Measuring Domestic Output, National Income, and the Price Level CH 7 *

Gross Domestic Product Total market value of all final goods and services produced within a country in one year

Goods or Services? What are goods? What are services?

Types of Goods Final goods: purchased by final use by the purchaser and not for resale or manufacturing Intermediate goods: purchased for resale or manufacturing Which is counted in GDP?

Avoid Multiple Counting 1.Use product’s final sale price 2.Value added: market value of firm’s output less the value of inputs which it has purchased from others

In Your Groups Make a list of all the final goods and services you used from the time you woke up yesterday until you went to bed last night. Combine all information in your group to one list, but do not repeat information.

Expenditures Approach 1.Personal Consumption Expenditures (C) Represents largest category of spending 2/3 of all spending in the US Consumer Goods Durable Non-Durable Payment for Services *

Expenditures Approach 2. Gross Private Domestic Investment: (Ig)  Final purchases of capital by firms  Construction: residential and business building  Changes in inventories: produced this year even though not sold this year  Only private business in the nation, not abroad  Gross = production of all investment goods  Net (investment in added capital) = gross investment-depreciation (capital used up)

Expenditures Approach 3.Government Purchases include: (G)  Direct purchases of consumption and capital goods  Labor Excludes:  Government transfers

Expenditures Approach 4. Net Exports (Xn): exports minus imports

GDP Expenditure Formula C + Ig + G + Xn = GDP

What is excluded from GDP? Financial Transactions:  Public Transfer Payments: recipients make no contribution to current production in return for these payments  Private Transfer Payments: monetary gifts  Security Transactions: buying and selling stocks and bonds Secondhand Sales: used products

Price Index Price of Market Basket in Given Year X 100 Price of Market Basket in Base Period Page 123 Example

Real GDP GDP Price index = Nominal GDP/Price index (decimal/hundredths form)

Calculating Real GDP YearUnits of Output PricePrice Index (Year 1 =100) Unadjusted, Nominal, Current GDP Adjusted, Real, Constant GDP 15$10100$50 27$20200$140$70 38$25250$200$80 410$30300$ $28280$308 Price in Year y X 100 Price in Year 1 Price in Year y X output in Year y Nom GDP/ Price Index (in hundredths)

Nonmarket Transactions Some transactions not included in GDP Homemakers’ services Self-Repairs

Leisure GDP does not recognize well-being produced by leisure Workweek: 53 hours in early 1900s  36 hours today Ignores “psychic income” generated by work

Improved Product Quality GDP measures quantity, not quality

Composition and Distribution of Output GDP measures dollar value of goods not what these goods are (i.e., guns and encyclopedias which cost the same are evaluated equally) GDP ignores income distribution

Per Capita Output GDP should be divided by the population

Environment Increased production and consumption leads to more pollution

Underground Economy GDP does not measure illegal activities:  Prostitution, drugs, loan-sharking, gambling Underreporting income or tips to IRS

Questions Page 128 #1-13

Net Investment and Economic Growth

Income Approach 1.Compensation of Employees: -Wages and salaries paid by businesses and government to suppliers of labor -Wage and salary supplements (payments by employers into social insurance and pension, health and welfare funds 2.Net Rents -income payments received from property resources: -gross rental minus depreciation 3.Interests -money-income payments from firms to suppliers of money capital

Income Approach 4.Proprietors’ Income: net income of sole proprietorships and partnerships 5.Corporate Profits: -Corporate income tax -Dividends -Undistributed corporate profits (Adjustments) add: -Indirect business taxes: sales, excise, business property, license taxes, and custom duties -Depreciation (consumption of fixed capital) -Net foreign factor income: income U.S. citizens gain from supplying resources abroad and the income foreigners gain by supplying resources in the USA

Other National Accounts…

Net Domestic Product GDP minus consumption of fixed capital Subtract from GDP the amount of depreciation of machinery and equipment which was consumed in producing the GDP and which had to be replaced

National Income National Income: All income earned by U.S. owned resources at home and abroad 1.Subtract net foreign factor income earned in the United States from NDP -All factor income earned in the USA by foreigners and add factor income earned by US citizens abroad 2.Subtract indirect business taxes from NDP

Personal Income All income received whether earned or unearned From national income: -Subtract incomes which are earned but not received (social security contributions, corporate income taxes, undistributed corporate profits) -Add income received but not currently earned (transfer payments)

Disposable Income Personal Income  minus personal taxes (personal income taxes, personal property taxes, and inheritance taxes)  Income which households have to dispose of as they see fit = consumption plus savings

Table: Gross domestic product (GDP)…………………….$8084 Consumption of fixed capital………………-868 Net domestic product (NDP)………………….…...$7216 Net foreign factor income earned in U.S…….-21 Indirect business taxes…………………… National Income (NI)……………………………….$6650 Social security contributions……………… Corporate income taxes…………………… Undistributed corporate profits…………… Transfer payments…………………………+1424 Personal income (PI)………………………………...$6874 Personal taxes…………………………………… Disposable income (DI)……………………………...$5887