1. 6
Measuring Domestic Output and National Income

2. Chapter Objectives How GDP is Defined and Measured
Relationships Between GDP, Net Domestic Product, National Income, Personal Income, and Disposable Income
The Nature and Function of a GDP Price Index
The Difference Between Nominal GDP and Real GDP
Some Limitations of the GDP Measure

3. Assessing Economy’s Performance
National Income Accounting
Bureau of Economic Analysis
Gross Domestic Product (GDP)
A Monetary Measure
Avoid Multiple Counting
Intermediate Goods
Final Goods
Value Added
Exclude Nonproduction Transactions

4. Assessing Economy’s Performance
Financial Transactions Excluded
Public Transfer Payments
Private Transfer Payments
Stock (and Bond) Market Transactions
Second Hand Sales

5. Two Approaches to GDP Income Approach Expenditure Approach Wages
Rental Incomes
Interest Incomes
Profits
Expenditure Approach
Final-Product or Value-Added
The Sum of the Money Spent to Buy the Output

6. + + + + + + + Two Approaches to GDP G D P = = Expenditure Approach
Income
Approach
Consumption by
Households
Wages + +
Rents
Investment by
Businesses + G D P + = =
Interest +
Government
Purchases +
Profits +
Expenditures
By Foreigners
Statistical
Adjustments

7. Expenditure Approach C Ig Personal Consumption Expenditures
Durable Consumer Goods
Nondurable Consumer Goods
Consumer Expenditures for Services
Gross Private Domestic Investment
Machinery, Equipment, and Tools
All Construction
Changes in Inventories
Noninvestment Transactions C Ig

8. - = Expenditure Approach Gross Investment Depreciation Net Investment
Increased
Consumption
& Government
Spending
Stock of
Capital
Stock of
Capital
January 1
Year’s GDP
December 31

9. Expenditure Approach Government Purchases G
Expenditures for Goods and Services
Expenditures for Social Capital
Net Exports
Xn = Exports (X) – Imports (M)
Putting It All Together:
GDP = C + I + G + Xn
GDP= $8, , , = $12,487 in 2005 G Xn

10. GDP Approaches Compared
Accounting Statement for the U.S. Economy, 2005
in Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)
Gross Private Domestic Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Gross Domestic Product
$ 8746
2105
2363
-727
$ 12,487
Compensation
Rents
Interest
Proprietor’s Income
Corporate Profits
Taxes on Production and Imports
National Income
Net Foreign Factor Income
Statistical Discrepancy
Consumption of Fixed Capital
Gross Domestic Product $ 73
498
939
1352
917
$10,904
-34 43
1574
$ 12,487

11. Comparative GDPs Select Nations GDPs - 2005 GLOBAL PERSPECTIVE
GDP in Trillions of Dollars
United States
Japan
Germany
China
United Kingdom
France
Italy
Spain
Canada
Brazil
Korea, Rep.
India
Mexico
Russian Fed.
Australia
$12.4
$4.5
$2.8
$2.2
$2.2
$2.1
$1.7
$1.1
$1.1
$.79
$.79
$.78
$.77
$.76
$.70
Source: World Bank

12. The Income Approach Compensation of Employees Rents Interest
Proprietor’s Income
Corporate Profits
Corporate Income Taxes
Dividends
Undistributed Corporate Profits
Taxes on Production and Imports

13. The Income Approach From National Income to GDP
Net Foreign Factor Income
Statistical Discrepancy
Consumption of Fixed Capital
Other National Accounts
Net Domestic Product (NDP)
National Income (NI)
Personal Income (PI)
Disposable Income (DI)
DI = C + S
W 6.1

14. The Income Approach Income Relationships – United States, 2005
Gross Domestic Product (GDP)
Consumption of Fixed Capital
Net Domestic Profit (NDP)
Statistical Discrepancy
Net Foreign Factor Income
National Income (NI)
Taxes on Production and Imports
Social Security Contributions
Corporate Income Taxes
Undistributed Corporate Profits
Transfer Payments
Personal Income (PI)
Personal Taxes
Disposable Income (DI)
$ 12,487
-1,574
$ 10,913
-43 34
$ 10,904
-917
-871
-378
-460
+1,970
$ 10,248
-1,210
$ 9,038

15. Circular Flow Revisited
U.S. Domestic Output and the
Flows of Expenditure and Income

16. Nominal Versus Real GDP
Nominal GDP
Real GDP
Price Index
GDP Price Index
W 6.2
O 6.1
Price
Index
In Given
Year = x
100
Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year
Real
GDP =
Nominal GDP
Price Index (in hundredths)

17. Shortcomings of GDP Nonmarket Activities Leisure
Improved Product Quality
The Underground Economy
GDP and the Environment
Composition and Distribution of the Output
Noneconomic Sources of Well-Being

18. Shortcomings of GDP
GLOBAL PERSPECTIVE
Underground Economy as a Percentage of GDP - Select Nations
Percentage of GDP
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United Kingdom
Japan
United States
Switzerland
Source: Journal of Economic Literature

19. Magical Mystery Tour BEA Sources of Data for Analysis Consumption
Last
Word
BEA Sources of Data for Analysis
Consumption
Census Bureau’s Retail Trade Survey
Census Bureau’s Survey of Manufacturers
Census Bureau’s Service Survey
Investment
All Consumption Data Sources
Survey of Manufacturers
Service Survey
Industry Sources
Census Bureau’s Housing Starts Survey and Housing Sales Survey
Retail Trade Survey
Wholesale Trade Survey
Survey of Manufacturing

20. Magical Mystery Tour Government Purchases Net Exports
Last
Word
Government Purchases
Office of Personnel Management
Construction Surveys
Census Bureau’s Survey of Government Finance
Net Exports
U.S. Customs Service
BEA Surveys and Analysis

21. Key Terms 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 (Ig)
net private domestic investment
government purchases
net exports (Xn)
taxes on production and imports
national income
consumption of fixed capital
net domestic product (NDP)
personal income (PI)
disposable income (DI)
nominal GDP
real GDP
price index

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and Inflation
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