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purple Tinky ___ ___ 1. You buy a purple Tinky Winky, [produced in TX] from Wal-Mart. paint your house ___ ___ 2. You and your family paint your house.

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Presentation on theme: "purple Tinky ___ ___ 1. You buy a purple Tinky Winky, [produced in TX] from Wal-Mart. paint your house ___ ___ 2. You and your family paint your house."— Presentation transcript:

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2 purple Tinky ___ ___ 1. You buy a purple Tinky Winky, [produced in TX] from Wal-Mart. paint your house ___ ___ 2. You and your family paint your house. [labor involved] marry your housemaid ___ ___ 3. You marry your housemaid. [working-for-love] [her services] buy 100 shares of Microsoft ___ ___ 4. You buy 100 shares of Microsoft Corporation. babysit your little sister ___ ___ 5. You volunteer to babysit your little sister to help your parents while they work. 1965 ford Mustang ___ ___ 6. Bob buys a 1965 ford Mustang convertible, in 2010, which is in mint condition. commission1965 Ford Mustang ___ ___ 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2010. volunteer to cook ___ ___ 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. $500 the dentist keeps Does the $500 the dentist keeps and doesnt report count? $100 billssmuggled drugs ___ ___ 10. You are given suitcase full of $100 bills from the sale of smuggled drugs. mother is teaching you to read ___ ___ 11. Your mother is teaching you to read [& not having much success]. bakes you a home-baked loaf of bread ___ ___ 12. Your dad bakes you a home-baked loaf of bread. [his labor] buy a loaf of bread ___ ___ 13. You buy a loaf of bread from Krogers Grocery Store. government purchases 5 B-2 Bombers ___ ___ 14. The U.S. government purchases 5 B-2 Bombers for $2 B each. ton of sheet metal used in making car doors ___ ___ 15. Ford buys a ton of sheet metal used in making car doors. iPad 2 ___ ___ 16. You buy a new iPad 2 [produced in China] from the Apple store. cleaning your teeth ___ ___ 17. You send in a $90 check to your dentist for cleaning your teeth. buys a new house ___ ___ 18. Your family buys a new house next to the mansion of Bill Gates. teachers are hired ___ ___ 19. 100 additional teachers are hired by the Frisco ISD. $500 million worth of robots ___ ___ 20. GM invest in $500 million worth of robots to assemble their cars. volunteer 10 hours a week ___ ___ 21. You volunteer 10 hours a week of your time to work for senior citizens. 25,000 F150s ___ ___ 22. Ford produces 25,000 F150s in Denver which are not sold by the end of the year. 3,000Dell computers, Rusky Dell Dudes ___ ___ 23. R ussia buys 3,000 Dell computers, produced in NY, as they become Rusky Dell Dudes. mans wifeworking for him 16 hours per day ___ ___ 24. A mans wife does all his cooking and sewing, working for him 16 hours per day. producesNike Air Jordans in Vietnam ___ ___ 25. Nike produces $10 million worth of Nike Air Jordans in Vietnam. YC N6 N 6 N3 N6 N1 YC N 8N N 7 N 6 6 N 6 YC Y G N 4 N 5 YC Y Ig YG YIg N6 Y Ig YX N6 N5 1. 2 nd Hd sales 2. Transfers 3. Financial 4. Intermediate 5. Overseas 6. Non-market 7. Illegal 8. Unreported Check your Homework!

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5 GDP= C +I+G+Xn (The Gross Domestic Product) = Consumption+Investment+Government Spending+ Net Exports (all exports-all imports) NDP= GDP- Depreciation (Net Domestic Product) NI= NDP +NFFIEUS- Statistical Discrepancy (National Income) Net Foreign Factor Income earned in US UCS TTPI= NI- U ndis Corp Pro– C orp Inc Taxes - S oc Secur- T axes on pro. & M+ T P= (Undistributed Corporate Profits-Corporate Income Taxes- Social Security- Taxes on Production and Imports- Transfer Payments) (Personal Income) DI= PI- personal income taxes) (Disposable Income) National Income Accounting

