Measuring National Output and National Income Lecture Three Measuring National Output and National Income

GDP GDP is the market value of all final goods and services produced within a given period of time by factors of production located within a country.

Expenditure Approach The expenditure approach is a method of computing GDP that measures the amount spent on all final goods during a given time period.

Expenditure Approach GDP = C + I + G + (EX - IM)

Consumption - C Durable goods: goods that last a relatively long time Nondurable goods: goods which are perishable Services: goods which do not involve the production of physical things

Investment - I Nonresidential: expenditures by firms on machines, factories, tools, etc. Residential: expenditures by households on new houses and apartment buildings Business inventories: goods that firms produce now with the intent to sell later

Government Purchases - G Expenditures by federal, state and local governments on final goods Does not include transfer payments (social security, unemployment benefits, etc.)

Net Exports - (EX-IM) Exports: sales to foreigners of U.S. produced goods Imports: purchases by U.S. citizens of foreign produced goods Net Exports = Exports - Imports

Income Approach A method of computing GDP that measures the incomes - wages, rents, interest, and profits - received by all factors of production in producing final goods.

National Income Compensation of employees: wages, salaries, etc., paid to households Proprietors’ income: income of unincorporated businesses Corporate profits: income of corporations Net interest: interest paid by businesses Rental income: income received by property owners

Depreciation Depreciation is the decline in value of capital assets as they wear out or become obsolete.

Indirect Taxes and Subsidies Indirect Taxes: sales taxes, custom duties, license fees, etc. Subsidies: payments made by the government for which it receives goods or services

Net Factor Payments to Rest of World Payments of factor income to the rest of the world minus the receipt of factor income from the rest of the world

Gross National Product Add to GDP any income earned abroad by US firms or residents Subtract any income earned in the US by foreign firms or residents.

Net National Product - NNP NNP = GDP - depreciation

National Income - NI NI = NNP - indirect taxes + subsidies

Personal Income - PI PI = NI - (corporate profits - dividends) - social insurance payments

Disposable Personal Income - DPI DPI = PI - personal income taxes

Nominal GDP Nominal GDP is GDP measured in current dollars Current dollars: the current prices that one pays for goods and services

Real GDP Real GDP is measured in constant year prices Real GDP is adjusted for inflation Constant year: an arbitrary base year from which prices are derived

GDP adjusted for inflation. Base year will be year 1. Real GDP GDP adjusted for inflation. Base year will be year 1.

GDP Deflator A measure of the prices of all goods and services produced = (Nominal GDP/Real GDP) * 100

Rate of change in price level Rate of Inflation Rate of change in price level GDP deflator (year 2) - GDP deflator (year 1) Inflation (year 2) = GDP deflator (year 1)

Limitations of the GDP Concept Social Welfare Underground Economy Per Capita GDP

Review Terms & Concepts Base year Business inventories Compensation of employees Corporate profits Current dollars Depreciation Disposable personal income Durable goods Expenditure approach Final goods & services Fixed-weight procedure Government consumption & investment Gross Domestic Product (GDP) Gross investment

Review Terms & Concepts (cont.) Gross National Product (GNP) Gross private investment Income approach Indirect taxes Intermediate goods National income Net exports Net factor payments Net interest Net investment Net National Product (NNP) Nominal GDP Nondurable goods Nonresidential investment

Review Terms & Concepts (cont.) Per capita GDP Personal consumption expenditures Personal income Personal saving Personal saving rate Proprietors’ income Rental income Residential investment Services Subsidies Underground economy Value added Weight