1)] Or Year 2: A country produces 9 apples x $1.25; Nominal GDP=$11.25 but real is $9 (9 apples x $1) (recession although nominal GDP is up)

Nominal [money] GDP v. Real GDP
An increase in prices and/or output will increase nominal GDP. Only an increase in output will increase real GDP. Nominal GDP could increase even if output falls. Real GDP = Nominal Y/GDP deflator x 100 So, nominal GDP measures output & prices. Real measures only output [actual production] Constant (real) GDP v. current (money) GDP

Nominal GDP v. Real GDP v. Real (constant) GDP Nominal [Current) GDP
Base year[$50/$50=1x100=100] $46/$50x100=92 [deflation of 8%] Price of Market Basket(2001) [nominal GDP] $64 GDP Price Index = Price of same Market Basket(1998)x100; [Real GDP] $50x100=128 [GDP Deflator] in the base year (1998) [$64/128 x 100 = $50] Nominal [Current) GDP v. Real (constant) GDP

The “GDP” Balloon Nominal – measured in terms of money.
$6,736.9/126.1 x 100 = $5,342.5 Nominal – measured in terms of money. Real–measured in terms of goods/services. takes

[Real GDP must decline for 6 months]
No Recession [Real GDP must decline for 6 months]

Recession [Real, not nominal GDP has declined]
Inflation component Real GDP

Long-term average growth (3%)
The Business Cycle in U.S. History [11 Recessions since WWII, from 6 months to 16 months] Recessions 20 Annual growth 15 10 5 3 GROWTH RATE (percent per year) -5 Zero growth Long-term average growth (3%) -10 1930 1940 1950 1960 1970 1980 1990 2000 2005

Positive Net Investment [Ig>D] [increasing product. capac.]
Gross Investment - Depreciation = Net Investment Net Investment Gross Investment Depreciation Increased [increasing product. capac.] Consumption and Government Spending Stock of Capital Stock of Capital January 1 Year’s GDP December 31

Depreciation, Investment & Disinvestment
Negative Net Investment Depreciation exceeds Ig Positive Net Investment Ig exceeds Depreciation Investment of $531 bil. Ig $2,105 Trillion Depreciation 1933 $7.6 billion [in current dollars] Disinvestment of $6 billion Great Depression [1933] Declining productive capacity Expanding productive capacity Depreciation 2005 $1,574 Trillion Ig $1.6 billion Ig($1.6) - D($7.6) = (Disinv. of $6) (Disinvest. of $6) + D($7.6)=($1.6) Ig($1.6)–Disinv.($6)=(Depr. of $7.6) Ig($2,105) - D($1,574) = (In of $531) In($531) + D($1,574) = (Ig of $2,105) Ig($2,105)-In($531)=(Depr. of $1,574)

Expanding/Static/Declining Productive Capacity
Expanding Productive Capacity Maintaining our production possibilities Static Productive Capacity Declining Productive Capacity

SHORTCOMINGS OF GDP Non-market Transactions don’t count
Earthquakes, divorces, etc. increase GDP Leisure isn’t factored in Improved Product Quality The Underground Economy GDP’s impact on the Environment Per Capita Output Countries with low GDP per capita have more infants with low birth weight, higher rates of infant mortality, higher rates of maternal mortality, higher rates of child malnutrition, and less common access to safe drinking water. Also, fewer go to school and they have fewer teachers. They have fewer TVs and telephones, fewer paved roads. They also win fewer Olympic medals.

NIA NS 1-10 produced (by/within) a nation in one year.
1. GDP is the monetary value of all final domestic goods/services produced (by/within) a nation in one year. 2. If N.F.F.I. is positive, which means U.S. profits are greater in the ROW than foreign profits in the U.S., then (GDP/GNP) is larger. 3. Double or multiple counting can be avoided by counting only (intermediate/final) goods. 4. (Final/Intermediate) goods and services refer to products purchased by the ultimate users. 5. Transfer payments [when you take tax money from those who are working & give it to those who are not working] (do/do not) count in GDP because they (do/do not) reflect current production. 6. (The purchase of 100 shares of Playboy stock/ The purchase of a drill press) is not considered real investment. 7. If depreciation exceeds gross private domestic investment, it can be concluded that In is (positive/negative) & we have declining productive capacity. 8. Depreciation can be determined by (adding/subtracting) In from Ig. 9. The largest component of GDP (spending) is (C/Ig/G/Xn) and the smallest is (C/Ig/G/Xn). 10. NDP is (GDP-indirect business taxes/GDP-Depreciation). NIA NS 1-10

GDP NS 11 and 11. Real GDP and nominal GDP differ because real GDP has been adjusted for changes in (depreciation/prices). 14. Which economy has expanding productive capacity(positive Ig)? (A/B/C). Which has declining productive capacity[negative Ig? (A/B/C). Which has static productive capacity? (A/B/C).

If this is Pat then this is “The End”.

[16th Ed.] National Income Accounting

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[16th Ed.] National Income Accounting

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