1. Chapter 7 Chapter 7 Measuring Domestic Output, National Income & Price Level

2. Assessing Economic Performance National Income Accounting is done by the Dept of Commerce (Bureau of Economic Analysis) National Income Accounting is done by the Dept of Commerce (Bureau of Economic Analysis) Consistent indicators which provide policy makers the information to manage the economy Consistent indicators which provide policy makers the information to manage the economy

3. GDP or Aggregate Output GDP – total of goods and services produced in a given year GDP – total of goods and services produced in a given year Monetary measure – Allows us to compare/ contrast different years Monetary measure – Allows us to compare/ contrast different years Only includes final products, cannot count products twice when figuring GDP Only includes final products, cannot count products twice when figuring GDP Excludes public transfers, private transfers, and stock market transactions Excludes public transfers, private transfers, and stock market transactions

4. Continuing w/ GDP What is spent on a product equates to income for the people that helped to produce and sell that product What is spent on a product equates to income for the people that helped to produce and sell that product Income is crucial to the National Accounting Process Income is crucial to the National Accounting Process Two ways to examine – Expenditures & Income Two ways to examine – Expenditures & Income

5. Expenditures Approach Personal Consumption Expenditures (C) Personal Consumption Expenditures (C) Includes all purchases of durable, non-durable, and services by household Includes all purchases of durable, non-durable, and services by household Gross Private Domestic Investment (Ig)– includes final purchase of capital equipment, construction, and changes in inventory Gross Private Domestic Investment (Ig)– includes final purchase of capital equipment, construction, and changes in inventory

6. Government Purchases (G) All spending at all levels All spending at all levels All purchases of resources, mainly labor All purchases of resources, mainly labor Excludes transfer payments Excludes transfer payments

7. Net Exports (Xn) Determining the amount of goods shipped overseas is also important to figuring GDP. Determining the amount of goods shipped overseas is also important to figuring GDP. Xn = Exports (X) minus imports (n) Xn = Exports (X) minus imports (n)

8. GDP Summarized GDP = C + Ig + G + Xn GDP = C + Ig + G + Xn

9. Income Approach Compensation or Wages Compensation or Wages Rents Rents Interest Accumulated Interest Accumulated Proprietors Income or Profits (Unincorporated Businesses) Proprietors Income or Profits (Unincorporated Businesses) Corporate Profits (Less taxes & dividends paid to shareholders) Corporate Profits (Less taxes & dividends paid to shareholders) The sum of these = National Income The sum of these = National Income

10. Modifications to Income Approach In order to correctly arrive @ GDP we must also figure in Indirect Business Taxes, Net Consumption of Fixed Capital (Depreciation), and Net Foreign Factor Income In order to correctly arrive @ GDP we must also figure in Indirect Business Taxes, Net Consumption of Fixed Capital (Depreciation), and Net Foreign Factor Income National Income (All Americans) vs. Domestic Income (All income paid within the U.S.) National Income (All Americans) vs. Domestic Income (All income paid within the U.S.)

11. Other National Accounts Net Domestic Product (NDP) = Net Domestic Product (NDP) = GDP - depreciation GDP - depreciation National Income (NI) = National Income (NI) = NDP – Net Foreign Factor NDP – Net Foreign Factor ($ earned in the USA by non- citizens) ($ earned in the USA by non- citizens) – Indirect taxes (fees, etc.) – Indirect taxes (fees, etc.)

12. Figuring Personal Income PI – Income received by households PI – Income received by households National Income needs to be adjusted for taxes not received, and conversely, for income not accounted for by the National Income figure National Income needs to be adjusted for taxes not received, and conversely, for income not accounted for by the National Income figure In simple, subtract all taxes and add all transfer payments to National Income In simple, subtract all taxes and add all transfer payments to National Income

13. National Accounts Continued Disposable Income (DI) = C + S (Savings) Disposable Income (DI) = C + S (Savings) Make sure you understand page and are familiar with the Circular Flow Model (Pg. 126) Make sure you understand page and are familiar with the Circular Flow Model (Pg. 126)

14. Real vs. Nominal GDP Nominal – not adjusted for inflation Nominal – not adjusted for inflation Real – After inflationary adjustments Real – After inflationary adjustments Rates of inflation are inconsistent and this is why we must make these adjustments Rates of inflation are inconsistent and this is why we must make these adjustments

15. Price Indexes Used in figuring Real GDP by accounting for any inflation Used in figuring Real GDP by accounting for any inflation Consumer Price Index – 300 goods & services purchased by a typical consumer Consumer Price Index – 300 goods & services purchased by a typical consumer

16. GDP and its Shortcomings Non–Market Transactions Leisure Improved Product Quality The Underground Economy GDP & The Environment