6 -Personnel Taxes-$1,102 $10, 089 [C] C onsumption [66%] $12,392[births-deaths]Available for sale $12,026 PI is what we can spend, save, or pay in taxes. Income received by households,whether earned or unearned $10,924DI is what we can SPENDor SAVE. Y received/not earned Y earned/not received GDP Gross Domestic Product $14,256 NDP National Domestic Product $12,392NI National Income $12,288 PI Personal income $12,026 DI Disposable Income $10,924 G ross P rivate DomesticInvestment $1, 628 GovernmentPurchases$2,931 Xn(X-M)-$392 - Depreciation [Replacement Cap.] $1,864 $12,288 Income earned by U.S. resources plus taxes on pro- duction & imports Statistical Discrep. - Statistical Discrep.$209 [to make the income approach match the expenditure approach] +N.F.F.I.$105 +$2,528 Trans Pay -$418 Undis Cor Pro -$315 Corp Inc Tax -$967Soc Sec Con -1090 Ta xes on pro.& M ROW[$264] U.S. [$159] NFFI = $105 U Can See Those ThunderducksU Can See Those Thunderducks

7 Depreciation1933 $7.6 billion [in current dollars] Depreciation, Investment & Disinvestment Positive Net Investment Ig exceeds Depreciation Negative Net Investment Depreciation exceeds Ig I g $1.6 billion D isinvestment of $6 billion Declining productive capacity I g($1.6) - D($7.6) = (Disinv. of $6) (Disinvest. of $6) + D($7.6)=($1.6) I g($1.6)–D isinv.($6)=( Depr. of $7.6) I g($2,105) - D($1,574) = (In of $531) I n($531) + D($1,574) = ( I g of $2,105) I g($2,105)- I n($531)=( Depr. of $ 1,574) Depreciation2005 $1,574 Trillion I g $2,105 Trillion In I nvestment of $ 531 bil. Expanding productive capacity

8 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%

9 N.F.F.I. = $10 billion [U.S.A. Profits Overseas ] R est o f W o rld $220 billion $220 billion F oreign Profits in U.S.A. $210 billion If U.S. profits in the ROW [$220] are greater than If U.S. profits in the ROW [$220] are greater than foreign profits in the U.S. [$210], add the difference. foreign profits in the U.S. [$210], add the difference.

10 [U.S.A. Profits Overseas] R est o f W orld $200 billion $200 billion U.S.A. F oreign Profits in U.S.A. $212 billion If foreign profits in the U.S. [$212] are greater than U.S. profits in the ROW [$200], subtract the difference. N.F.F.I.E.U.S. = -$12 billion

11 Simon Kuznets Simon Kuznets Father of GDP quantitative precision to economic entities Father of GDP - gave quantitative precision to economic entities Sir Richard Stone After WWII, Stone headed a U.N. project that developed a standard NIA model for other countries. Today, most countries follow these guidelines, making international comparisons possible.

12 C + Ig + G + Xn[X-M] C + Ig + G + Xn[X-M] = GDP GDP – Depreciation = [what is for sale] NDP NDP + NFFIEUS –Statistical Discrepancy = NI UCSTT NI – U ndis Corp Pro– C orp Inc Taxes - S oc Secur- T axes on pro. & M+ T P= PIspend, save, or pay in taxes [ PI is what you can spend, save, or pay in taxes ] PI – Personal Income Taxes = DIspend or save [ DI is what you can spend or save ] [Replacement capital] [GDP and its four cousins] -

