Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 weeks

Assessing the Economy National income accounts serve a purpose just as income statements do for a business Compare conditions with other countries Provides a basis for public policies to improve economic performance

Gross Domestic Product (GDP) GDP = the total market value of all final goods and services produced within a country in one year Measured in quarters (every 3 months) 1st = January - March 2nd = April - June 3rd = July – September 4th = October - December

GDP Includes only final goods = g & s that are purchased for final use by the consumer Does not include intermediate goods = g & s that are resold or go on for further processing or manufacturing This avoids multiple counting Is the value of what has been produced, not what was actually sold

GDP Excludes Nonproduction Transactions Existing assets or property that is sold or transferred, including used items Public or private transfer payments --public = SS or welfare payments --private = student allowance or alimony --sale of stocks and bonds --broker services rendered ARE counted

More Nonproduction Transactions Secondhand sales Unreported business activities done in cash (ie unreported tips) Illegal activities “Non-market” activities like volunteering or family work US corporation’s production in overseas plants

2 ways to look at GDP Expenditures Approach GDP has 4 components GDP = C + Ig + G + Xn C = Personal Consumption durable & nondurable finished g & s (but not houses)

Expenditures Approach Ig = Gross Private Domestic Investment (Gross Investment) Purchases of machinery, equipment & tools Factory equipment maintenance All construction (including residential) Unsold inventory of products

Expenditures Approach G = Government Spending Government purchase of resources (mainly labor) Again, it excludes transfer payments like SS

Expenditures Approach Xn = Net Exports (exports – imports) --All spending on g & s produced in the US must be included in the GDP, whether the purchase is made here or abroad --For decades, Xn has been a negative (= trade deficit)

Expenditures Approach C + Ig (In+CFC) + G + Xn (X-M) = GDP

GDP to DI Using the expenditure approach C = about 67% of GDP C + Ig + G + Xn = GDP C = about 67% of GDP Xn = mostly negative since WWII Ig = In (net investment) + CFC

GDP to DI Start with GDP – consumption of fixed capital (CFC) or depreciation =now we have net domestic product (NDP) Take NDP – indirect businesses taxes (sales, excise & property taxes, licenses, duties) Also – net foreign factor income (add US income earned overseas and sent back home and subtract foreigner’s income earned in the US and sent back home as remittances) =now we have National Income (NI)

GDP to DI Take NI and subtract - social security contribution (a tax) - corporate income taxes paid - undistributed corporate profits (total profits – corporate taxes = profits not given out as dividends but kept for reinvestment at a later date) + transfer payments (SS payments, unemployment compensation, disability pay) Now we have Personal Income (PI)

GDP to DI Take PI and – personal income taxes Now we have DISPOSABLE INCOME (DI) Disposable income can only be used for consumption or savings (C or S)

GDP to DI GDP to NDP to NI to PI to DI to C and S

Income Approach W + R + I + P + SA = GDP

Compensation of Employees (Wages) Income Approach to GDP Compensation of Employees (Wages) --largest part of the GDP --includes wages, salaries, fringe benefits, health care and pension plans

Income Approach Rents Tenant payments Lease payments

Interest Earned Income Approach Money paid by private businesses to suppliers of money capital Includes interests households receive on savings and bond payments

Income Approach Proprietor’s Income and corporate profits (Profits) Net income of unincorporated businesses Corporate profits: corporate income tax, dividends and undistributed corporate profits

Statistical Adjustments Income Approach Statistical Adjustments Indirect business taxes General sales tax, business property tax, license fees and custom duties Consumption of Fixed Capital (CFC) (depreciation)

Statistical Adjustment continued Net foreign factor income in US Income of foreign nationals must be + Income of American income earned abroad must be – GDP measures the output of geographical US regardless of the nationality of the contributors

Income Approach W + R + I + P + SA = GDP