5 Measures of Output National-income accounting: the measurement of aggregate economic activity,particularly national income and its components.These are Macroeconomic measures.Why are economists interested in these measures? …
6 Gross Domestic Product (GDP) is the total dollar value of final output produced within a nation’s borders in a given time period.LO1
7 Gross Domestic Product (GDP) Each good and service produced and brought to market has a price.That price serves as a measure of value for calculating total output.LO1
8 GDP Versus GNP GDP: geographically focused, includes all output produced within a nation’s borders, …regardless of whose factors of production are used to produce it (foreign or domestic).LO1
9 GNP is dead I say! - It’s over! GDP Versus GNPGNP - Gross National Product :the old standard of measure,refers to output produced by American-owned factors, regardless of locationGDP is the new standard of measure since 1992.GNP is dead I say! - It’s over!LO1
10 International Comparisons The geographic focus of GDP facilitates international comparisons of economic activity.LO1
11 GDP per Capita REVIEW: GDP per capita: total GDP divided by total population (average GDP).commonly used as a measure of a country’s standard of living.
16 Non-Market Activities GDP measures exclude most goods and services produced that are not sold in the market.This causes GDP to be understated.Exclusion of non-market activities causes problems when:comparing living standards over time,or between countries.LO1
18 Unreported IncomeThe GDP statistics fail to capture market activities that are not reported to tax or census authorities.The underground economy is motivated by tax avoidance or to conceal illegal activities.LO1
20 Value AddedThe production of most goods and services involves a series of stages.To accurately measure GDP we must distinguish between two types of goods:intermediate goods, and…final goods.This avoids what in the accounting field is known as “double counting.”LO1
21 Value Added in Various Stages of Production (Pg. 91)LO1
22 Value Added Intermediate goods: Value added: goods or services purchased for use as inputs in the production of final goods or services.Value added:the increase in the market value of a product that takes place at each stage of the production process.LO1
23 Two Ways to Calculate GDP 1. Compute the value of the final output.2. Count only the value added at each stage of production.LO2
24 Value added Stages of Production Transaction Value Value Added 1. Logger produces logs forthe sawmill:$500$5002. Sawmill produces lumberfor the furniture factory:$1,200$7003. Furniture factory producesfurniture for the Store:$5,000$3,8004. Store sells furniture to thePublic:$7,500$2,500Total Value of Transactions:$14,200$7,500
26 Computing Real GDP Inflation: the increase in the average level of prices of goods and services.Inflation distorts comparisons of GDP over time.Nominal vs. Real GDP -accounting for inflation.
27 Real Versus Nominal GDP the value of final output produced in a given period, measured in the prices of that period (current prices).Real GDP:the value of final output produced in a given period, adjusted for changing prices.***Why Hidden = Redundant with previous slide as adjusted.
28 Computing Real GDPA base period is picked to be the time period used for comparative analysis.It is the basis for the indexing of price changes.
34 Nominal to Real GDP Year GDP Deflator Nominal GDP(Billions $)Nom. Change(Billions $)Real GDP(Billions $)351432470521531573609609646Real Change(Billions $)
35 Chain-Weighted Price Adjustments Chain-weighted indices use a moving average of price levels in consecutive years as an inflation adjustment.You won’t be tested on chain-weighted indices.LO3
36 Net Domestic Product (NDP) Now let’s make an ADJUSTMENT to GDP:LO3
37 Net Domestic Product (NDP) Example situation:You produceYou’ve got– $1,000↑Wore outProduced→$10,000(GDP)LO3
38 Net Domestic Product (NDP) We can’t produce as much output next year unless…… we replace the capital we use-up this year.Depreciation:- the consumption of capital in the production process.(the wearing out of plant and equipment).LO3
39 Net Domestic Product (NDP) GDP:Total output.NDP:Total output after subtracting the value of capital stock used up.LO3
40 Net Domestic Product (NDP) DepreciationDepreciationGDPGDPNDPDepreciationDepreciationNewCapital StockOldCapital Stock
41 Net Domestic Product (NDP) Net Domestic Product is what we’ve produced (GDP), minus the capital we’ve worn out (depreciation).The amount of output we (C+G) could consume without reducing our stock of capital.NDP = GDP – depreciationLO3
42 Net Domestic Product GDP NDP GDP Capital Stock Old Capital Stock DepreciationDepreciationGDPNDPGDPDepreciationDepreciationCapital StockOldCapital Stock
43 Gross vs. Net Investment production of new plant, equipment, and structures (capital),……plus changes in business inventories,…and new residential construction.LO3
44 Gross vs. Net Investment The difference between GDP and NDP is mirrored by the difference between gross investment and net investment:Gross investment:- total investment expenditure in a given time period.Net investment:= gross investment – depreciationLO3
45 Net Investment Total capital stock has increased Dep. I G GrossInvestmentIGThe change in our capital stockGDP(positive)NDPNet InvestmentGrossInvestmentCGrossInvestmentDepreciationDepreciationNew Capital StockOld Capital Stock
46 Total capital stock has decreased Net InvestmentCGIGrossInvestmentDepreciationGross Inv.Total capital stock has decreasedGGDPNDPNet InvestmentCDepreciationDepreciationDepreciationGross Inv.(negative)Capital Stock
47 Negative Net Investment The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.(***Positive net investment***)LO3
49 The Uses of OutputThe 4 major uses of total output parallel the four sets of market participants:Households – consumption (C) = 70%Business Firms – investment (I) = 17%Government – gov’t spending (G) = 20%Foreigners - net exports (X-M) = –7%
50 Consumption Consumption goods: goods and services used by households are calledConsumer spending claims over two-thirds of our annual output.