13 NDP NI PI DI GDP

14 C = $_______ Ig = $_______ Ig = $_______ G = $_______ G = $_______ Xn = $_______ Xn = $_______ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) N + Net For. Factor Inc. Earn. U.S. Statistical Discrepancy -Statistical Discrepancy National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions T -Taxes on prod. & imports +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) [18 th Edition] NIA Practice – How To Do It Personal taxes 403-Undistributed corp. profits 46 Personal taxes 403-Undistributed corp. profits 46 Imports 362-Social Security contrib. 169 Imports 362-Social Security contrib. 169 +Transfer payments 283Personal consumption 2,316 +Transfer payments 283Personal consumption 2,316 -Corporate Income Taxes 88Gross private domes invest. 503 -Corporate Income Taxes 88Gross private domes invest. 503 -Taxes on prod. & imports 231Government purchases 673 -Taxes on prod. & imports 231Government purchases 673 Exports 465Depreciation [Capital consumption] 307 Exports 465Depreciation [Capital consumption] 307 Statistical Discrepancy 10N.F.F.I.E. in the U.S. -12 $112 NFFI = -$12 2,316 503 673 +103 3,595 - 307 3,288 - 12 - 231 3,266 - 46 - 88 - 169 + 283 - 534 3,015 - 403 2,612 ROW $ 100 English C Accounting C American History D Economics F - 10 Im going through an academic recession. $ _____ ______ $______ ______ $ _____ ______ $ _____ ______ $ _____

15 C = $_______ Ig = $_______ Ig = $_______ G = $_______ G = $_______ Xn = $_______ Xn = $_______ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) N + Net For. Factor Inc. Earn. U.S. Statistical Discrepancy -Statistical Discrepancy National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions T -Taxes on prod. & imports +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) [18 th Edition] NIA Practice – How To Do It Personal taxes 403-Undistributed corp. profits 46 Personal taxes 403-Undistributed corp. profits 46 Imports 362-Social Security contrib. 169 Imports 362-Social Security contrib. 169 +Transfer payments 283Personal consumption 2,316 +Transfer payments 283Personal consumption 2,316 -Corporate Income Taxes 88Gross private domes invest. 503 -Corporate Income Taxes 88Gross private domes invest. 503 -Taxes on prod. & imports 231Government purchases 673 -Taxes on prod. & imports 231Government purchases 673 Exports 465Depreciation [Capital consumption] 307 Exports 465Depreciation [Capital consumption] 307 Statistical Discrepancy 10N.F.F.I.E. in the U.S. -12 $112 NFFI = -$12 ROW $ 100 $___ ___ ______ $______ ______ $ _____ ______ $ _____ ______ $ _____

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17 C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) + Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions -Taxes on prod. & imports +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) [18 th Edition] Personal taxes 370-Undistributed corp. profits 65 Personal taxes 370-Undistributed corp. profits 65 Statistical Discrepancy 12 -Social Security contrib. 158 Statistical Discrepancy 12 -Social Security contrib. 158 +Transfer payments 330Personal consumption 1,820 +Transfer payments 330Personal consumption 1,820 -Corporate Income Taxes 98Gross private domes invest. 447 -Corporate Income Taxes 98Gross private domes invest. 447 -Taxes on prod. & imports 265Government purchases 587 -Taxes on prod. & imports 265Government purchases 587 Exports 377Depreciation [capital consumption] 317 Exports 377Depreciation [capital consumption] 317 Imports 348N.F.F.I.E. in the U.S. 10 Imports 348N.F.F.I.E. in the U.S. 10 1,820447587+29 $ 2,883 -317$2,566+10-12 $ 2,564 -65-98-158-265 + +330 $ 2,308 -370 $ 1,938 $100 NFFI = $ 10 ROW $ 110

18 C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) + Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions -Taxes on prod. & imports +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) [18 th Edition] Personal taxes 370-Undistributed corp. profits 65 Personal taxes 370-Undistributed corp. profits 65 Statistical Discrepancy 12 -Social Security contrib. 158 Statistical Discrepancy 12 -Social Security contrib. 158 +Transfer payments 330Personal consumption 1,820 +Transfer payments 330Personal consumption 1,820 -Corporate Income Taxes 98Gross private domes invest. 447 -Corporate Income Taxes 98Gross private domes invest. 447 -Taxes on prod. & imports 265Government purchases 587 -Taxes on prod. & imports 265Government purchases 587 Exports 377Depreciation [capital consumption] 317 Exports 377Depreciation [capital consumption] 317 Imports 348N.F.F.I.E. in the U.S. 10 Imports 348N.F.F.I.E. in the U.S. 10 _____________________________________________________________________________________________________________________________________________ $100 NFFI = ____ ROW $ 110

