1. Macroeconomic issues: National income accounting
AP Macroeconomics

2. Why Measure Economies?
Allows for an assessment of the health of the economy
Allows for a comparison over time
Has it grown, been constant, or declined?
Allows for international comparisons
Aids in forming economic policy
Safeguard & improve the economy’s health

3. Important Macro Issues
Economic growth—measured by national income accounting (i.e. GDP)
Inflation—measured by the Consumer Price Index
Employment—measured by a couple of unemployment indicators
External stability—measured by the balance of payments
Income distribution—measured by GINI index
Goals conflict and society must choose…
If we understand goals and their implications, we can understand implications and trade-offs of goals

5. So… How do/should we measure success?

7. How is National Income Measured?
National output =
National income =
National expenditure

8. What is GDP? Gross Domestic Product (GDP)
Total output of goods and services
A.K.A.: Aggregate Output or Supply
GDP is…
The total market value of all final goods and services produced in a given year
Citizen-supplied or foreign supplied resources employed within the country
U.S. GDP includes market value of Fords produced in American-owned Michigan factory and the market value of Hondas produced by a Japanese-owned factory in Ohio

9. GDP: A monetary measure
# cappuccinos
# lattes
# scones
January 25 50
February 30 40
Which month has greater output?
Product
Quantity
Prices
Value of production
January
Cappuccinos 25
$3.00
$75
Lattes
$2.50
$62.50
Scones 50
$1.50
Totals
100
$212.50
February 30 40
$90
$75
$60
$225

10. Avoiding Multiple Counting
To measure accurately, must count goods & services produced only once
GDP includes only the market value of FINAL GOODs & SERVICEs
When purchased by the last consumer
Intermediate goods & services are ignored altogether
Michelin Tires
Ford
Car Buyer/
Consumer
Discount
Tires
Car Driver/

11. GDP Calculation Production (GDP) = Income
Expenditures or Output Approach
--What is purchased--
Add up all the spending on final goods & services during the year.
Income or
Allocations Approach
--What income is generated through production--
Sums compensation to employees, rent, interest, proprietors’ income, and corporate profits. Add indirect business taxes, consumption of fixed capital, and net foreign income OR

12. 4 Major Categories of Goods and Services
Consumption (C): Spending by households on goods and services. Includes spending on things such as cars, food, and visits to the dentist. Makes up two-thirds of GDP spending.
Investment (I): Spending by businesses on machinery, factories, equipment, tools, and construction of new buildings.

13. 4 Categories, cont. GDP = C + I + G + (X - M)
Government (G): Spending by all levels of government on goods and services. Includes spending on the military, schools, and highways.
Net Exports (X-M): Spending by people abroad on U.S. goods and services (exports, or X) minus spending by people in the U.S. on foreign goods and services (imports, or M).
GDP = C + I + G + (X - M)

15. Which category: C, I, G, X, M?
Plickers!!!

16. Analyzing GDP
When GDP increases, the economy experiences economic growth and unemployment goes down.
Simplified (thanks Reagan!): when GDP decreases for two consecutive quarters, the economy is in a recession and unemployment goes up.

17. GDP

18. October 25, 2016.

20. Per Capita GDP
GDP is most valuable when we consider it in relation to the size of the population in supports.
Therefore, economists look at per capita GDP.
Per capita GDP is the value of total GDP divided by the number of people in the country.

22. GDP – measures legal production in U.S. in one year.
What 8 Things Do Not Count In GDP
GDP – measures legal production in U.S in one year.
GDP measures all final goods/services
produced by workers and capital located
in the U.S., regardless of ownership.
[Domestically located resources]

23. What Eight Things Do Not Count In GDP?
1. Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.
B. KFC buys chickens to eventually sell to customers.