52 Government SpendingResources purchased by the government sector are unavailable for consumption or investment purposes.Government spending on goods and services (excludes income transfers) claims about one-fifth of our annual output.
53 Net ExportsNet exports are the value of exports minus the value of imports.Exports are goods and services sold to foreign buyers.Imports are goods and services purchased from foreign sources.
54 GDP ComponentsThe value of GDP can be computed by adding up expenditures of market participants:GDP = C + I + G + (X – M)Where:C = Consumption expenditureI = investment expenditureG = government expenditureX = exportsM = imports
56 Measures of Income GDP accounts have two sides. Expenditures – the demand side.Income – the supply side.LO2
57 Measures of Income Income = Output …so… Income = GDP By charting the flow of income through the economy, we see FOR WHOM our output is produced.LO2
58 The Circular Flow (pg. 44) Product Goods and services markets demanded ConsumersBusinessFirmsProductmarketsFactorGoods and servicesdemandedGoods and servicessuppliedFactors ofproduction suppliedFactors ofproduction demanded
59 Income = Output Factor market Product market VALUE OF OUTPUT (Pg. 97)VALUE OF OUTPUTVALUE OF INCOMEFactor marketProduct marketConsumer spendingWagesInvestment spendingProfitsTaxesGovernment spendingInterestNet exportsRentDepreciationAllowancesLO2
60 The Equivalence of Expenditure and Income (2006 data in billions of dollars) (Pg. 98) LO2
61 Measures of IncomeEconomists break down the nation’s production into various measures of income:GDP gross domestic productNDP net domestic productNI national incomePI personal incomeDI disposable incomeC consumptionS savingsAnd don’t forget:Net investment = gross investment - depreciationLO2
62 Depreciation & Net Domestic Product Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production.NDP = GDP – depreciationLO3
63 Depreciation & Net Domestic Product NDP = GDP – depreciationLO3
64 National Income (NI) National income (NI): total income earned by current, domestically- owned factors of production.Wages, interest, and profits paid to foreigners are not part of U.S. income.They need to be subtracted from the income flow.Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added.This + & - is known as net foreign factor income.LO3
65 National Income (NI) Net foreign factor income = + Foreign wages earned by Americans– American wages paid to foreignersNI = NDP + net foreign factor incomeLO3
66 Personal Income (PI) Personal income (PI): the income received by HOUSEHOLDS before payment of personal taxes.Personal income (PI) = National income (NI),– indirect bus. taxes,– corporate taxes,– retained earnings,– Social Security taxes,+ transfer payments,+ net interest.LO3
67 Personal Income (PI) Indirect Business Taxes: When goods are sold in the marketplace, their purchase price is typically encumbered with some sort of sales tax.LO3
68 Personal Income (PI) Corporate taxes and retained earnings: These are taken out of corporate profits,Therefore, they are not received by households.They must be subtracted from national income.Social security taxes are also subtracted.Transfer payments and net interest are added.LO3
69 Disposable Income Disposable income (DI): the after-tax income of households.It is PI minus personal (income) taxes.It’s what’s left at the end for you and I to spend.Disposable income = personal income– personal taxesLO3
70 Measures of IncomeEconomists break down the nation’s production into various measures of income:GDP gross domestic productNDP net domestic productNI national incomePI personal incomeDI disposable incomeLO2
71 Disposable income = Consumption + Saving All disposable income is either:consumed, or …saved.Saving:disposable income less consumption;(that part of disposable income not spent on current consumption).Disposable income = Consumption + SavingLO3
77 The Flow of IncomeThe dollar value of output will always equal the dollar value of income.LO2
78 The Flow of IncomeTotal income (GDP) ends up distributed in the following way:To households:in the form of disposable income.To businesses:in the form of retained earnings and depreciation allowances.To government:in the form of taxes.LO2
79 Income and Expenditure The flow of income that starts with GDP ultimately returns to the market in the form of:new consumption (C),investment (I), and …government purchases (G).LO2
80 Circular Flow of Spending and Income (Pg. 101)LO2
81 Chapter Questions1. The manuscript for this book was typed by a friend. Had I hired a secretary to do the same job, GDP would have been higher, even though the amount of output would have been identical. Why is this? Does this make sense?
82 Chapter Questions2. GDP I 1981 was $2.96 trillion. It grew to $3.07 trillion in 1982, yet the quantity of output actually decreased. How is this possible?
83 Chapter Questions3. If gross investment is not large enough to replace the capital that depreciates in a particular year, is net investment greater or less than zero? What happens to our production possibilities?
84 Chapter Questions6. What jobs are likely part of the underground economy? 7. How might the quality of life be adversely affected by an increase in GDP?