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Measuring Domestic Output and National Income
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Assessing the Economy’s Performance
National Income Accounting measures economy’s overall performance Bureau of Economic Analysis compiles National Income and Product Accounts Assess health of economy Track long run course Formulate policy LO1 24-2
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Gross Domestic Product
Measure of aggregate output Monetary measure Avoid multiple counting Market value final goods Ignore intermediate goods Count value added LO1 24-3
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Gross Domestic Product
Exclude financial transactions Public transfer payments Private transfer payments Stock (and bond) market transactions Exclude second hand sales Sell used car to a friend LO1 24-4
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Count income derived from production
Two Approaches to GDP Income approach Count income derived from production Wages, rental income, interest income, profit Expenditure approach Count sum of money spent buying the final goods Who buys the goods? LO2 24-5
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Expenditures or Output Approach
Two Approaches to GDP Expenditures or Output Approach Income or Allocations Approach Consumption by Households Wages + + Rents Investment by Businesses + G D P + = = Interest + Government Purchases + Profits + Expenditures By Foreigners Statistical Adjustments LO2 24-6
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Expenditures Approach
Personal consumption expenditures (C) Durable consumer goods Nondurable consumer goods Consumer expenditures for services Domestic plus foreign goods produced LO2 24-7
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Expenditures Approach
Gross private domestic investment (Ig) Machinery, equipment, and tools All construction Changes in inventories Creation of new capital assets Noninvestment transactions excluded LO2 24-8
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Expenditures Approach
Government purchases (G) Expenditures for goods and services Expenditures for publicly owned capital Excludes transfer payments Net exports (Xn) Add exported goods Subtract imported goods Xn = exports – imports GDP = C + Ig + G + Xn LO2 24-9
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U.S. Economy 2009 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 $10,089 1628 2931 -392 $ 14,256 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 $ 268 788 1041 1309 1090 $12,288 105 209 1864 $ 14,256 LO2 24-10
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Comparative GDP LO2 24-11
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Compensation of employees Rents Interest Proprietor’s income
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 LO2 24-12
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From national income to GDP Subtract net foreign factor income
The Income Approach From national income to GDP Subtract 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) LO2 24-13
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U.S. Income Relationships 2009
Gross Domestic Product (GDP) Less: Consumption of Fixed Capital Equals: Net Domestic Product (NDP) Less: Statistical Discrepancy Plus: Net Foreign Factor Income Equals: National Income (NI) Less: Taxes on Production and Imports Less: Social Security Contributions Less: Corporate Income Taxes Less: Undistributed Corporate Profits Plus: Transfer Payments Equals: Personal Income (PI) Less: Personal Taxes Equals: Disposable Income (DI) $ 14,256 1864 $ 12,392 209 105 $ 12,288 1090 967 315 418 2528 $ 12,026 1102 $ 10,924 LO2 24-14
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GDP is a dollar measure of production
Nominal vs. Real GDP GDP is a dollar measure of production Using dollar values creates problems Nominal GDP Use prevailing price Real GDP Reflect changes in price Use base year price LO3 24-15
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Use price index to determine real GDP
GDP Price Index Use price index to determine real GDP 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) LO3 24-16
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Improved product quality The underground economy
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 LO4 24-17
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Underground Economy LO4 24-18
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