Measuring National Output Chapter 5

Economic goals  Economic growth  Full employment  Low inflation  An economy grows because of increases in available resources and improvements in technology.  Economic growth is not smooth

Output  The value of goods and services produced is the single most important measure of the nation’s output.

Output  Output of goods and services is diverse, running the gamut  One way to measure output is to classify the goods and services produced according to who is purchasing output

Four Sectors of Output  Households  Consumption  Business  Investment  Government  Government  Foreign Sector  Net exports

Gross Domestic Output (GDP)  The market value of the final goods and services produced in the economy within some time period, usually one quarter or one year  Key terms  Market value – price paid  Final goods – goods to ultimate consumer  Intermediate goods – goods used to make other goods

Expenditure Approach  Method of computing GDP that sums consumption, gross investment, government purchases, and net exports.  GDP = C + I + G + NX

Consumption  Purchasing by households  70% of GDP  Durable goods  Nondurable goods

Investment  Spending now in order to increase output or productivity later; includes spending on capital, new housing, and changes in business inventories  16% of GDP  Purchases by firms on capital such as new factories and machines  Consumers’ purchases of new housing, a form of consumer capital  The market value of change in business inventories

Change in Inventories  Increase in inventories: part of firms production is not sold, economy slows down  Decrease in inventories: firm’s production falls short of sales, economy speeds up

Investment  Gross investment  The total amount of investment  Net investment  Gross investment minus depreciation  Depreciation  Reduction in value of an asset due to its use  Net investment is positive then economy growing  Net investment is negative then economy falling

Government  Federal, state and local levels  19% of GDP  Purchases goods and services  Transfer payments such as social security are not included

Net Exports  Exports – foreign purchase of domestic products  Imports – domestic purchases of foreign products  Net Exports = Exports minus Imports  -4.6% of GDP

Income Approach  Method of computing GDP that sums various forms of income Compensation of employees + Proprietor’s income + Rental income of persons + Corporate profits + Net interest + Capital consumption allowance + Indirect business taxes + Net income of foreigners

GDP as value added  Value added – the difference between the revenue and the cost of purchased inputs.

Contrasting GDP to GNP  Gross National Product  Differs in that the value added to production by resources located outside the US but owned by US citizens is counted in GNP  GNP excludes value added within the US by foreign owned resources.

Shortcomings to GDP  Underground economy  Market transactions that go unreported to government  Household production  Environmental issues Measure of Economic Welfare - Tobin

Nominal Vs. Real GDP  GDP = P X Q  Nominal GDP – GDP that is stated without adjusting for inflation  Real GDP – the value of GDP after nominal GDP is adjusted for inflation

GDP Price Index  Is an index of prices that measures price changes over time, linking each year with the next.  Real GDP = Nominal GDP X 100 GDP price index

Real GDP across countries  Nations of the world compute the value of real GDP for their economics  The size of a nation’s real GDP is probably the best indicator of the size of a country’s economy CountryReal GDP US Canada741.6 Germany2708 Japan Mexico375.

Business Cycle  Refers to the expansions and contractions in economic activity that take place over time. REAL GDP Time Expansion Peak Recession Trough

Business Cycle  Expansion  Economic growth  GDP   Income (Y) ,  C ,  GDP ,  u   Recession  Contraction  Sustained decrease in real GDP  GDP   Income   C   GDP   U 

Business Cycle  Peak – highest level of economic activity  Full employment  Potential GDP is reached  Trough – lowest level of economic activity  Highest level of unemployment  Overall economic trend is to grow

Leading Indicators  Statistics that are expected to change direction before the economy of large does, thereby indicating where the economy is headed  Business inventories  Housing starts  Durable goods production

National Income Accounting GDP Less: Depreciation Net Domestic Production -indirect business taxes -business transfer payments National income – payments to owners of capital -corporate profits -net interest -social security taxes Personal income = -personal taxes Disposable income = Consumption + Savings