7 - 1 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Measuring Domestic Output, and National Income 7 C H A P T E R

7 - 2 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Assessing the Economy’s Performance National Income Accounting: Health of the Economy Comparisons Over Time Formulation of Public Policy What Are These Accounting Measures?

7 - 3 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show A Monetary Measure Avoid Multiple Counting Intermediate Goods Final Goods Value Added GROSS DOMESTIC PRODUCT The total market value of all final goods and services produced in a given year

7 - 4 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 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

7 - 5 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show GROSS DOMESTIC PRODUCT Consumption by Households Investment by Businesses Government Purchases Expenditures by Foreigners Expenditures ApproachIncome Approach Wages Rents Interest Profits Statistical Adjustments = = GDPGDP

7 - 6 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Personal Consumption Expenditure ( C ) EXPENDITURES APPROACH Durable Consumer Goods Nondurable Consumer Goods Consumer Expenditures for Services

7 - 7 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 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

7 - 8 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show EXPENDITURES APPROACH Net Investment Gross Investment Depreciation - = Stock of Capital Consumption and Government Spending Stock of Capital Depreciation Net Investment January 1 Year’s GDP December 31 Increased Gross Investment

7 - 9 Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 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

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 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)

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Putting it all together: GDP = C + I g + G + X n EXPENDITURES APPROACH

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show United States Japan Germany United Kingdom France China Italy Canada Mexico Spain Brazil India Korea, Rep. Netherlands Australia GLOBAL PERSPECTIVE Comparative GDPs in Trillions, 2001 Source: World Bank Next: The Income Approach

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Compensation of Employees Rents Interest Proprietors’ Incomes Corporate Profits Corporate Income Taxes Dividends Undistributed Corporate Profits THE INCOME APPROACH

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show From National Income to GDP Indirect Business Taxes Consumption of Fixed Capital (Depreciation) Net Foreign Factor Income THE INCOME APPROACH

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show OTHER NATIONAL ACCOUNTS Gross Domestic Product (GDP) $10,446 Consumption of fixed capital-1,393 Net Domestic Product (NDP) $9,053 Net foreign factor income earned in the U.S Indirect business taxes -695 National Income (NI) $8,348 Social security contributions -748 Corporate income taxes -213 Undistributed corporate profits -141 Transfer payments +1,683 Personal Income (PI) $8,929 Personal Taxes -1,113 Disposable Income (DI) $7,816 U.S. GDP, NDP, NI, PI, & DI, 2002

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Nominal Values Deflate GDP when prices rise Inflate GDP when prices fall Nominal GDP Calculating Real GDP NOMINAL GDP vs. REAL GDP $ $ $ (2) Price Pizza Per Unit (1) Units of Output Year (3) Price Index Year 1 = 100 (4) Unadjusted, or Nominal, GDP, (1)x(2) (5) Adjusted, Or Real, GDP

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 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

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Nonmarket Activities Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of Output Noneconomic Sources of Well-Being SHORTCOMINGS OF GDP

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland GLOBAL PERSPECTIVE The Underground Economy as a Percent of GDP Source: The Journal of Economic Literature, 2000

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 real GDP price index BACK Copyright McGraw-Hill/Irwin, 2005

Copyright McGraw-Hill/Irwin, 2005 Assessing the Economy’s Performance Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show Next... Introduction to Economic Growth And Instability Chapter 8