1 Fifth Edition Fifth Edition Economics A Contemporary Introduction William A. McEachern Measuring Economic Aggregates and the Circular Flow of Income Fifth Edition Fifth Edition Economics A Contemporary Introduction William A. McEachern Measuring Economic Aggregates and the Circular Flow of Income

2 Exhibit 1: Computation of Value Added for a New Desk Cost of Sale Intermediate Value Stage of Value Goods Added Production (1) (2) (3) Logger$ 20——$ 20 Miller50$ 2030 Manufacturer Retailer $200

3 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 2: The Circular Flow of Income and Expenditure

4 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 3: Hypothetical Example of a Price Index (base year = 1997) Price of BreadPrice of Bread in Current Yearin Base YearPrice Index Year(1)(2)(3) = (1)/(2)x $1.25$

5 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 4a: Hypothetical Market Basket Used to Develop the Consumer Price Index Quantity inPrice inCost of Basket Good or Market BasketBase Yearin Base Year Service (1)(2)(3 ) = (1) x (2) Twinkies365 packages$0.84/pkg.$ Fuel Oil500 gallons1.00/gallon Cable TV12 months30.00/month $1,184.85

6 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 4: Hypothetical Market Basket Used to Develop the Consumer Price Index Prices in Cost of Basket Good or Current Yearin Base Year Service (4)(5) = (1) x (4) Twinkies$0.79$ Fuel Oil Cable TV $1,398.35

7 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 5: Gross Domestic Product: Current Dollars Versus Chained (1992) Dollars Source: Developed from estimates by the U.S. Dept. of Commerce in Survey of Current Business, 77 (August 1997) and 79 (January 1999).

8 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 6: Deriving Net Domestic Product and National Income Using 1998 Data (in trillions of dollars) Gross domestic product (GDP)$8.51 Minus depreciation–0.91 Net domestic product7.60 Plus net earnings of American resources abroad minus indirect business taxes (net of subsidies)–0.60 National income$7.00 Source: Economic Report of the President, February 1999, and Survey of Current Business, 79 (February 1999).

9 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 7: Deriving Personal Income and Disposable Income Using 1998 Data (in trillions of dollars) National income$7.00 Minus income earned but not received (Social Security taxes, corporate income taxes, undistributed corporate profits)–2.06 Plus income received but not earned (government and business transfers, net personal interest income)2.18 Personal income7.12 Minus personal tax and nontax charges–1.10 Disposable income$6.02 Source: Economic Report of the President, February 1999, and Survey of Current Business, 79 (February 1999).

10 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 8a: Expenditure and Income Statement for the U.S. Economy Using 1998 Data (in trillions of dollars) Aggregate Expenditure Consumption (C)$5.81 Gross investment (I)1.37 Government purchases (G)1.49 Net exports (X – M)–0.16 GDP$8.51 Source: Economic Report of the President, February 1999, and Survey of Current Business, 79 (February 1999).

11 Measuring Economic Aggregates and the Circular Flow of Income Exhibit 8b: Expenditure and Income Statement for the U.S. Economy Using 1998 Data (in trillions of dollars) Allocation of Income Depreciation$0.91 Net earnings of American resources abroad–0.02 Net indirect business taxes0.62 Compensation of employees4.98 Proprietors’ income0.58 Corporate profits0.83 Net interest0.45 Rental income of persons0.16 GDP$8.51 Source: Economic Report of the President, February 1999; annual estimates based on figures for three quarters.