1. Copyright 2011 The McGraw-Hill Companies 15-1 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 15 Measuring Domestic Output and National Income

2. Copyright 2011 The McGraw-Hill Companies 15-2 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Chapter Objectives How GDP and GNI is Defined and Measured Relationships Between GDP, Net Domestic Product, Gross National Income, Household 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 2011 The McGraw-Hill Companies 15-3 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Assessing Economy’s Performance National Income Accounting Gross Domestic Product (GDP) Gross value added at factor cost + other taxes on production - other subsidies on production Gross value added at basic prices + taxes on production -Subsidies on production GDP at market prices

4. Copyright 2011 The McGraw-Hill Companies 15-4 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Assessing Economy’s Performance National Income Accounting Gross Domestic Product (GDP) –A Monetary Measure –Avoid Double Counting Intermediate Goods Final Goods Value Added –Exclude Nonproduction Transactions

5. Copyright 2011 The McGraw-Hill Companies 15-5 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production 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

6. Copyright 2011 The McGraw-Hill Companies 15-6 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Three Approaches to GDP Income Approach –Wages / Rental Incomes –Interest Incomes / Profits Expenditure and Value added (production) Approach –Final-Product or Value- Added / The Sum of the Money Spent to Buy the Output

7. Copyright 2011 The McGraw-Hill Companies 15-7 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show 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 +

8. Copyright 2011 The McGraw-Hill Companies 15-8 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production 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 I

9. Copyright 2011 The McGraw-Hill Companies 15-9 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production 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 - =

10. Copyright 2011 The McGraw-Hill Companies 15-10 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production 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 G XnXn

11. Copyright 2011 The McGraw-Hill Companies 15-11 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show The Income Approach Compensation of Employees Net operating surplus –Rent –Interest –Proprietors Income –Corporate profits Corporate Income Taxes Dividends Undistributed Corporate Profits –Consumption of fixed capital –Taxes and Subsidies

12. Copyright 2011 The McGraw-Hill Companies 15-12 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show GDP Approaches Compared Compensation Net operating surplus (profits, rents and Interest) Consumption of fixed capital Taxes on Production Less: Subsidies on production Gross Domestic Product R855 845 636 378 256 373 263 244 12 754 R1 999 086 Personal Consumption (C) Gross Private Domestic Investment (I) Government Purchases (G) Net Exports (X n ) Gross Domestic Product Accounting Statement for the S.A Economy, 2009 in Billions current prices Receipts Expenditures Approach Allocations Income Approach R1 227 816 438 346 394 653 -61 729 R1 999 086

13. Copyright 2011 The McGraw-Hill Companies 15-13 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Comparative GDPs selected nations Source: World Bank United States China United Kingdom Brazil Australia Sweden South Africa Botswana Uganda Zimbabwe 0 1 2 3 4 5 15 7 8 9 10 12 $13 811 $3280 $2726 $821 $277 $11 $444 $3 GDP in billions of Dollars GLOBAL PERSPECTIVE $1314

14. Copyright 2011 The McGraw-Hill Companies 15-14 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show The Production Approach Stages of Production Sales ValueValue Added Firma A: Sheep Farm R0 – R120R120 Firm B: Wool processor R120 – R180R60 Firm C: Suit Manufacturer R180 – R22040 Firm D: Clothing wholesaler R220 -R270R50 Firm E: Retail Clothier R270- R350R80 Total Sales ValueR1140 Value AddedR350

15. Copyright 2011 The McGraw-Hill Companies 15-15 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show The Income Approach Other National Accounts –Net Domestic Product (NDP) –Gross National Income (GNI) –Household Income (HI) –Disposable Income (DI) DI = C + S 15.1

16. Copyright 2011 The McGraw-Hill Companies 15-16 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Circular Flow Revisited S.A. Domestic Output and the Flows of Expenditure and Income

17. Copyright 2011 The McGraw-Hill Companies 15-17 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production 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) 15.2 15.1

18. Copyright 2011 The McGraw-Hill Companies 15-18 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Shortcomings of GDP Nonmarket Activities Leisure Improved Product Quality The Informal Sector GDP and the Environment Composition and Distribution of the Output Noneconomic Sources of Well-Being

19. Copyright 2011 The McGraw-Hill Companies 15-19 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production 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 Production 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 Gross national income net domestic product (NDP)net domestic product (NDP) Household income (HI)Household income (HI) disposable income (DI)disposable income (DI) nominal GDP real GDP price index

20. Copyright 2011 The McGraw-Hill Companies 15-20 Assessing the Economy’s Performance Three Approaches to GDP Expenditure Approach GDP Approaches Compared Income and Production Approach Nominal vs. Real GDP Shortcomings of GDP Last Word Key Terms End Show Next Chapter Preview… Basic Macroeconomic Relationships