19 C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions -Taxes on prod. & imports +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) [18 th Edition] Exports 95-U ndistributed corp. profits 37 Exports 95-U ndistributed corp. profits 37 Imports 75-Social Security contrib. 25 Imports 75-Social Security contrib. 25 +Transfer payments 39Personal consumption 310 +Transfer payments 39Personal consumption 310 -C orporate I ncome T axes 55Gross private domes invest. 85 -C orporate I ncome T axes 55Gross private domes invest. 85 -Taxes on prod. & imports 15Government purchases 130 -Taxes on prod. & imports 15Government purchases 130 Personal taxes 60N.F.F.I.E. -18 Statistical Discrepancy 15Depreciation 25 _310__85130___20_545___25___520__-18__15$487-37-55-25-15+39$394-60$334 $118 NFFI = -$18 ROW$100

20 C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic ProductGDP Gross Domestic Product (GDP) - Consumption of fixed capital Net Domestic ProductNDP Net Domestic Product (NDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy National IncomeNI National Income (NI) - U - Undistributed Corporate Profits -C -Corporate income taxes -S -Social Security Contributions -Taxes on prod. & imports +T +Transfer payments Personal IncomePI Personal Income (PI) - Personal Taxes Disposable IncomeDI Disposable Income (DI) [18 th Edition] Exports 95-U ndistributed corp. profits 37 Exports 95-U ndistributed corp. profits 37 Imports 75-Social Security contrib. 25 Imports 75-Social Security contrib. 25 +Transfer payments 39Personal consumption 310 +Transfer payments 39Personal consumption 310 -C orporate I ncome T axes 55Gross private domes invest. 85 -C orporate I ncome T axes 55Gross private domes invest. 85 -Taxes on prod. & imports 15Government purchases 130 -Taxes on prod. & imports 15Government purchases 130 Personal taxes 60N.F.F.I.E. -18 Statistical Discrepancy 15Depreciation 25 ________________________________________________________________________________________________________ $118 NFFI = -$18 ROW$100

21 C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ 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 -Taxes on prod. and imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [18 th Edition] Personal taxes 50-Undistributed corp. profits 23 Exports 109-Social Security contrib. 40 Imports 89Personal consumption 358 +Transfer payments 41Gross private domes invest. 130 -Corporate income taxes38Government purchases 165 -Taxes on prod. & imports21Depreciation [capital consumption] 45 Statistical Discrepancy 8N.F.F.I.E. in the U.S. -23 358130165+20 $ 673 -45$628-23-8 $ 597 -23-38-40-21+41 $ 516 -50 $ 466 $123 NFFI = -$23 ROW $100

22 C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ 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 -Taxes on prod. and imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [18 th Edition] Personal taxes 60-Undistributed corp. profits 16 Exports 37-Social Security contrib. 32 Imports 23Personal consumption 312 +Transfer payments 50Gross Investment 104 -Corporate income taxes 42Government purchases 110 -Taxes on prod. & imports 34N.F.F.I.E. in the U.S. -30 Depreciation [cap. Consumption] 24Statistical Discrepancy 14 312104110+14 $ 540 -24$516-30-14 $ 472 -16-42-32-34+50 $ 398 -60 $ 338 $130 NFFI = -$30 ROW$100 A streaker

23 BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GDI [$14,256] GDP [$14,256] =

24 total spending on U.S. productiontotal income received from that production.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]Expenditure approach [C+Ig+G+Xn] Gross Domestic Production –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) ]Income approach [R+I+P+SA+W (RIP SAW) ] Gross Domestic Income[sales] –Adds up the aggregate income earned during the year by those who produce that output Gross Domestic Income[sales]

25 Expenditure Approach Gross Domestic Production Income Approach Gross Domestic Sales GDPGDP == + Consumption by Households Investment by Businesses Government Purchases Expenditures By Foreigners + + + + + Rents Interest Profits Statistical Adjustments [corporate income taxes, Dividends, undistributed Corporate profits] Wages +

