1. Copyright 2008 The McGraw-Hill Companies 6-1 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 6 Measuring Domestic Output and National Income

2. Copyright 2008 The McGraw-Hill Companies 6-2 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Chapter Objectives How GDP is Defined and Measured Relationships Between GDP, Net Domestic Product, National Income, Personal Income, and Disposable Income The Nature and Function of a GDP Price Index The Difference Between Nominal GDP and Real GDP Some Limitations of the GDP Measure

3. Copyright 2008 The McGraw-Hill Companies 6-3 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Assessing Economy’s Performance National Income Accounting Bureau of Economic Analysis Gross Domestic Product (GDP) –A Monetary Measure –Avoid Multiple Counting Intermediate Goods Final Goods Value Added –Exclude Nonproduction Transactions

4. Copyright 2008 The McGraw-Hill Companies 6-4 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Assessing Economy’s Performance Financial Transactions Excluded –Public Transfer Payments –Private Transfer Payments –Stock (and Bond) Market Transactions Second Hand Sales

5. Copyright 2008 The McGraw-Hill Companies 6-5 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Two Approaches to GDP Income Approach –Wages –Rental Incomes –Interest Incomes –Profits Expenditure Approach –Final-Product or Value- Added –The Sum of the Money Spent to Buy the Output

6. Copyright 2008 The McGraw-Hill Companies 6-6 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Two Approaches to GDP Expenditure Approach Income Approach GDPGDP == + Consumption by Households Investment by Businesses Government Purchases Expenditures By Foreigners + + + + + Wages Rents Interest Profits Statistical Adjustments +

7. Copyright 2008 The McGraw-Hill Companies 6-7 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Expenditure Approach Personal Consumption Expenditures Durable Consumer Goods Nondurable Consumer Goods Consumer Expenditures for Services Gross Private Domestic Investment Machinery, Equipment, and Tools All Construction Changes in Inventories Noninvestment Transactions C IgIg

8. Copyright 2008 The McGraw-Hill Companies 6-8 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Expenditure Approach January 1Year’s GDPDecember 31 Consumption & Government Spending Depreciation Net Investment Gross Investment Stock of Capital Increased Stock of Capital Gross Investment Depreciation Net Investment - =

9. Copyright 2008 The McGraw-Hill Companies 6-9 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Expenditure Approach Government Purchases Expenditures for Goods and Services Expenditures for Social Capital Net Exports X n = Exports (X) – Imports (M) Putting It All Together: GDP = C + I + G + X n GDP= $8,746 + 2,105 + 2,363 - 727 = $12,487 in 2005 G XnXn

10. Copyright 2008 The McGraw-Hill Companies 6-10 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show GDP Approaches Compared Compensation Rents Interest Proprietor’s Income Corporate Profits Taxes on Production and Imports National Income Net Foreign Factor Income Statistical Discrepancy Consumption of Fixed Capital Gross Domestic Product $ 7125 73 498 939 1352 917 $10,904 -34 43 1574 $ 12,487 Personal Consumption (C) Gross Private Domestic Investment (I g ) Government Purchases (G) Net Exports (X n ) Gross Domestic Product Accounting Statement for the U.S. Economy, 2005 in Billions Receipts Expenditures Approach Allocations Income Approach $ 8746 2105 2363 -727 $ 12,487

11. Copyright 2008 The McGraw-Hill Companies 6-11 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Comparative GDPs Source: World Bank Select Nations GDPs - 2005 United States Japan Germany China United Kingdom France Italy Spain Canada Brazil Korea, Rep. India Mexico Russian Fed. Australia 0 1 2 3 4 5 6 7 8 9 10 12 $12.4 $4.5 $2.8 $2.2 $2.1 $1.7 $1.1 $.79 $.78 $.77 $.76 $.70 GDP in Trillions of Dollars GLOBAL PERSPECTIVE

