1 Measuring Production Gross Domestic Product

Circular Flow Diagram Total Production Firms Government Rest of World National Income Investment Consumption Government Spending K Taxes Savings Households Stocks, Funds Bonds, CD’s, Life Insurance Stocks, Funds Bonds, CD’s, Life Insurance

3 National Income How is this number important? The more goods and services we produce, the more Income is generated and the better our ability to satisfy needs. Total Production 15.8 T

4 U.S is #1 2011

Does this mean that the U.S. grows faster than any other country?

U.S. is not in the list!

Does this mean that Americans are the richest in terms of income per person?

8 U.S Drops from # 1 to #

Does it mean all Americans receive $48,328/year?

Personal Income 10 Median Household Income = $50,000(2011) Less than $25K48.01% $25K - $50K27.23% Less than $50K75.24% $50K - $75K12.86% $75K - $100K5.29% 50K-100K18.15% Less than 100K93.39% ~Half the population makes less than $25,000/year ~75% the population makes less than $50,000/year Most of the population makes less than $100,000/year

11 Poverty Thresholds for 2009 by Size of Family and Number of Related Children Under 18 Years Related children under 18 years Size of family unitWeighted Eight average None One Two Three Four Five Six Seven or more threshold s One person (unrelated individual)....10,956 Under 65 years , years and over ,289 Two people ,991 Householder under 65 years ,439 14,366 14,787 Householder 65 years and over ,982 12,968 14,731 Three people ,098 16,781 17,268 17,285 Four people ,954 22,128 22,490 21,756 21,832 Five people ,991 26,686 27,074 26,245 25,603 25,211 Six people ,405 30,693 30,815 30,180 29,571 28,666 28,130 Seven people ,372 35,316 35,537 34,777 34,247 33,260 32,108 30,845 Eight people ,252 39,498 39,847 39,130 38,501 37,610 36,478 35,300 35,000 Nine people or more ,366 47,514 47,744 47,109 46,576 45,701 44,497 43,408 43,138 41,476 Note: The poverty thresholds are updated each year using the change in the average annual Consumer Price Index for All Urban Consumers (CPI-U). Since the average annual CPI-U for 2009 was lower than the average annual CPI-U for 2008, poverty thresholds for 2009 are slightly lower than the corresponding thresholds for Source: U.S. Census Bureau. A family of four making 25,000 a year is $2,000 above the poverty threshold ~Half the population makes less than $25,000/year

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13 Income Distribution U.S. If we divide Income: The richest ten percent of the population gets a third, the next thirty percent gets another third, and the bottom sixty percent get the last third. 1/3 Income 10% 1/3 Income 30 % 1/3 Income 60% 35% Wealth 1% 38% Wealth 9% 27% Wealth 90% 43% Fin. Wealth 1% 40% Fin. Wealth 9% 17% Fin. Wealth 90%

One of the highest levels of income inequality among high income countries Income Richest Income Poorest

15 GDP alone is not a good measure of wellbeing We need to know how this income is distributed. Can not be used for cross country comparisons unless we add both: income distribution and population size.

Goods and Services Rest of World Interest Rent Profits Wages Households Firms Save =300 Pay taxes Government Ask firms how much they produced Ask individuals how much income they earned Incomes Approach Value Added Approach Ask firms how much they SOLD Expenditures Approach Buy equipment and buildings Buy goods and services Buys goods Buys goods and services To Measure Production

17 GDP Sum of expenditures on new, final goods and services produced in the U.S during the year. GDP includes ONLY NEW production

Rest of World Interest Rent Profits Wages Goods and Services Households Firms S T G Circular Flow Diagram pay Sold to GDP C I NX G

19 The Expenditures Approach GDP is the sum of purchases made by  Consumers  Firms  The Government  Other Countries Exports Government (G) Spending Investment (I) Consumption (C)

20 The Expenditures Approach

21 GDP adds purchases of Final Goods ONLY! …Excludes intermediate goods

22 Final Good A good (or service) available for purchase by the ultimate or intended (end) user with no plans for further transformation or as an input in the production of other goods that will be resold.