26 Compensation of Employees R Rents I Interest P Profits [Proprietors Income] SA [statistical adjustments] SA [statistical adjustments] Corporate Income Taxes Dividends Dividends Undistributed Corporate Profits W ages W ages THE INCOME APPROACH [RIP SAW]

27 Receipts: Expenditures Approach C $10,089 Ig 1,628 G 2,931 Xn -392 $14,256 GDP $14,256 Allocations: Income Approach ____ Compensation of Compensation of employees $ 7,792 Rents Rents 268 Interest 788 Proprietors income 1,040 Corporate Profits 1,309 Taxes on production & imports 1,090 National Income $12,288 Net Foreign Factor Inc 105 Statistical Discrepancy 209 C onsumption of fixed capital 1,864 $14,256 GDP $14,256

28 [8 pts]counted in 3. [8 pts] Indicate whether each of the following is counted in the U.S. GDP the U.S. GDP for the year 2006. E xplain each of your answers. used textbook (a) The value of used textbook sold through online auction in 2006. 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] Rent b. Rent paid in 2006 by residents in an apartment building built in 2000 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] Commissions c. Commissions earned in 2006 by a stockbroker 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. You are consuming a service 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] 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. ownership. These autos were produced in South Korea. [2 pts: 1 pt for not included and 1 pt for saying produced in Korea]

29 Nominal GDP [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]

30 Importance of Real GDP in Determining a Recession Apple GDP Example A country produces 10 apples in base year x $1; Nominal [current] & Real [constant] 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) Real GDP measures current output at base-year prices.

31 Nominal [money] GDP v. Real GDP increase in pricesoutput An increase in prices and/or output will increase nominal GDP nominal GDP. increase in output will increase real 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 nominal GDP measures output & prices So, nominal GDP measures output & prices. Real measures only output [actual production] Constant (real) GDP current (money) GDP Constant (real) GDP v. current (money) GDP

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

33 Real GDP takes the air out of the nominal GDP balloon. The effects of inflation have been eliminated, so the remaining changes are real changes. Nominal GDP – measured in terms of money. [Current output measured in current prices] Real GDP – measured in terms of goods/services. base-year prices [Current output measured in base-year prices] $13,847119.98 $11,541 [$13,847/119.98 x 100=$11,541] Real GDP [& Nominal GDP] $9,847 Real GDP $11,541 GDP Deflator [119.98] + $1,694 trillion Nominal GDP [$13,847] Inflationcomponent 2000 2006 Base Year [not $4 trillion ]

34 [Real GDP must decline for 6 months] [Real GDP must decline for 6 months]

35 Recession [Real, not nominal GDP has declined] Recession [Real, not nominal GDP has declined]1990-91 Real GDP Inflationcomponent

36 19301940195019601970198019902000 Annual growth GROWTH RATE (percent per year) Long-term average growth (3%) Recessions Zero growth 0 3 5 10 15 20 -10 -5 The Business Cycle in U.S. History [12 Recessions since WWII, from 6 months to 16 months] 2007

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

38 Depreciation1933 $7.6 billion [in current dollars] Depreciation, Investment & Disinvestment Positive Net Investment Ig exceeds Depreciation Negative Net Investment Depreciation exceeds Ig I g $1.6 billion D isinvestment of $6 billion Declining productive capacity I g($1.6) - D($7.6) = (Disinv. of $6) (Disinvest. of $6) + D($7.6)=($1.6) I g($1.6)–D isinv.($6)=( Depr. of $7.6) I g($2,105) - D($1,574) = (In of $531) I n($531) + D($1,574) = ( I g of $2,105) I g($2,105)- I n($531)=( Depr. of $ 1,574) Depreciation2005 $1,574 Trillion I g $2,105 Trillion In I nvestment of $ 531 bil. Expanding productive capacity

39 Expanding/Static/Declining Productive Capacity Expanding/Static/Declining Productive CapacityMaintaining our production possibilities Expanding Productive Capacity Static Productive Capacity Declining Productive Capacity increased decreased No change