12. Copyright 2008 The McGraw-Hill Companies 6-12 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show The Income Approach Compensation of Employees Rents Interest Proprietor’s Income Corporate Profits –Corporate Income Taxes –Dividends –Undistributed Corporate Profits –Taxes on Production and Imports

13. Copyright 2008 The McGraw-Hill Companies 6-13 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show The Income Approach From National Income to GDP –Net Foreign Factor Income –Statistical Discrepancy –Consumption of Fixed Capital Other National Accounts –Net Domestic Product (NDP) –National Income (NI) –Personal Income (PI) –Disposable Income (DI) DI = C + S W 6.1

14. Copyright 2008 The McGraw-Hill Companies 6-14 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show The Income Approach Gross Domestic Product (GDP) Consumption of Fixed Capital Net Domestic Profit (NDP) Statistical Discrepancy Net Foreign Factor Income National Income (NI) Taxes on Production and Imports Social Security Contributions Corporate Income Taxes Undistributed Corporate Profits Transfer Payments Personal Income (PI) Personal Taxes Disposable Income (DI) $ 12,487 -1,574 $ 10,913 -43 34 $ 10,904 -917 -871 -378 -460 +1,970 $ 10,248 -1,210 $ 9,038 Income Relationships – United States, 2005

15. Copyright 2008 The McGraw-Hill Companies 6-15 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Circular Flow Revisited U.S. Domestic Output and the Flows of Expenditure and Income

16. Copyright 2008 The McGraw-Hill Companies 6-16 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Nominal Versus Real GDP Nominal GDP Real GDP Price Index GDP Price Index Price Index In Given Year =x100 Price of Market Basket In Specific Year Price of Same Basket In Base Year Real GDP = Nominal GDP Price Index (in hundredths) O 6.1 W 6.2

17. Copyright 2008 The McGraw-Hill Companies 6-17 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Shortcomings of GDP Nonmarket Activities Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of the Output Noneconomic Sources of Well-Being

18. Copyright 2008 The McGraw-Hill Companies 6-18 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Shortcomings of GDP Source: Journal of Economic Literature Underground Economy as a Percentage of GDP - Select Nations Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland 0 5 10 15 20 25 30 Percentage of GDP GLOBAL PERSPECTIVE

19. Copyright 2008 The McGraw-Hill Companies 6-19 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Magical Mystery Tour Consumption –Census Bureau’s Retail Trade Survey –Census Bureau’s Survey of Manufacturers –Census Bureau’s Service Survey Investment –All Consumption Data Sources –Survey of Manufacturers –Service Survey –Industry Sources –Census Bureau’s Housing Starts Survey and Housing Sales Survey –Retail Trade Survey –Wholesale Trade Survey –Survey of Manufacturing Last Word BEA Sources of Data for Analysis

20. Copyright 2008 The McGraw-Hill Companies 6-20 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Magical Mystery Tour Government Purchases –Office of Personnel Management –Construction Surveys –Census Bureau’s Survey of Government Finance Net Exports –U.S. Customs Service –BEA Surveys and Analysis Last Word

21. Copyright 2008 The McGraw-Hill Companies 6-21 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Key Terms national income accountingnational income accounting gross domestic productgross domestic product intermediate goods final goods multiple counting value added expenditures approach income approach personal consumption expenditures (C)personal consumption expenditures (C) gross private domestic investment (I g )gross private domestic investment (I g ) net private domestic investmentnet private domestic investment government purchases net exports (X n )net exports (X n ) taxes on production and importstaxes on production and imports national income consumption of fixed capitalconsumption of fixed capital net domestic product (NDP)net domestic product (NDP) personal income (PI)personal income (PI) disposable income (DI)disposable income (DI) nominal GDP real GDP price index

22. Copyright 2008 The McGraw-Hill Companies 6-22 Assessing the Economy’s Performance Two Approaches to GDP Expenditure Approach GDP Approaches Compared Income Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Next Chapter Preview… Introduction to Economic Growth, Unemployment, and Inflation