Measuring Domestic Output

Gross Domestic Product All goods & services produced within a country’s borders, in a given year. [ Geography matters, not citizenship] Gross National Product All goods & services produced by citizens of a country, either home or aboard. [ Citizenship mattered, not geography] Nike in Indonesia Plano, TX ChinaEurope BMW in Waco P rovo, UT Honda in Ohio Honda in Ohio in Chicago

Gross Domestic Product is a monetary measure of the economy’s health

Expenditure Approach Expenditure Approach [C+Ig+G+Xn] [C+Ig+G+Xn]Consumption Gross Investment Gov. Purchases Net Exports (C I G-X) -Calculating

Personal Consumption Expenditure ( C ) = all expenditures by households on durable goods & services. GDP = C(66%) + Ig(18%) + G(16%) + Xn Durable Consumer Goods (cars) account for 12% Nondurable goods (food) account for 29% Consumer Expenditures for Services account for 59%

Gross Private Domestic Investment (I g ) = all final purchases of capital goods and construction. 3 S ubcategories A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment – construction of new houses & apartments [which can be rented for financial return]. C. Inventory investment – change in business inventories -An net increase in inventories is investment -A net decrease in inventories is negative investment or disinvestment (representing consuming or the sale of more product than was bought or produced in a given year. )

1 / 1 / 04 During / 31 / 04 “Music By Ben” creates music CDs. The owner has five machines used to create CD music (his capital stock). If during the course of the year he expands by buying a new machine, and loses no machines, then at the end of the year his capital stock will increase by one, showing a positive net investment. Net investment = initial stock – depreciation + Ig InitialCapital Initial c apital less d eprec. D eprec- iation Ig & appreciatio n of capital Initial capital less deprec. Gross I n vestmen t InitialCapital Pos. Net Invest ment 5 0

1 / 1 / 04 During / 31 / 04 However, if the owner buys a new machine but during the same his two oldest machines chase, then at the end of the year his capital stock will decrease by one, showing negative net investment. Depreciation1 machine that was not replaced Depreciation is the 1 machine that was not replaced during the year. Investment-increases the capital stock. Depreciation-decreases the capital stock. Net Investment -change in capital stock in one year. InitialCapital Initial c apital less d eprec. D eprec- iation Ig & depreciatio n of capital Initial capital less deprec. Gross I n vestmen t InitialCapital Neg. Net Invest ment 5 0

Government Purchases (G) = all government consumption of goods & services, and all investment in social capital (school/highways). [“G” purchases of goods/svcs produced (not transfer payments) 3 Subcategories A. Federal government40% B. 50 State governments C. 84,000 local governments 60% for state and local

Net Exports( X n ) = all U.S. exports minus U.S. imports (X-M=X n ) If the U.S. imports more than it exports then X n will be a negative sum, and will be subtracted from the GDP amount.

Eight Things Do Not Count In Intermediate Goods 1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. chickens B. KFC buys chickens to eventually sell to customers.

Chevy Chevy Second Hand Sales 2. Second Hand Sales – not current production. A. If a 1957 Chevy is bought in 2005 The car was counted in the GDP of 1957, so would not be counted this year. However, the salesman’s commission would be counted because you are buying his service.

Purely Financial Transactions 3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production being made if 100 shares of Dell stock is bought. Wealth is simply transferred from one form of paper to another. I’m going to buy 100 shares of Dell Stock. Exchanging one financial asset for another

4. Transfer Payment s – 4. Transfer Payment s – welfare, unemployment, social security. There is no contribution to final production. Why didn’t I pay attention in Economics class?

Unreported “Legal” business Activity - 5. Unreported “Legal” business Activity - Unreported “legal” business activity does not count. This is two-thirds of the “underground economy.” What if an eye surgeon doesn’t report $500 of his his $3,400 IntraLASIK bill? What if this waitress doesn’t report all tips? What if the dentist doesn’t report $400 for teeth whitening?

6. Illegal business activity - Illegal business activity are unreported, so they don’t count. This underground economy makes up 1/10 of our GDP. What about“Jane”? “I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.”

