NATIONAL INCOME & GDP

National Income Accounting  Measures the Economy’s overall performance  Like a personal accountant….. But for the economy  Bureau of Economic Accounting (BEA) Bureau of Economic Accounting Complies the National Income and Product Accounts  Assess economic health  Track the long-run of the economy  Develop policies to improve economy

The GDP  Gross Domestic Product  Total market value of all final goods and services in a given year Included or excluded?? 1. Fords produced by an American-owned factory in Detroit 2. Hondas produced by a Japanese-owned factory in Ohio Both Included! GDP includes all goods and services produced within the country

Gives a Monetary Measure Year 1: Produce 3 iPods and 2 Zunes Year 2: Produce 2 iPods and 3 Zunes Which year has a greater output? Need a price tag! GDP is based on a monetary measure to gain an accurate measure of economic output

2 Rules of GDP 1. Avoid Multiple Counting:  Only accounts for Final Goods Final Goods/Services: example: Any retail good Intermediate G/S: example: Peanuts sold from Bob the farmer to Jiffy to make peanut butter If both transactions were counted in the GDP we would have multiple counting

2 Rules of GDP  Public Transfer Payments  SS, Welfare  Private Transfer Payments  Cash for B-day  Stocks/Bonds  Do not create production  In reality…. They are just slips of paper!  Sell your ‘03 Toyota Camry to your best friend ……..Just don’t tell them about the brakes…… Financial TransactionsSecond Hand Sales 2.Excluded Nonproduction Transactions

Two ‘Faces’ of GDP  a.k.a. Output approach  Sum of all money spent  a.k.a. Allocations approach  Sum of income created during production Expenditure Approach Income Approach In general, buying (spending money) and selling (receiving income) are two aspects of the same transactions

Expenditures Approach GDP= C + I g + G + X n

GDP= C+ ……… Personal Consumption  Durable consumer goods Cars, appliances, electronics  Nondurable consumer goods Bread, milk, pencils, toothpaste  Consumer Expenditures for Services Lawyers, doctors, barbers

GDP=... I g +... Gross Private Domestic Investment 1. Final purchases of machinery, equipment, tools 2. All construction Both residential and nonresidential construction Why is residential construction not counted in consumption? Houses could be rented to bring in an income return 3. Changes in inventory Including unsold goods… “unconsumed output”

... More about Investment  Not counted in investment  Stocks/bonds  Resale of tangible goods (houses) So how does a Realtors Commission fit in? Is it included in GDP? counted as CONSUMPTION (service)  Overall…. Investment deals with the creation of new capital

GDP=... G+...  Government purchases  “Government consumption expenditures”  All government expenditures on final goods Service- costs for public goods Social capital- highways, schools What is not counted in G? Transfer payments

GDP=... X n  Net Exports (International Trade)  Net Exports (X n )= Exports (X) – Imports (M)

GDP Jan. 29th, 2011 Billions of $% of GDP Personal Consumption Expenditures (C) % Goods % Durable goods % Nondurable goods % Services % Gross PrivateDomestic Investment (Ig) % Fixed investment % Nonresidential % Structures % Equipment and software % Residential % Change in private inventories % Net Exports of Goods and Services (Xn) % Exports % Goods % Services % Imports % Goods % Services % Government Expenditures and Investment (G) % Federal % National defense % Nondefense % State and local % Gross Domestic Product (Y) %

Nominal 2009 GDP in USD