40 Non-market Transactions dont count Earthquakes, divorces, etc. increase GDP Leisure isnt factored in Improved Product Quality The Underground Economy GDPs impact on the Environment Per Capita Output low GDP per capitamore infants with low birth weighthigher rates of infant mortalityhigher rates of maternal mortalityhigher rates of child malnutrition safe drinking waterfewer go to schoolfewer teachersfewer TVstelephonesfewer paved roadsfewer Olympic medals 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. SHORTCOMINGS OF GDP

41 GDP 1. GDP is the monetary value of all final domestic goods/services produced (by/within) a nation in one year. N.F.F.I. is positive 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. multiple counting 3. Double or multiple counting can be avoided by counting only (intermediate/final) goods. 4. (Final/Intermediate) goods and services refer to products ultimate users purchased by the ultimate users. Transfer payments 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/ not considered real investment The purchase of a drill press) is not considered real investment. depreciation exceeds gross private domestic investment 7. If depreciation exceeds gross private domestic investment, it can be concluded that In is (positive/negative) & we have declining productive capacity. Depreciation 8. Depreciation can be determined by (adding/subtracting) In from Ig. largest component of GDP 9. The largest component of GDP (spending) is (C/Ig/G/Xn) and the smallest is (C/Ig/G/Xn). NDP 10. NDP is (GDP-indirect business taxes/GDP-Depreciation). NIA NS 1-10

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

43 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) Capital Consumption Net Domestic Product (NDP) Net Foreign Factor Inc. Earned in the U.S. Statistical discrepancy Statistical discrepancy National Income (NI) Undistributed Corporate Profits Corporate income taxes Social Security Contributions Taxes on production and imports Taxes on production and imports Transfer payments Transfer payments Personal Income (PI) Personal Taxes Disposable Income (DI) Exports 34-Undistributed corp. profits 35 Exports 34-Undistributed corp. profits 35 Imports 32-Social Security contrib. 25 Imports 32-Social Security contrib. 25 +Transfer payments 42Personal consumption 260 +Transfer payments 42Personal consumption 260 -Corporate Income Taxes 40Gross private domes invest. 75 -Corporate Income Taxes 40Gross private domes invest. 75 -Taxes on prod. & imports 30Government purchases 100 -Taxes on prod. & imports 30Government purchases 100 Personal Taxes 50Depreciation [capital consumption] 15 Statistical discrepancy 30 N.F.F.I. 20 _______$ _______ _______$_______$______$______$ $100 NFFI = $__ ROW$120

44 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) - Capital Consumption Net Domestic Product (NDP) +Net Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy -Statistical discrepancy National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production and imports -Taxes on production and imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [18 th Edition] [18 th Edition] Exports 34-Undistributed corp. profits 35 Exports 34-Undistributed corp. profits 35 Imports 32-Social Security contrib. 25 Imports 32-Social Security contrib. 25 +Transfer payments 42Personal consumption 260 +Transfer payments 42Personal consumption 260 -Corporate Income Taxes 40Gross private domes invest. 75 -Corporate Income Taxes 40Gross private domes invest. 75 -Taxes on prod. & imports 30Government purchases 100 -Taxes on prod. & imports 30Government purchases 100 Personal Taxes 50Depreciation [capital consumption] 15 Statistical discrepancy 30 N.F.F.I. 20 26075100+2 $ 437 -15$422+20-30 $ 412 -35-40-25-30+42 $ 324 -50 $ 274 $100 NFFI = $20 ROW$120

