1. Measuring Domestic Output,7
C H A P T E R
Measuring Domestic Output,
National Income, and
the Price Level

2. Macroeconomic Measurement
The Importance of
Macroeconomic Measurement
National Income Accounting:
Health of the Economy
Comparisons Over Time
Formulation of Public Policy
What Are These Accounting Measures?
Health – measure health by comparing production regular intervals.
Has economy grown, been constant or declined.
Establish policy that safeguard and improve health

3. Avoid Multiple Counting Final Goods Intermediate Goods Value Added
GROSS DOMESTIC PRODUCT
The total market value of all final goods and services produced in a given year
A Monetary Measure
Avoid Multiple Counting
Final Goods
Intermediate Goods
Value Added
MONEY MEASURE = Quantity times price
MULTIPLE COUNTING - only final, finished goods and services are counted. Intermediate goods are included in final good. Auto includes tires, CD player etc. VALUE ADDED method. Hence, Multiple counting is avoided.

4. Excludes Nonproduction Transactions Financial Transactions
GROSS DOMESTIC PRODUCT
Excludes Nonproduction Transactions
Financial Transactions
Public Transfer Payments
Private Transfer Payments
Stock Market Transactions
Secondhand Sales
Two Approaches
Expenditures Approach
Income Approach more…
Exclusions =
Public transfer payments – Social Security, welfare & veterans’ payments.
Private transfer payments – Allowance, gifts to children.
Stock Market transactions. Buying & selling of securities is simply “swapping paper”.
Secondhand Sales – anything used has been counted in a previous years GDP.
Expenditures = C + Ig + G + Xn = W + R + I + P + #’s adjustments
C = personal consumption – durable/non-durable goods.
Ig = Gross private domestic investment – machinery, all construction, the changes in inventory.
Government purchases = 1) $ spent on G/S, & 2) projects, hwy, i.e. long term. Fed., State, Local inc.
Xn = exports – imports (M) can be negative number.

5. EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Durable Consumer Goods
Nondurable Consumer Goods
Consumer Expenditures for Services

6. EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Machinery, Equipment, and Tools
All Construction
Changes in Inventories
Noninvestment Transactions
Gross vs. Net Investment
Net Private Domestic Investment
Gross vs. Net = Gross – depreciation (consumption on fixed capital)

7. EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases ( G )
G & S = labor, weapons etc
Social Captial = long term purchases = highways, schools, etc.
Transfer payments = SS, Vets, Welfare
Expenditures for Goods & Services
Expenditures for Social Capital
Does NOT include Government Transfer Payments

8. EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases ( G )
Net investment = Gross - depreciation
Net Exports ( Xn)
Net Exports (Xn) = Exports (X) – Imports (M)

9. GDP = C + Ig + G + Xn Putting it all together:
EXPENDITURES APPROACH
Putting it all together:
GDP = C + Ig + G + Xn
Next: The Income Approach

10. Compensation of Employees Rents Interest Proprietors’ Income
THE INCOME APPROACH
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
Corporate Income Taxes
Dividends
Undistributed Corporate Profits
Compensation = Wages
Rents = income from property resources
Interest = money paid to lenders (financial institutions savings and investments) and money paid by private businesses to lenders
Proprietors’ Income = 1) sole proprietorship, partnership and unincorporated businesses. 2) corporate profits
Corporate profits.
Taxes levied on net earnings like personal income tax
Dividends are portions of profits paid to shareholders
Undistributed profits = profits used for capital investment

11. From National Income to GDP Indirect Business Taxes
THE INCOME APPROACH
From National Income to GDP
Indirect Business Taxes
Consumption of Fixed Capital (Depreciation)
Net Foreign Factor Income
National Income = all income that flows to U.S. supplied resources whether here or abroad.
Indirect business taxes = general sales, excise, business property taxes, license fees and customs duties.
Net Foreign Factor Income = Money earned abroad – foreign income earned in the U.S.

12. U.S. GDP, NDP, NI, PI, & DI, 2000 OTHER NATIONAL ACCOUNTS
Gross Domestic Product (GDP) $9966
Consumption of fixed capital
Net Domestic Product (NDP) $8709
Net foreign factor income earned in the U.S
Indirect business taxes
National Income (NI) $8018
Social security contributions
Corporate income taxes
Undistributed corporate profits
Transfer payments
Personal Income (PI) $8282
Personal Taxes
Disposable Income (DI) $6990

13. Deflate GDP when prices rise Inflate GDP when Prices fall Nominal GDP
NOMINAL GDP vs. REAL GDP
Nominal Values
Deflate GDP when prices rise
Inflate GDP when Prices fall
Nominal GDP
Calculating Real GDP
(4)
(2)
Unadjusted,
(1)
Price
(3)
or Nominal,
(5)
Units of
Pizza
Price Index
GDP,
Adjusted, or
Year
Output
Per Unit
Year 1 = 100
(1)x(2)
Real, GDP 1 5
$10
100
$ 50
$50 2 7 20
200
140 70 3 8 25
250 80 4 10 30 - 11 28

14. = = = x 100 NOMINAL GDP vs. REAL GDP An Alternative Method
Adjustment Process
GDP Price Index
Price Index
in a given
year =
Price of market basket
in specific year
Price of same market
basket in base year
x 100
Real GDP =
Nominal GDP
Price Index
(in hundredths)
An Alternative Method
Price Index
(in hundredths) =
Nominal GDP
Real GDP

15. = CPI x 100 Consumer Price Index NOMINAL GDP vs. REAL GDP
Price of the same market
basket in
x 100
CPI
Price of market basket in any given year

16. SHORTCOMINGS OF GDP Nonmarket Transactions Leisure
Improved Product Quality
The Underground Economy
GDP and the Environment
Composition and Distribution of Output
Per Capita Output
Noneconomic Sources of Well-Being
Homemaker services, self home improvement
Dollar value isn’t placed on leisure time
Computer enhancement $1K in 1985 not = $1K 2003
Illegal activity, under the table, non-reported tips
Costs of pollution
Mix of goods not necessarily representative of GDP. Guns vs. books.
Per capita output – considered most meaningful measure of performance. Divide GDP by population. Measure of standard of living. Save Madagascar. GDP grows by 1.3% and population grows by 2.8% = decline in per capita GDP.

17. GLOBAL PERSPECTIVE The Underground Economy as a Percent of GDP
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United Kingdom
Japan
United States
Switzerland
Source: The Journal of Economic Literature, 2000

18. Chapter
Conclusions

19. Key Terms national income accounting gross domestic product
intermediate goods
final goods
multiple counting
value added
expenditures approach
income approach
personal consumption expenditures (C)
gross private domestic investment (Ig)
net private domestic investment
government purchases (G)
net exports (Xn)
national income
indirect business taxes
consumption of fixed capital
net domestic product (NDP)
personal income (PI)
disposable income (DI)
nominal GDP
price index
real GDP
consumer price index (CPI)
per capita output
BACK
END
Copyright McGraw-Hill/Irwin, 2002

20. Next...
Introduction to
Economic Growth
And Instability
Chapter 8