1. Measuring Domestic Output, National Income and the Price Level
Chapter 7
Time period = 2 weeks

2. Assessing the Economy
National income accounts serve a purpose just as income statements do for a business
Compare conditions with other countries
Provides a basis for public policies to improve economic performance

3. Gross Domestic Product (GDP)
GDP = the total market value of all final goods and services produced within a country in one year
Measured in quarters (every 3 months)
1st = January - March
2nd = April - June
3rd = July – September
4th = October - December

4. GDP
Includes only final goods = g & s that are purchased for final use by the consumer
Does not include intermediate goods = g & s that are resold or go on for further processing or manufacturing
This avoids multiple counting
Is the value of what has been produced, not what was actually sold

5. GDP Excludes Nonproduction Transactions
Existing assets or property that is sold or transferred, including used items
Public or private transfer payments
--public = SS or welfare payments
--private = student allowance or alimony
--sale of stocks and bonds
--broker services rendered ARE counted

6. More Nonproduction Transactions
Secondhand sales
Unreported business activities done in cash (ie unreported tips)
Illegal activities
“Non-market” activities like volunteering or family work
US corporation’s production in overseas plants

7. 2 ways to look at GDP Expenditures Approach
GDP has 4 components
GDP = C + Ig + G + Xn
C = Personal Consumption
durable & nondurable finished g & s (but not houses)

8. Expenditures Approach
Ig = Gross Private Domestic Investment (Gross Investment)
Purchases of machinery, equipment & tools
Factory equipment maintenance
All construction (including residential)
Unsold inventory of products

9. Expenditures Approach
G = Government Spending
Government purchase of resources (mainly labor)
Again, it excludes transfer payments like SS

10. Expenditures Approach
Xn = Net Exports (exports – imports)
--All spending on g & s produced in the US must be included in the GDP, whether the purchase is made here or abroad
--For decades, Xn has been a negative
(= trade deficit)

11. Expenditures Approach
C + Ig (In+CFC) + G + Xn (X-M)
= GDP

12. GDP to DI Using the expenditure approach C = about 67% of GDP
C + Ig + G + Xn = GDP
C = about 67% of GDP
Xn = mostly negative since WWII
Ig = In (net investment) + CFC

13. GDP to DI
Start with GDP – consumption of fixed capital (CFC) or depreciation
=now we have net domestic product (NDP)
Take NDP – indirect businesses taxes (sales, excise & property taxes, licenses, duties)
Also – net foreign factor income
(add US income earned overseas and sent back home and subtract foreigner’s income earned in the US and sent back home as remittances)
=now we have National Income (NI)

14. GDP to DI Take NI and subtract - social security contribution (a tax)
- corporate income taxes paid
- undistributed corporate profits
(total profits – corporate taxes = profits
not given out as dividends but kept for
reinvestment at a later date)
+ transfer payments
(SS payments, unemployment compensation, disability pay)
Now we have Personal Income (PI)

15. GDP to DI Take PI and – personal income taxes
Now we have DISPOSABLE INCOME (DI)
Disposable income can only be used for consumption or savings (C or S)

16. GDP to DI
GDP to
NDP to
NI to
PI to
DI to
C and S

17. Income Approach
W + R + I + P + SA = GDP

18. Compensation of Employees (Wages)
Income Approach to GDP
Compensation of Employees (Wages)
--largest part of the GDP
--includes wages, salaries, fringe benefits, health care and pension plans

19. Income Approach
Rents
Tenant payments
Lease payments

20. Interest Earned Income Approach
Money paid by private businesses to suppliers of money capital
Includes interests households receive on savings and bond payments

21. Income Approach Proprietor’s Income and corporate profits (Profits)
Net income of unincorporated businesses
Corporate profits: corporate income tax, dividends and undistributed corporate profits

22. Statistical Adjustments
Income Approach
Statistical Adjustments
Indirect business taxes
General sales tax, business property tax, license fees and custom duties
Consumption of Fixed Capital (CFC) (depreciation)

23. Statistical Adjustment continued
Net foreign factor income in US
Income of foreign nationals must be +
Income of American income earned abroad must be –
GDP measures the output of geographical US regardless of the nationality of the contributors

24. Income Approach
W + R + I + P + SA = GDP