45 Clear your Desks! QUIZ TIME!!!

46 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) - Capital Consumption Net Domestic Product (NDP) + Net Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy -Statistical discrepancy National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production and imports -Taxes on production and imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [18 th Edition] [18 th Edition] Exports 97-Undistributed corp. profits 16 Exports 97-Undistributed corp. profits 16 Imports 117-Social Security contrib. 32 Imports 117-Social Security contrib. 32 +Transfer payments 36Personal consumption 340 +Transfer payments 36Personal consumption 340 -Corporate Income Taxes 28Gross private domes invest. 116 -Corporate Income Taxes 28Gross private domes invest. 116 -Taxes on prod. & imports 24Government purchases 170 -Taxes on prod. & imports 24Government purchases 170 Personal taxes 58Depreciation [capital consumption] 25 Personal taxes 58Depreciation [capital consumption] 25 Statistical discrepancy 24 N.F.F.I. 15 Statistical discrepancy 24 N.F.F.I. 15 340116170-20 $ 606 -25$581+15-24$572-16-28-32-24+36$508-58$450 $100 NFFI = $15 ROW$115

47 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) Capital Consumption Net Domestic Product (NDP) Net Foreign Factor Inc. Earned in the U.S. Statistical discrepancy Statistical discrepancy National Income (NI) Undistributed Corporate Profits Corporate income taxes Social Security Contributions Taxes on production and imports Taxes on production and imports Transfer payments Transfer payments Personal Income (PI) Personal Taxes Disposable Income (DI) Name__________________________ Exports 97-Undistributed corp. profits 16 Exports 97-Undistributed corp. profits 16 Imports 117-Social Security contrib. 32 Imports 117-Social Security contrib. 32 +Transfer payments 36Personal consumption 340 +Transfer payments 36Personal consumption 340 -Corporate Income Taxes 28Gross private domes invest. 116 -Corporate Income Taxes 28Gross private domes invest. 116 -Taxes on prod. & imports 24Government purchases 170 -Taxes on prod. & imports 24Government purchases 170 Personal taxes 58Depreciation [capital consumption] 25 Personal taxes 58Depreciation [capital consumption] 25 Statistical discrepancy 24 N.F.F.I. 15 Statistical discrepancy 24 N.F.F.I. 15 ______$______$______$_____$_____$ $100 NFFI = $___ ROW$115

48 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) - Capital Consumption Net Domestic Product (NDP) +N et Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production & imports -Taxes on production & imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [17 th Edition] [17 th Edition] Personal taxes 1,210-Undistributed corp. profits 460 Exports 1,101-Social Security contrib. 871 Imports 1,828Personal consumption 8,746 +Transfer payments 1,970Gross private domes invest. 2,105 -Corporate income taxes 378Government purchases 2,363 -Taxes on prod. & imports 917Depreciation [capital consumption] 1,574 Statistical Discrepancy 43 N.F.F.I. 34 8,746 2,105 2,363 -727 $ 12,487 -1,574 $10,913 34 -43 $10,904 -460 -378 -871 -917 +1,970 $10,248 -1,210$9,038 ROW$244 $210 NFFI = 34

49 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) Capital Consumption Net Domestic Product (NDP) N et Foreign Factor Inc. Earned in the U.S. Statistical discrepancy National Income (NI) Undistributed Corporate Profits Corporate income taxes Social Security Contributions Taxes on production & imports Taxes on production & imports Transfer payments Transfer payments Personal Income (PI) Personal Taxes Disposable Income (DI) Name_______________________ Personal taxes 1,210-Undistributed corp. profits 460 Exports 1,101-Social Security contrib. 871 Imports 1,828Personal consumption 8,746 +Transfer payments 1,970Gross private domes invest. 2,105 -Corporate income taxes 378Government purchases 2,363 -Taxes on prod. & imports 917Depreciation [capital consumption] 1,574 Statistical Discrepancy 43 N.F.F.I. 34 _______ $ _______ $ _______ $ ______ $ _______$ ROW$244 $210 NFFI = $__

50 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) - Capital Consumption Net Domestic Product (NDP) +N et Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production & imports -Taxes on production & imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [18 th Edition] [18 th Edition] -Undistributed corp. profits 344 Personal taxes 1,482-Undistributed corp. profits 344 Exports 1,625-Social Security contrib. 979 Imports 2,333Personal consumption 9,734 +Transfer payments 2,237Gross private domes invest. 2,125 -Corporate income taxes 467Government purchases 2,690 -Taxes on prod. & imports 1,009Depreciation [capital consumption] 1,687 Statistical Discrepancy 29 N.F.F.I. 96 9,734 2,125 2,690 -708 $ 13,841 -1,687 $12,154 96 -29 $12,221 -344 -467 -979 -1,009 +2,237 $11,659 -1,482$10,177 ROW$286 $190 NFFI = 96

