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

3. The Importance of Macroeconomic Measurement National Income Accounting: Health of the Economy Comparisons Over Time Formulation of Public Policy What Are These Accounting Measures?

4. A Monetary Measure 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

5. Excludes Nonproduction Transactions Financial Transactions Public Transfer Payments Private Transfer Payments Stock Market Transactions Secondhand Sales Two Approaches Expenditures Approach Income Approach more… GROSS DOMESTIC PRODUCT

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

7. Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Machinery, Equipment, and Tools All Construction Changes in Inventories Noninvestment Transactions Gross vs. Net Investment Net Private Domestic Investment

8. Government Purchases ( G ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Expenditures for Goods & Services Expenditures for Social Capital Does NOT include Government Transfer Payments

9. Government Purchases ( G ) Net Exports ( X n ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Net Exports (X n ) = Exports (X) – Imports (M)

10. Putting it all together: GDP = C + I g + G + X n EXPENDITURES APPROACH Next: The Income Approach

11. Compensation of Employees Rents Interest Proprietors’ Income Corporate Profits Corporate Income Taxes Dividends Undistributed Corporate Profits THE INCOME APPROACH

12. From National Income to GDP Indirect Business Taxes Consumption of Fixed Capital (Depreciation) Net Foreign Factor Income THE INCOME APPROACH

13. OTHER NATIONAL ACCOUNTS Gross Domestic Product (GDP)$9966 Consumption of fixed capital -1257 Net Domestic Product (NDP)$8709 Net foreign factor income earned in the U.S. - 9 Indirect business taxes -682 National Income (NI)$8018 Social security contributions -706 Corporate income taxes -286 Undistributed corporate profits -274 Transfer payments+1530 Personal Income (PI)$8282 Personal Taxes 1292 Disposable Income (DI)$6990 U.S. GDP, NDP, NI, PI, & DI, 2000

14. Nominal Values Deflate GDP when prices rise Inflate GDP when Prices fall Nominal GDP Calculating Real GDP NOMINAL GDP vs. REAL GDP (4) (2)Unadjusted, (1)Price(3)or Nominal,(5) Units ofPizzaPrice IndexGDP,Adjusted, or YearOutputPer UnitYear 1 = 100(1)x(2)Real, GDP 1 5$10100$ 50 2 7 20200 140 70 3 8 25250 200 80 410 30--- 511 28---

15. 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) Price Index (in hundredths) = Nominal GDP Real GDP An Alternative Method NOMINAL GDP vs. REAL GDP

16. Consumer Price Index = Price of the same market basket in 1982-1984 x 100 CPI Price of 1993-1995 market basket in any given year NOMINAL GDP vs. REAL GDP

17. 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 SHORTCOMINGS OF GDP

19. Chapter Conclusions

21. END 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 (I g ) net private domestic investment government purchases (G) net exports (X n ) 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 Copyright McGraw-Hill/Irwin, 2002

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