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

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?

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

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…

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

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

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

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

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

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

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

U.S. GDP, NDP, NI, PI, & DI, 2000 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

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

= = = 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

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

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

GLOBAL PERSPECTIVE The Underground Economy as a Percent of GDP 0 5 10 15 20 25 30 Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland Source: The Journal of Economic Literature, 2000

Chapter Conclusions

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

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