1. National Income Accounting Lecture 8 Dr. Jennifer P. Wissink ©2015 Jennifer P. Wissink, all rights reserved. February 24, 2016

2. u If you have a conflict with Prelim 1, make sure you have... –read the syllabus concerning your options –and then use the link you can find on our Blackboard site (see left hand menu choices) and register for Option 1 or Option 2. »Note: You WILL NOT get any email reply from me or the head TA – all you need to do is sign up. If you want “proof” you signed up, print the screen you see once you submit the form. u Final Exam Schedule for Spring 2016 Has Been Posted –We have been given Tuesday May 17 at 2pm for our final. Everyone should be prepared to take the final that day and time. –The makeup final the next week on Monday May 23 at 9am will only be for people who qualify under Cornell’s guideline OR for people who come and see me in person with extremely compelling reasons. I am very very tough on this. Papers that are due at the end of the term do not count as extremely compelling reasons since you know they are due and have plenty of time to get them done. So don’t procrastinate! Also make sure you carefully read Cornell’s guidelines – many people seem to misinterpret them. See: https://registrar.cornell.edu/Sched/rules.htmlhttps://registrar.cornell.edu/Sched/rules.html –Both exams will be of equal length and difficulty. Possibly slightly different formats, but not radically different. –The final in May will only be given on May 17 and May 23, unless there are very very very compelling circumstances. Almost surely if something prevents you from taking the final on either the 17 th or the 23 rd, then you will have to take an incomplete and you and I will discuss individually how you make up the incomplete. If May 17 or May 23 presents problems for you, you need to see me in person ASAP to see if it makes sense for you to stay in the class. u Wissink’s makeup Office Hours from Monday are TODAY from 1-2pm Announcements: 1120 S2016

3. The Circular Flow & National Income Accounting

4. National Income & Product Accounts u National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy. u The U.S. Department of Commerce is responsible for producing and maintaining the “National Income and Product Accounts” that keep track of economic activity. –http://www.bea.gov/national/index.htm#gdphttp://www.bea.gov/national/index.htm#gdp u Arguably the most well known of these is GDP.

5. GDP: Gross Domestic Product u Gross Domestic Product (GDP) is the total “dollar” market value of all final goods and services currently produced within a given period by factors of production located within a country. u About how big was it in the U.S. in 2014? $17,348 billion$15,962 billion

6. Important GDP Notes u Gross Domestic Product (GDP) is the total “dollar” market value of all final goods & services currently produced within a given period by factors of production located within a country. –Market value... –Final goods and services... »The term final goods and services in GDP refers to goods and services produced for final use. »Intermediate goods are goods produced by one firm for use in further processing (i.e., transformation) by another. »Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. »In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales. –Currently produced stuff... »Current »Productive –Located within, i.e., stuff produced HERE... »Output produced by a country’s citizens, regardless of where the output is produced, is measured by Gross National Product (GNP). –It’s gross... »Refers to investment purchases of newly produced capital like housing, plants, equipment, and inventory.

7. GDP Observations & Limitations u Population matters... u Leisure matters... u Quality matters... u Home production matters... u Illegal markets matter... u Distribution matters... u Social Benefits/Costs matter... u What’s produced matters... u Depreciation matters... u So what do we do? –Try the best we can. –Look at various indicators and scale them or compare them in meaningful ways. u How Happy Is America? –http://www.npr.org/blogs/money/2013/02/08/171414674/how -happy-is-america

8. Interesting Read u How Society Pays When Women’s Work Is Unpaid –http://www.nytimes.com/2 016/02/23/upshot/how- society-pays-when- womens-work-is- unpaid.html?hp&action=cl ick&pgtype=Homepage& clickSource=story- heading&module=photo- spot-region&region=top- news&WT.nav=top- news&_r=0http://www.nytimes.com/2 016/02/23/upshot/how- society-pays-when- womens-work-is- unpaid.html?hp&action=cl ick&pgtype=Homepage& clickSource=story- heading&module=photo- spot-region&region=top- news&WT.nav=top- news&_r=0

9. United States2008 GDP per capita, PPP (current international $) 46,715 GDP, PPP (millions of current international $) 14,204,322 Source: World Development Indicators database Pop in US: 304,060,000 China2008 GDP per capita, PPP (current international $) 5,961 GDP, PPP (millions of current international $) 7,903,235 Source: World Development Indicators database Pop in China: 1,325,640,000 Example: Interesting Numbers

10. http://data.worldbank.org/indicator/NY.GDP.PCAP.CD

11. Touchstones For GDP Questions u Did it go through a legal market? –Omit “under the table” illegal stuff. –Omit “home” production. –Omit “unmarketed” externalities. u Was it currently produced? –Omit transactions in which money or goods changes hands but in which no new goods and services are produced. –Omit capital gains on resale of assets (but include the value of currently rendered services or currently produced items that were a part of the transaction). –Omit transfer payments – nothing produced. u Are we making sure we’re only calculating “final” values? –Omit double counting intermediate goods (but you can use these IF you are using value added summed up all along the way, rather than final good sales). –Include gross investment. –Include currently produced inventory. u Was it produced within the borders of the country? –Omit output produced by citizens working abroad.

12. i>clicker questions On Feb 18, 2015 Joe buys some IBM stock from Fred and pays Fred $10,000 for it. There are no transaction fees or broker fees. It’s just a transaction between these two guys. When calculating GDP for 2015 you include this $10,000. A. True B. False A piano is produced in 2014 and valued at $8,000. It does not sell until 2015. So the $8,000 gets recorded in GDP for 2015 since that is when it sells. A. True B. False In 2015 Mikko, A Finnish citizen residing in Ithaca, NY sells $5,000 worth of financial advice to clients. Half of these clients also reside in the U.S. The other half do not. Therefore, only $2,500 of Mikko’s financial advice gets counted in 2015 U.S. GDP. A. True B. False

13. Calculating GDP u The expenditure approach: A method of computing GDP that measures the total amount spent on all currently produced final goods during a given period. u The income approach: A method of computing GDP that measures the income – that is, wages/salaries, rents, interest, and profits - received by all factors of production in producing final goods.

14. wages: 20 rents: 10 interest: 30 profits: 10 wages: 10 rents: 0 interest: 0 profits: 20 wages: 50 rents: 0 interest: 0 profits: -20 wages: 18 rents: 2 interest: 0 profits: 0 wages: 90 rents: 100 interest: 0 profits: 0 Key

15. value of final sale expenditure loop, 1a sum of all sales WRONG WAY sum of value added expenditure loop, 1b sum of all payments to factors of production income loop $340$70 ∑w=$188 $190 ∑r=$112 $290$30∑int=$30 $320$30∑π=$10 $340$20--------- $340 $1210$340

16. TABLE 6.2 Components of U.S. GDP, 2009: The Expenditure Approach Billions of DollarsPercentage of GDP Personal consumption expenditures (C)10,089.170.8 Durable goods1,035.07.3 Nondurable goods2,220.215.6 Services6,833.947.9 Gross private domestic investment (l)1,628.811.4 Nonresidential1,388.89.7 Residential361.02.5 Change in business inventories  120.9  0.8 Government consumption and gross investment (G) 2,930.720.5 Federal1,144.88.0 State and local1,786.912.5 Net exports (EX – IM)  392.4  2.8 Exports (EX)1,564.211.0 Imports (IM)1,956.613.7 Gross domestic product14,256.3100.0 Note: Numbers may not add exactly because of rounding. The Expenditure Approach to GDP