7. Non-market Transactions - Work in your own household or volunteer work in the community does not count because there was no payment. don’t marry your maid, gardener, or So, don’t marry your maid, gardener, or fitness instructor fitness instructor, or you will hurt GDP.

8. U.S. Corporations Producing Goods Overseas - If U.S. corporations produce goods overseas, it does not count in the U.S. GDP, but would count in another nations GDP. We are measuring production inside the U.S. Our production outside the U.S. helps other economies. Chevy in France Nike in Djibouti

Do These Count in GDP? Do These Count in GDP? - W hen Outback buys potatoes for baked potatoes -When a tattoo business buys ink for tats -When HEB buys spam to sell it to you -When the popsicle maker buys the sticks -Dell buys a computer monitor frame -Ice cream that Baskin-Robbins buys for sundaes -Mrs. Smith buys an apple to put in its pies -W hen F ord buys a windshield wiper for a car

Does Her Work Count? It depends on whether she is the maid or housewife.

And – What About This? It depends. Is he the owner or a hired mechanic?

Non-market Transactions Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of Output Per Capita Output SHORTCOMINGS OF GDP

National Accounts

C + I g + G + X n = GDP – depreciation of fixed capital = NDP – indirect business taxes – NFFIE = NI – Social Security tax - Corporate income taxes - Undistributed corporate profits + transfer payments = PI - personal income taxes + credit spending = DI – credit interest payments = C & S Undistributed corporate profits = corporate profits – corporate income taxes – distributed dividends

N.F.F.I.E.U.S. N.F.F.I.E.U.S. = $9 billion [U.S.A. Profits Overseas] R est o f W orld $200 bil. U.S.A. F oreign Profits in U.S.A. $209 bill. All income earned in the U.S. by foreign companies.

N.F.F.I.EU.S. N.F.F.I.E.U.S. N.F.F.I.E.U.S. = -$11 billion [U.S.A. Profits Overseas ] R est o f W o rld $ 220 bil. $ 220 bil. F oreign Profits in U.S.A. $209 billion

C = $ Ig = $ G + $ Xn = $ GDP Gross Domestic Product (GDP) - Consumption of fixed capital NDP Net Domestic Product (NDP) N - Net For. Factor Inc. Earn. U.S. I -Indirect business taxes NI National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments PI Personal Income (PI) - Personal Taxes DI Disposable Income (DI) How to calculate NIA Personal taxes 403 -U ndistributed corp. profits 46 Personal taxes 403 -U ndistributed corp. profits 46 Imports 362-Social Security contrib. 169 Imports 362-Social Security contrib Transfer payments 283Personal consumption 2,316 +Transfer payments 283Personal consumption 2,316 -C orporate I ncome T axes 88Gross private domes invest C orporate I ncome T axes 88Gross private domes invest. 503 Indirect business taxes 231Government purchases 673 Indirect business taxes 231Government purchases 673 Exports 465Depreciation 307 Exports 465Depreciation 307 N.F.F.I.E. in the U.S. 12 ______ $_ _____ ______$_______ $_ _____ ______ _______ $_ ______ ________ $ _______ 2, , , , , ,622

C = $ Ig = $ G + $ Xn = $ GDP Gross Domestic Product (GDP) - Consumption of fixed capital NDP Net Domestic Product (NDP) - Net For. Factor Inc. Earn. U.S. -Indirect business taxes NI National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments PI Personal Income (PI) - Personal Taxes DI Disposable Income (DI) NIA Practice #1 Personal taxes 382-U ndistributed corp. profits 65 Personal taxes 382-U ndistributed corp. profits 65 Imports348-Social Security contrib. 158 Imports348-Social Security contrib Transfer payments 330Personal consumption 1,820 +Transfer payments 330Personal consumption 1,820 -C orporate I ncome T axes 98Gross private domes invest C orporate I ncome T axes 98Gross private domes invest. 447 Indirect business taxes 265Government purchases 587 Indirect business taxes 265Government purchases 587 Exports 377Depreciation 317 Exports 377Depreciation 317 N.F.F.I.E. in the U.S , $ 2, $2, $ 2, $ 2, $ 1,938 $100 NFFI = -$ 10 ROW $ 110

