1. Part 2 Topics Measuring Domestic Output and National Income
Introduction to growth and instability
Basic Macroeconomic Relationships
The Aggregate Expenditures Model
The Aggregate Demand and Supply Model
Fiscal Policy

2. Measuring Domestic Output and National Income Please listen to the audio as you work through the slides.

3. Macroeconomic measurement and basic concepts
Why worry about this stuff?
Where are we now?
Where were we before?
Are we better off?
Measuring Domestic Output,
and National Income

4. Students should be able to thoroughly and completely explain:
Learning objectives
Students should be able to thoroughly and completely explain:
The three approaches to determining GDP.
The difference between real and nominal GDP.
Some of the shortcomings of GDP as a measure of the performance of an economy.

5. Assessing the Economy’s
Performance
Bureau of Economic Analysis compiles National Income and Product Accounts bea.gov
Health of the Economy
Comparisons Over Time
Formulation of Public Policy
What Are These Accounting Measures?

6. A Measure of aggregate output A Monetary Measure
Gross Domestic Product
Definition:
The total market value of all final goods and services produced in a given year
A Measure of aggregate output
A Monetary Measure

7. The Circular Flow Revisited
Import & export
Resource
Market
Money flows
Money Income
Costs
Resources
Input Factors
Expenditures
Resources
Goods &
Services
Goods &
Services
Rest
Of the
World
Businesses
Government
Households
Net Taxes
Net Taxes
Goods &
Services
Expenditures
Goods & Services
Goods & Services
Import & export
Money flows
Product
Market
Revenue
Consumption
4-7

8. Approaches to computing GDP
Value Added – a way to compute GDP
Expenditures Approach – money spent buying output
Income Approach – income derived from the production of output

9. The Value-added Approach to Measuring GDP
Production Sold for Value added
Farmer harvest wheat $ $100
Miller makes into flour
Baker makes into bread
$ $300
This is the same as the “value-added.”
GDP counts only the $ value of the final good
9-25

10. Count only final good and services
Gross Domestic Product
The challenge: Avoid Multiple Counting
Exclude nonproductive transactions
Intermediate Goods – excluded
Goods used in the production of other goods
Examples?
Financial Transactions such as:
Public Transfer Payments – welfare, social security
Private Transfer Payments – parent to child
Stock and Bond Market Transactions – but include payment to broker
Secondhand Sales - why not?
Count only final good and services

11. From GDP to Disposable Income
See BEA.GOV for current data
Gross Domestic Product (GDP) $10,446
Consumption of fixed capital -1,393
Net Domestic Product (NDP) $9,053
Net foreign factor income earned in the U.S
Indirect business taxes
National Income (NI) $8,348
Social security contributions
Corporate income taxes
Undistributed corporate profits
Transfer payments ,683
Personal Income (PI) $8,929
Personal Taxes ,113
Disposable Income (DI) $7,816

12. + + + + + + + G D = P = Gross Domestic Product Consumption Wages
Expenditures Approach
Income Approach
Consumption
by Households
Wages + +
Rents G D P +
Investment
by Businesses = + =
Interest +
Government
Purchases
Profits + +
Expenditures
by Foreigners
Statistical
Adjustments

13. Personal Consumption Expenditure ( C )
Expenditures Approach
Personal Consumption Expenditure ( C )
Aggregate Spending on:
Durable Consumer Goods
Nondurable Consumer Goods
Consumer Expenditures for Services

14. Gross Private Domestic Investment ( Ig )
Expenditures Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Aggregate Spending by business inside the country on
Machinery, Equipment, and Tools
All Construction
Changes in Inventories
Creation of new capital assets
Noninvestment Transactions excluded –
Transfers of paper assets (stocks or bonds) or resale of tangible assets (house, boat)

15. - = Gross Investment Depreciation Net Investment Expenditures Approach
The total amount of
Investment spending on capital by the business sector that is actually used to expand the capital stock.
Net Investment
Net
Investment
Gross
Investment
Depreciation
Increased
Consumption,
Government
Spending,
Net exports
Stock of
Capital
Stock of
Capital
January 1
Year’s GDP
December 31

16. Expenditures Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases ( G )
Expenditures for Goods & Services
Expenditures for Social Capital – schools, highways
Does NOT include Government Transfer Payments

17. Expenditures Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases ( G )
Net Exports ( Xn)
Net Exports (Xn) = Exports (X) – Imports (M)

18. Expenditures Approach
Putting it all together:
GDP = C + Ig + G + Xn

19. Use your favorite search engine to find a
List of countries ranked by GDP for the most
recent year.
Do the same for GDP per capita.
What are some reasons for the different results?

20. Nominal vs. Real GDP GDP is a dollar measure of production
Using dollar values creates problems
Nominal GDP
Use prevailing (current) prices
Real GDP
Reflect changes in prices
Use base year price

21. Bureau of Labor Statistics
Consumer Price Index
Bureau of Labor Statistics
Consumer price index (CPI) look up the background
Market basket of
300 goods and services purchased by
Typical urban consumer
What is the consumer price index and how is it used?
Check Google for the different types of CPI’s. What did you learn?
CPI
Price of the Most Recent Market
Basket in the Particular Year
Price estimate of the Market
Basket in = x
100

22. = = = 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

23. Using CPI to compute rate of inflation The annual percentage change in a CPI is used as a measure of inflation
In 2002 CPI was 119 and in 2001 CPI was 116.4
The rate of inflation from 2001 to 2002 is
Is 2.2% per year good or bad?
What is the impact on you?

24. Some Shortcomings of GDP
Nonmarket Activities – services of homemakers – not counted
Leisure – value of leisure underestimated
Improved Product Quality – not counted
GDP and the Environment – social and environmental costs not counted.
Composition and Distribution of Output – does not measure wellbeing
The Underground Economy – not counted

25. Underground Economy As a percentage of GDP, Selected Nations, 2007
Mexico
South Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States
Source: Open Assessment, E-Journal