51 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) Capital Consumption Net Domestic Product (NDP) N et Foreign Factor Inc. Earned in the U.S. Statistical discrepancy National Income (NI) Undistributed Corporate Profits Corporate income taxes Social Security Contributions Taxes on production & imports Taxes on production & imports Transfer payments Transfer payments Personal Income (PI) Personal Taxes Disposable Income (DI) Name_______________________ -Undistributed corp. profits 344 Personal taxes 1,482-Undistributed corp. profits 344 Exports 1,625-Social Security contrib. 979 Imports 2,333Personal consumption 9,734 +Transfer payments 2,237Gross private domes invest. 2,125 -Corporate income taxes 467Government purchases 2,690 -Taxes on prod. & imports 1,009Depreciation [capital consumption] 1,687 Statistical Discrepancy 29 N.F.F.I. 96 _______ $ _______ $ _______ $ ______ $ ______$ ROW$286 $190 NFFI = $__

52 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) - Capital Consumption Net Domestic Product (NDP) +N et Foreign Factor Inc. Earned in the U.S. -Statistical discrepancy National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions -Taxes on production & imports -Taxes on production & imports +Transfer payments +Transfer payments Personal Income (PI) - Personal Taxes Disposable Income (DI) [19 th Edition] [19 th Edition] -Undistributed corp. profits 418 Personal taxes 1,102-Undistributed corp. profits 418 Exports 1,576-Social Security contrib. 967 Imports 1,968Personal consumption 10,089 +Transfer payments 2,528Gross private domes invest. 1,628 -Corporate income taxes 315Government purchases 2,931 -Taxes on prod. & imports 1,090Depreciation [capital consumption] 1,864 Statistical Discrepancy 209 N.F.F.I. 105 10,089 1,628 2,931 -392 $ 14,256 -1,864 $12,392 105 -209 $12,288 -418 -315 -967 -1,090 +2,528 $12,026 -1,102$10,924 ROW$286 $181 NFFI = 96

53 C = $ C = $ Ig = $ Ig = $ G = $ G = $ Xn = $ Xn = $ Gross Domestic Product (GDP) Capital Consumption Net Domestic Product (NDP) N et Foreign Factor Inc. Earned in the U.S. Statistical discrepancy National Income (NI) Undistributed Corporate Profits Corporate income taxes Social Security Contributions Taxes on production & imports Taxes on production & imports Transfer payments Transfer payments Personal Income (PI) Personal Taxes Disposable Income (DI) Name________________________ -Undistributed corp. profits 418 Personal taxes 1,102-Undistributed corp. profits 418 Exports 1,576-Social Security contrib. 967 Imports 1,968Personal consumption 10,089 +Transfer payments 2,528Gross private domes invest. 1,628 -Corporate income taxes 315Government purchases 2,931 -Taxes on prod. & imports 1,090Depreciation [capital consumption] 1,864 Statistical Discrepancy 209 N.F.F.I. 105 _______ $ _____ $ _______ $ _______ $ _______$ ROW$286 $181 NFFI = $__

54 If this is Pat then this is The End. If this is Pat then this is The End.

55 NIA Answers NIA Answers NIA 1: $1938 [GDP of $2,883] [NDP of $2,566] NIA 2: $334 [GDP of $545] [NDP of $520] NIA 3: $466 [GDP of $673] [NDP of $628] NIA 4: $338 [GDP of $538] [NDP of $516] NIA 5: $274 [GDP of $437] [NDP of $422] Quiz#1$450 [GDP of $606] [NDP of $581] Quiz#2 $9,038 [GDP of $606] [NDP of $10,913] For 2007: $10,177 [NDP of $12,154] $12,392 For 2009: $10,924[NDP of $12,392] Homework: $1,658[NDP of $2,246]


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