Measuring the Nation’s Output Objectives: Describe methods by which the U.S. measures domestic output, national income, and price level. Identifying the contribution of final goods & services to the computation of the GDP. Comparing data from various regions of the U.S. and other national economies.

Gross Domestic Product (GDP)  The dollar amount of all final goods and services produced within a country’s national borders in a year.  Includes goods & services made within U.S. borders.  Gives us a measure of the health of our economy.

National Income Accounting  A system of statistics and accounts that keeps track of production, consumption, saving, and investment.  Used to track overall economic performance.

Computing GDP  Multiply all of the final goods & services produced in a 12 month period by their prices, and then add them up to get the total dollar value of production.  See Fig p. 342

Things Not Included in GDP

Intermediate Products  Products used to make other products already counted in GDP.  Example: If you purchase replacement tires for your car, these are counted in GDP. If you purchase a new car, the tires are not counted separately because their value is built into the car.  Keeps items from being count twice.

Secondhand Sales  The sales of used goods.  Examples: used car, house, clothes.  Only the original sale is included in GDP

Nonmarket Transactions  Transactions that do not take place in the market.  Difficult to measure.  Example: Value of services when you mow your own lawn or perform your own home maintenance.  Counted only when they are done for pay outside the home.

Underground Economy  Unreported legal and illegal activities such as gambling, smuggling, prostitution, drugs, & counterfeiting.  Illegal and not reported in GDP.

The Measure of National Income Objective: Describe methods by which the U.S. measures domestic output, national income, and price level.

National Income & Product Accounts  NIPA 1.GNP 2.Net National Product (NNP) 3.National Income (NI) 4.Personal Income (PI) 5.Disposable Personal Income (DI)

Gross National Product (GNP)  The dollar value of all final goods, services, and structures produced in one year with labor and property supplied by a country’s residents.  GNP measures the value of all Americans, whether the goods and services are produced in the United States or in other countries.  To go from GDP to GNP, it is necessary to add all payments that Americans receive from outside the U.S., then subtract all payments made to foreign- owned resources in the U.S.

Net National Product  GNP less depreciation, which represents the capital equipment that has worn out or become obsolete over the year.  Depreciation: The capital equipment that has worn out or become obsolete over the year.

National Income  The income left after all taxes except the corporate profits tax are subtracted from NNP.  Examples: excise taxes, property taxes, licensing fees, customs duties, & general sales taxes.

Personal Income  The total amount of income going to consumers before individual income taxes are subtracted.

Disposable Personal Income  The total income the consumer sector has at its disposal after personal income taxes.

The Output-Expenditure Model Objective: Describe methods by which the United States measures domestic output, national income, and price level.

Output-Expenditure Model  Is a macroeconomic model used to show aggregate demand by the consumer, investment, government, and foreign sectors.  GDP= C+I+G+(X-M)

Consumer Sector  Spends its income on the goods & services used by households.  Receives its income in the form of disposable personal income. Income left over after all of the depreciation, business taxes, and FICA payments are made.

Investment or Business Sector  Spends its income on plants, offices, equipment, inventories, & other investment goods. These expenditures represent the total value of capital goods created in the economy during the year.  Made up of proprietorships, partnerships, and corporations. Responsible for bringing the factors of production together to produce output.

Government Sector  Spends its income on many categories, including national defense, income security, interest on the national debt, health care, roads, and education.  Includes all local, state, and federal levels of government. Recieves its income from sources such as indirect business taxes, corporate income taxes, Social Security contributions, and personal income taxes from the consumer or household sector.

Foreign Sector  Buys many goods and services—tractors, computers, airplanes, and agricultural products—that make up GDP. In treturn it supplies such products as Japanese cars, Korean shirts, and Brazilian shoes to be consumed at home.  Includes all consumers and producers outside the United States.  Net Exports of goods & services: difference between the United State’s exports & its imports.  Represents the dollar value of goods purchased from abroad, (x-m)

GDP & Changes in the Price Level Objective: Describing the function & construction of the CPI.

Inflation  A rise in the general price level.  The dollar value of the final output of GDP usually appears to go up without any changes in the quantity of goods and services produced.

Price Index  A statistical series that can be used to measure changes in prices over time. (compiled for a specific product or a group of products.)  Select a base year: a year that serves as the basis of comparison for all other years.  Select a market basket: a representative selection of commonly purchased goods and services.  Record the price of each item in the market basket.  Total the prices. The total represents the base-year market basket price and is assigned a value of 100%.  See Fig p. 352

Major Price Indices

Consumer Price Index (CPI)  Reports on price changes for about 80,000 items in 364 categories.  See fig p. 352  Prices for the goods & services currently sampled are taken from 85 geographically distributed areas around the country & compared to their base-year prices.  Information on price changes is collected by the Bureau of Labor Statistics employees. The BLS compiles the index monthly and then publishes it for the economy as a whole.

Producer Price Index  Measures price changes paid by domestic producers for their inputs.  Based on a sample of about 100,000 commodities & uses 1982 as the base year.  The Bureau of Labor Statistics reports the producer price index every month.  Compiled for all commodities and is also broken down into subcategories including farm products, fuels, chemicals, rubber, pulp and paper, and processed foods.

Implicit GDP Price Deflator  An index of average levels of prices for all goods & services in the economy.  Computed quarterly and has a base year of  Good long-run indicator of the price changes that consumers face.

Real Vs. Current GDP  Current GDP: When GDP is not adjusted to remove the effects of inflation.  Real GDP: When the distortions of inflation have been removed. This measure reflects what the GDP would have been if prices had not changed from what they were in the base year.

Converting GDP to Real Dollars  Real GDP = GDP in current dollars divided by implicit GDP price deflator X 100  Example: GDP estimate for the first quarter of 2003 was $10,688.4 billion. The GDP deflator for that period was So, prices in 2003 were percent higher than in  $10,688.4 billion divided by X 100 = $ billion  $ billion is the dollar value of all goods and services produced, if measured in 1996 prices.