24. Value Added – increase in the market value at each stage
Only Final Sales($20) Count [to prevent “multiple counting”($38)]
Value Added – increase in the market value at each stage
$20 “Wife-beater”
Shirt from Kohls
Final Good
Retail Shirt
$20 $8
Intermediate Good 8
Wholesale
Shirt
$12 $7 $7
Value Added ($)
Value of Output($) 7
Cloth $5 $4 $4 $4 4 $1
Cotton $1 $1 $1 $1 1
Cotton
Farmer
Textile
Mill
Shirt
Manufacturer
Retail
Store
$20 = sum
Sum = $38
So, to avoid “multiple counting”, we count the $20 final price, not $38.

25. GDP - what is not counted [#2]
2. 2nd Hand Sales
– no current production.
A Chevy bought in 2015
57 Chevy
salesman
[It has not been produced again in 1963 & would not count.]
The salesman is doing productive work. His commission would count.
B. Boots produced in 1980 are bought in a Thrift Store in ‘15.
They also have not been produced again.
Salesman’s commission would count.
You are buying his services.
Shoe salesman

26. GDP – what is not counted [#3]
3. Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
Ex: If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm.
I’m not buying a Dell computer
but part ownership of Dell.
Exchanging one financial asset for another

27. GDP – what is not counted [#4].
4. Transfer Payments –welfare, unemployment, social security.
[There is no contribution to final production]
“Now that I’ve gotten my welfare check, I can get an iPhone”

28. 5. Unreported “Legal” Business Activity
Unreported “legal” business activity does not count.
This is two-thirds of the “underground economy.”
Before LASIK Surgery
Then he has LASIK but the
surgeon doesn’t report
$500 of his $3,400 bill?
And what if the
dentist doesn’t
report $400 for
teeth whitening?
And what if this
waitress doesn’t
report all tips?

29. U.S. Underground Economy
Underground Economy [compared to “above ground”]
Unreported exchanges that take place - legal and
Illegal [Hidden – “off the books”]
Total illegal activities - $300 billion
Total legal activities - $600 billion
Total legal and illegal - $900 billion
Underground Economy
1. Illegal business activities (1/3) – gambling,
narcotics trade, prostitution, loan sharking, etc.
2. Unreported legal business activities (2/3)
a. waitresses not reporting all of her tips
b. Cabdriver not reporting all of his income
c. Self employed cheat the most. Off-the-books cash transactions
d. $300 billion
*IRS estimates that about $300 billion in income taxes from
the underground economy escapes federal taxes each year.
$300 B

30. Shortcomings of GDP
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

31. 7. Non-market Transactions Are Not Counted
Work in your own household or volunteer work in
the community does not count because there was no
payment.
So, don’t marry your maid, gardener, or
fitness instructor, or you will hurt GDP.

32. 8. U.S. Corporations Producing Overseas
GM in
France
Nike in
Indonesia
If U. S. corporations produce goods overseas,
it does not count in GDP, but would count in GNP.
Remember, we are measuring production inside
the U.S. Imports represent production outside of
the U.S.

33. - When Outback buys potatoes for baked potatoes
Do These Count in GDP?
- When Outback buys potatoes for baked potatoes
When a tattoo business buys
ink for tattoos
When Tom Thumb buys
spam to sell it to you
When the popsicle maker buys the sticks
Dell buys a computer monitor frame
Ice cream that Denny’s buys for sundaes
A bakery buys an apple to put in its pies
When Ford buys a windshield wiper for a car
When hooker, J-Lo Ho, is paid $200.00

35. 3. [8 pts] Indicate whether each of the following is counted in
the U.S. GDP for the year Explain each of your answers.
(a) The value of used textbook sold through Ebay in 2006.
FRQ 2007
Answer: No, it was counted the year it was produced. Because it was
not produced again, it would not be counted. That would be double counting.
[2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]
b. Rent paid in 2006 by residents in an apartment building built in 2000
Answer: Yes, rents consist of the income received by the households and
businesses that supply property resources. The properties have to be maintained
or “serviced” each year. It is included in the income approach to GDP.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
c. Commissions earned in 2006 by a stockbroker
Answer: Yes, payment is being made for productive services of the
broker. So the purchase of stocks would not count but his work would.
[2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
d. The value of autos produced in 2006 entirely in South Korea by a
firm fully owned by U.S. citizens
Answer: No, GDP measures production inside the U.S. regardless of
ownership. These autos were produced in South Korea.
[2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]

