2. 1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

3. 2 Chapter 20 Gross Domestic Product Accounting 11/20/2015 © ©1999 South-Western College Publishing

4. 3 This chapter discusses principles associated with © ©1999 South-Western College Publishing The Limitations of GDP as a Measure of Economic Well Being The Relationship Between GDP, NDP, and National Income The Income Approach to Measuring GDP The Expenditure Approach of Measuring GDP The Circular Flow of Money The Circular Flow of Resources, Goods, and Services

5. 4 What is the Circular Flow of Goods, Services, and Resources? The movement of goods and services from firms to households and of resources from households to firms © ©1999 South-Western College Publishing

6. Households Resource Markets Firms Goods Markets Simplified two sector economy

7. 6 What is the Circular Flow of Money? The movement of income in the form of resource payments from firms to households, and of income in the form of revenue from households to firms © ©1999 South-Western College Publishing

8. 7 The Circular Flow of Money Goods Resources Payments Expenditures © ©1999 South-Western College Publishing

9. 8 For more information on statistics: http://www.bea.doc.gov © ©1999 South-Western College Publishing

10. 9 How do we measure economic growth? Gross Domestic Product © ©1999 South-Western College Publishing

11. 10 What is Gross Domestic Product? GDP is the dollar value of all new and final goods & services produced in a country in any one year © ©1999 South-Western College Publishing

12. 11 What is a Final Good or Service? Goods and services sold to final, or ultimate, users © ©1999 South-Western College Publishing

13. 12 What is an Intermediate Good? A good used to produce other goods. © ©1999 South-Western College Publishing

14. 13 What are the two Approaches of measuring GDP? Expenditure Income © ©1999 South-Western College Publishing

15. 14 Why Expenditure and Income? Because when someone spends money that money is income to someone else © ©1999 South-Western College Publishing

16. 15 What is the Expenditure Approach? A method of calculating GDP that adds all expenditures made for final goods and services by households, foreigners, firms, & government © ©1999 South-Western College Publishing

17. 16 Expenditure Approach C + I + G + (X-M) Consumption Investment Government 16 Exports - Imports © ©1999 South-Western College Publishing

18. 17 What is the largest component of GDP? Consumption © ©1999 South-Western College Publishing

19. 18 What do Consumers spend their money on? Durable Goods Nondurable Goods Services © ©1999 South-Western College Publishing

20. 19 What is Gross Private Domestic Investment? Businesses purchase such things as plants & equipment, and changes in inventory © ©1999 South-Western College Publishing

21. 20 What are examples of Government Purchases? military hardware computers military food & clothing highways & education © ©1999 South-Western College Publishing

22. 21 Why are Imports not added to U.S. GDP? Because they are produced abroad © ©1999 South-Western College Publishing

23. 22 Why do we include Exports in GDP? Because they are produced domestically © ©1999 South-Western College Publishing

24. 23 What is the Income Approach? A method of calculating GDP by adding up all payments to owners of resources used to produce output during a year © ©1999 South-Western College Publishing

25. 24 What is value-added? The difference between the value of a good the firm produces and the value of the goods the firm uses to produce it. © ©1999 South-Western College Publishing

26. 25 What does Value Added have to do with GDP? Using the expenditure approach, summing all the values at each stage adds up to GDP © ©1999 South-Western College Publishing

27. 26 Who earns income? Labor - compensation to employees Capital - interest Land - rent Entrepreneurship - profit © ©1999 South-Western College Publishing

28. 27 What is National Income? The sum of all payments made to resource owners for the use of their resources © ©1999 South-Western College Publishing

29. 28 What is Gross National Product? The value, measured in current market prices, of all final goods and services in an economy produced in a calendar year. © ©1999 South-Western College Publishing

30. 29 Check out the World Fact Book at http://www.odci.gov/cia/public ations/nsolo/wfb-all.htm © ©1999 South-Western College Publishing

31. 30 What is Depreciation? The value of capital stock used up during a year in producing GDP © ©1999 South-Western College Publishing

32. 31 Does GDP account for depreciation? No! GDP refers to gross domestic production. It does not take into account the goods used up to produce it. © ©1999 South-Western College Publishing

33. 32 What is Net Domestic Product (NDP)? Gross Domestic Product minus depreciation © ©1999 South-Western College Publishing

34. 33 What is the relationship between National Income and Net Domestic Product? National Income is Net Domestic Product minus indirect business taxes © ©1999 South-Western College Publishing

35. 34 What are Indirect Business Taxes? general sales taxes excise taxes customs duties business property taxes license fees © ©1999 South-Western College Publishing

36. 35 What is the difference between National Income and Personal Income? National income is what people earn Personal income is what people receive © ©1999 South-Western College Publishing

37. 36 What is Disposable Personal Income? Personal income minus direct taxes © ©1999 South-Western College Publishing

38. 37 What are some limitations to GDP? Excludes some productive work, such as homemaking Ignores the Underground Economy Does not consider loss of leisure time Ignores quality changesIgnores Social Costs © ©1999 South-Western College Publishing

39. 38 Given these limitations, why is GDP used? It still provides us with a fairly accurate measure of the economy’s well being. © ©1999 South-Western College Publishing

40. 39 The Dismal Science is an economic news & analysis service http://www.dismal.com © ©1999 South-Western College Publishing

41. 40 How do we measure growth? What is Gross Domestic Product? How do we measure GDP? What is the Expenditure Approach? What is the Income Approach? What is Gross National Product? What is Net Domestic Product? What is Personal & Disposable Income?

42. 41 ENDEND © ©1999 South-Western College Publishing