1. 24 Measuring Domestic Output and National Income McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. National Income Accounting measures economy’s overall performance Bureau of Economic Analysis compiles National Income and Product Accounts Assess health of economy Track long run course Formulate policy Assessing the Economy’s Performance LO1 24-2

3. Gross Domestic Product Measure of aggregate output Monetary measure Avoid multiple counting Market value final goods Ignore intermediate goods Count value added LO1 24-3

4. Gross Domestic Product (1) Stage of Production (2) Sales Value Of Materials Or Product $ 0 Firm A, sheep ranch120 Firm B, wool producer180 Firm C, coat manufacturer220 Firm D, clothing manufacturer270 Firm E, retail clothier350 Total Sales Value$1140 Value Added (total income) (3) Value Added ]--------$120 (= $120 - $ 0) ]-------- 60 (= 180 - 120) ]-------- 40 (= 220 - 180) ]-------- 50 (= 270- 220) ]-------- 80 (= 350 – 270) $350 LO1 24-4

5. Gross Domestic Product Exclude financial transactions Public transfer payments Private transfer payments Stock (and bond) market transactions Exclude second hand sales Sell used car to a friend LO1 24-5

6. Two Approaches to GDP Income approach Count income derived from production Wages, rental income, interest income, profit Expenditure approach Count sum of money spent buying the final goods Who buys the goods? LO2 24-6

7. GDPGDP == + Consumption by Households Investment by Businesses Government Purchases Expenditures By Foreigners + + + + + Wages Rents Interest Profits Statistical Adjustments + Two Approaches to GDP Expenditures or Output Approach Income or Allocations Approach LO2 24-7

8. Expenditures Approach Personal consumption expenditures (C) Durable consumer goods Nondurable consumer goods Consumer expenditures for services Domestic plus foreign goods produced LO2 24-8

9. Expenditures Approach Gross private domestic investment (I g ) Machinery, equipment, and tools All construction Changes in inventories Creation of new capital assets Noninvestment transactions excluded LO2 24-9

10. Expenditures Approach January 1Year’s GDPDecember 31 Consumption & Government Spending Depreciation Net Investment Gross Investment Stock of Capital Increase Stock of Capital Gross Investment Depreciation Net Investment - = LO2 24-10

11. Expenditures Approach Government purchases (G) Expenditures for goods and services Expenditures for publicly owned capital Excludes transfer payments Net exports (X n ) Add exported goods Subtract imported goods X n = exports – imports GDP = C + I g + G + X n LO2 24-11

12. Compensation Rents Interest Proprietor’s Income Corporate Profits Taxes on Production and Imports National Income Net Foreign Factor Income (-) Statistical Discrepancy (+) Consumption of Fixed Capital (+) Gross Domestic Product $ 7792 268 788 1041 1309 1090 $12,288 105 209 1864 $ 14,256 Personal Consumption (C) Gross Private Domestic Investment (I g ) Government Purchases (G) Net Exports (X n ) Gross Domestic Product In Billions Receipts Expenditures Approach Allocations Income Approach $10,089 1628 2931 -392 $ 14,256 U.S. Economy 2009 LO2 24-12

13. Comparative GDP LO2 24-13

14. The Income Approach Compensation of employees Rents Interest Proprietor’s income Corporate profits Corporate income taxes Dividends Undistributed corporate profits Taxes on production and imports LO2 24-14

15. The Income Approach From national income to GDP Subtract net foreign factor income Statistical discrepancy Consumption of fixed capital Other national accounts Net domestic product (NDP) National income (NI) Personal income (PI) Disposable income (DI) LO2 24-15

16. U.S. Income Relationships 2009 Gross Domestic Product (GDP) Less: Consumption of Fixed Capital Equals: Net Domestic Product (NDP) Less: Statistical Discrepancy Plus: Net Foreign Factor Income Equals: National Income (NI) Less: Taxes on Production and Imports Less: Social Security Contributions Less: Corporate Income Taxes Less: Undistributed Corporate Profits Plus: Transfer Payments Equals: Personal Income (PI) Less: Personal Taxes Equals: Disposable Income (DI) $ 14,256 1864 $ 12,392 209 105 $ 12,288 1090 967 315 418 2528 $ 12,026 1102 $ 10,924 LO2 24-16

17. Circular Flow Revisited LO2 24-17

18. Nominal vs. Real GDP GDP is a dollar measure of production Using dollar values creates problems Nominal GDP Use prevailing price Real GDP Reflect changes in price Use base year price LO3 24-18

19. GDP Price Index Use price index to determine real GDP 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) LO3 24-19

20. GDP Price Index Calculating Real GDP (Base Year = Yr 1) Year (1) Units of Output (2) Price of Pizza Per Unit (3) Price Index (Year 1 = 100) (4) Unadjusted, or Nominal, GDP (1) X (2) (5) Adjusted, or Real, GDP 15$10100$ 50 2720200 14070 3825250 20080 41030--- 51128--- LO3 24-20

21. Shortcomings of GDP Nonmarket activities Leisure Improved product quality The underground economy GDP and the environment Composition and distribution of the output Noneconomic sources of well-being LO4 24-21

22. Underground Economy LO4 24-22

23. Sources of BEA Data Consumption Census Bureau’s Retail Trade Survey Census Bureau’s Survey of Manufacturers Census Bureau’s Service Survey Industry Trade Sources LO4 24-23

24. Sources of BEA Data Investment All consumption data sources Census Bureau’s Housing Starts Survey and Housing Sales Survey Retail Trade Survey Wholesale Trade Survey Survey of Manufacturing LO4 24-24

25. Sources of BEA Data Government Purchases Office of Personnel Management Construction Surveys Census Bureau’s Survey of Government Finance Net Exports U.S. Customs Service BEA Surveys and Analysis LO4 24-25