C = $ Ig = $ G + $ Xn = $ GDP Gross Domestic Product (GDP) - Consumption of fixed capital NDP Net Domestic Product (NDP) - Net For. Factor Inc. Earn. U.S. -Indirect business taxes NI National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments PI Personal Income (PI) - Personal Taxes DI Disposable Income (DI) NIA Practice #2 Inventory consumption 60 Personal taxes 60-U ndistributed corp. profits 37 Personal taxes 60-U ndistributed corp. profits 37 Imports 75-Social Security contrib. 25 Imports 75-Social Security contrib. 25 +Transfer payments 24Personal consumption 310 +Transfer payments 24Personal consumption 310 -C orporate I ncome T axes 55Gross private domes invest. 85 -C orporate I ncome T axes 55Gross private domes invest. 85 Indirect business taxes 15Government purchases 130 Indirect business taxes 15Government purchases 130 Exports 95N.F.F.I.E. 18 Exports 95N.F.F.I.E. 18 [Depreciation = Ig – In] [Ig______ - In _______ = _______] $ $ $ $ $ 334 $118 NFFI = $ ROW$100

C = $ Ig = $ G + $ Xn = $ GDP Gross Domestic Product (GDP) - Consumption of fixed capital NDP Net Domestic Product (NDP) - Net For. Factor Inc. Earn. U.S. -Indirect business taxes NI National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments PI Personal Income (PI) - Personal Taxes DI Disposable Income (DI) NIA Practice #3 Personal taxes 58-U ndistributed corp. profits 23 Exports 109-Social Security contrib. 40 Imports 89Personal consumption 358 +Transfer payments 41Gross private domes invest. 130 Corporate income taxes 38Government purchases 165 I ndirect business taxes 21Depreciation 45 N.F.F.I.E. in the U.S $ $ $ $ $ 466 $123 NFFI = $23 ROW$100

C = $ Ig = $ G + $ Xn = $ GDP Gross Domestic Product (GDP) - Consumption of fixed capital NDP Net Domestic Product (NDP) - Net For. Factor Inc. Earn. U.S. -Indirect business taxes NI National Income (NI) - Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments PI Personal Income (PI) - Personal Taxes DI Disposable Income (DI) NIA Practice #4 Inventory consumption 80 Personal taxes 60-U ndistributed corp. profits 16 Exports 37-Social Security contrib. 32 Imports 23Personal consumption 312 +Transfer payments 26Ig 104 Corporate income taxes 42Government purchases 110 I ndirect business taxes 24N.F.F.I.E. in the U.S. 30 [Depreciation = Ig – In] [Ig ______ - In ______ = ____] $ $ $ $ $ $130 NFFI = $30 ROW$100

Nominal GDP (money) v. Real GDP (buying power) Nominal GDP is unadjusted for effect of inflation. Real GDP (GDP deflator) is adjusted for effect of inflation. Real GDP = Nominal GDP/price index x 100 Real GDP measures in terms of the value of G/S Nominal GDP measures in terms of money

Calculating Real GDP; Year Units of Price Nominal RealPrice OutputPer unit GDPGDPIndex 1 5$10$ 50$ $20$140$ $25$200$ $30$300 $ $28$308 $ Price Index = Nominal GDP/Real GDP x 100 Real GDP = nominal GDP/price index (in hundredths) Nominal GDP = units of output x price per unit.

Importance of Real GDP in Determining a Recession Apple GDP Example A country produces 10 apples x $1; $10 GDP = $10 [base year =100] A country produces 10 apples x $1.25; $12.50 GDP = $12.50 (GDP r is the same but we are worse off; because $10 is no long what it use to.) A country produces 9 apples x $1.25; $11.25 GDP=$11.25 (GDP r is down/recession, but nominal GDP is up)

If this is Pat then this is “The End”.