23 Final Goods can be…  Durable: last a relatively long time.  Non-durable : perishable.  Services: intangibles, do not represent production of physical things.

24 Intermediate Good A good (or service) that is used as an input or component in the production of another good. Intermediate goods are combined into the production of final goods. Intermediate goods will be further processed before sold as final goods.

25 Car Manufacturer purchase tires from tire manufacturer at $200 each Car Manufacturer purchase windows from window manufacturer at $300 each Consumer buys the car for $16,000.

Total Sales 2 Windows = tires = car = 16,000 Total Sales = 17,400 Total Sales Include twice the value of the tires and the windows

27 GDP Excludes Intermediate Goods GDP seeks to measure the market value of final goods. The value of intermediate goods is included in the value of final goods To do so would create the problem of double counting. Market transactions that capture the value of intermediate goods are not included separately in gross domestic product.

28 Investment The purchase of capital goods

29 Capital Good A good that is a manufactured (or previously produced) factor of production that is used to produce other things. Examples: factories, buildings, trucks, tools, machinery, and equipment used by businesses.

Depreciation 30 Depreciates Flour Sugar Flour Sugar Oven

New Capital (Investment) goods  Are used to produce other goods just like intermediate goods.  Are not entirely used up in production of the final good like intermediate goods are.  Depreciate (are used up) as they are used to produce final goods.  Purchases of capital goods are ADDED into GDP at full value. 31

32 GDP Excludes Paper Goods Bonds, stocks, Certificates of Deposit (CD’s), These do not represent a good or service that satisfies needs but are considered SAVING instruments.

33 Government Purchases G  Include expenditures by federal, state and local governments.  Include final, intermediate and capital goods purchased by the government.  Exclude transfer payments (social security, unemployment benefits, etc) Payment for which the government does NOT receive a good or a sevice

 Bullet proof vests purchased by military.  Bullet proof vest purchased by Security Company.  New goods  Intermediate Good purchased by firms  Capital Good  Newly produced goods no one purchased  House  Tools  Cash for clunkers  Computer purchased by the government.  Coffee and pastries purchased by the government for their offices.  Coffee and pastries purchased by Ford for their offices.  Goods manufactured in other countries 34

Germany Spain France England Italy Japan Excludes goods and services produced by U.S. Companies outside the U.S Excludes goods and services produced by U.S. Companies outside the U.S Goods and services produced inside the U.S including those produced by other countries. Goods and services produced inside the U.S including those produced by other countries. Foreign Production in the US Final, new, no paper goods, no unreported

36  We measure GDP because we must know how much we produced  We can not add apples and computers.  We must use dollars as a “common denominator” to be able to add.  We add dollars worth of apples + dollars worth of computers… Why is GDP measured in dollars?

37 Questions to prepare 1. What is GDP? What is included? What is excluded? What are its limitations? 2. Explain the difference between GDP & GNP, NDP & GDP, between real GDP and nominal GDP. Provide an example to illustrate your answer. 3. Explain how a loaf of bread can be considered both a final good and an intermediate good. Provide an example to illustrate your answer. 4. Is the purchase of a home included in the calculation of GDP? If yes how and why? If not, why not?

38 Questions to prepare 5. Determine if the following items are included in GDP and under what component C, I, G, X or M? a. Jane buys newly issued shares of stock in Macro.com. Inc. b. Ross buys a new pair of jeans at a local department store. c. Joey has his mustache trimmed at his hair salon. d. Rachel buys an antique chest at a resale shop. e. Phoebe grows her own herbs on her apartment balcony. f. Michael travels to France and buys French wine. g. John, a stay-at-home dad, takes care of his 4 year old twins. h. Mary sends her 3 year old to pre-school. i. Rose volunteers at a homeless shelter. j. Government pays farmers a 10 cent/pound subsidy. k. Amazon. COM buys books from a publisher. l. Mark buys a book from a publisher. m. Mitsubishi Co. builds a car in Illinois and ships it to Japan for sale. n. Mike bets $500 on a basketball game. o. You buy land to build a home.

200 Countries, 200 Years Click here to view video 39