36. Income Approach
Income GDP = W + P + I + R + a few things like depreciation and indirect business taxes
W = wages and other compensation for working
P = profits of business entities
I = interest payments received by households
R = RENTS, which are royalty payments for patents and copyrights.
In order of magnitude… wages is biggest, rent is smallest

37. Shortcomings of GDP Nonmarket activities Leisure
Productive activities that do not take place in a market
Results in an understatement of GDP
Leisure
Improved Product Quality
The Underground Economy
Non-economic Sources of Well Being

38. Hidden economy % of GDP (2002-03)
Greece
28.2
Italy
25.7
Norway
18.4
Canada
15.2 US
8.4
“The Size of the Shadow Economies of 145 Countries all over the World.” Friedrich Schneider University of Linz, Discussion Paper No 1431, December 2004.

39. The Financial Times made this chart with the shadow economy as a percentage of GDP for the developed countries. You can see that the shadow economy is relatively the biggest in Bulgaria en the smallest in the United States.

40. Nominal vs. Real GDP
How can we compare the market values of GDP from year to year if the value of money itself changes in response to inflation or deflation?
Nominal = current prices
Real = constant or unchanging prices
Price index
In given year =
Price of market basket
In specific year
Price of same market
Basket in base year
X 100

41. Calculating real GDP Year Tons of Corn Price per Ton Tons of Soybeans
Nominal GDP
Real GDP Base Year = 2016
2016
100
$100 80
$50
(100*$100) + (80*$50) = $14,000
$14,000
2017
110
$110
(110*$110) + (80*$50) = $20,100
(110*$100) + (80* $50) = $15,000
2018
$90
Suppose an economy consists of only two commodities. The table above shows prices and output levels for two recent years.
Note: The instructor might want to select two goods/services that are relevant to the local community or state.
Nominal GDP in each year multiplies current prices by current levels of output.
In this simple economy, nominal GDP has risen by $6100.
In % terms: (20,100 – 14,000)/14,000 = .436 or 43.6%
WOW! The politicians will really be proud of themselves!!!
But was this increase due to a fundamental increase in output, or was it due to higher prices?
Let’s hold prices constant at 2016 levels and compute the value of real GDP.
By choosing to use 2016 prices, we have made 2007 our base year.
Notice that nominal GDP = real GDP in the base year of 2016.
Now we compute real GDP in 2017 by using output in 2017, but at prices from 2016.
Real GDP 2017 = $15,000, so in real terms the value of the economic output has only risen by $1000
In % terms: (15,000 – 14,000)/14,000 = .071 or 7.1%
Note: The instructor could add a third year where real GDP actually falls and introduce the class to what it means when the data indicates a recession.

42. Your turn! Calculate the nominal GDP for 2015 2016
Widgets
Gizmos
Thingamagigs
Year
Price
Quantity
2015
$100 1
$10 8 $5 4
2016
$110
$11 10 $4 5
Calculate the nominal GDP for
2015
2016
Compute the percentage change in nominal GDP from 2015 to 2016.
Using 2015 as a base year, calculate the real GDP for 2016.
Compute the percentage change in real GDP from 2015 to 2016.
$200, $240
( )/200 = .2 or 20%
$225
(225/200)/200 = or 12.5%

43. Gross National Product (GNP) and Net National Product (NNP)
GNP is the total income that is earned by a country’s factors of production regardless of where the assets are located
GDP + net property income from abroad
NNP considers depreciation
Depreciation is when capital stock loses its value
Wear and tear, damage to equipment, technology makes machines obsolete
NNP = GNP - depreciation