1. Measuring National Output and National Income

2. Gross Domestic Product
Gross domestic product (GDP) is the total market value of all final goods and services produced within a given period by factors of production located within a country.

3. 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 by another firm.

4. Value Added
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.

5. Value Added
Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers)
STAGE OF PRODUCTION
VALUE OF SALES
VALUE ADDED
(1)
Oil drilling $
.50
(2)
Refining
.65
.15
(3)
Shipping
.80
(4)
Retail sale
1.00
.20
Total value added

6. Exclusions of Used Goods and Paper Transactions
GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.

7. Exclusion of Output Produced Abroad by Domestically Owned Factors of Production
GDP is the value of output produced by factors of production located within a country. Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP).

8. Calculating GDP GDP can be computed in two ways:
The expenditure approach: A method of computing GDP that measures the total amount spent on all final goods during a given period.
The income approach: A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods.

9. The Expenditure Approach
Expenditure categories:
Personal consumption expenditures (C)—household spending on consumer goods.
Gross private domestic investment (I)—spending by firms and households on new capital: plant, equipment, inventory, and new residential structures.

10. The Expenditure Approach
Expenditure categories:
Government consumption and gross investment (G)
Net exports (EX – IM)—net spending by the rest of the world, or exports (EX) minus imports (IM)

11. The Expenditure Approach
The expenditure approach calculates GDP by adding together the four components of spending. In equation form:

12. Components of GDP, 1999: The Expenditure Approach
BILLIONS OF DOLLARS
PERCENTAGE OF GDP
Personal consumption expenditures (C)
7303.7
69.9
Durable goods
871.9
8.3
Nondurable goods
2115.0
20.2
Services
4316.8
41.3
Gross private domestic investment (l)
1543.2
14.8
Nonresidential
1117.4
10.7
Residential
471.9
4.5
Change in business inventories
3.9
Government consumption and gross investment (G)
1972.9
18.9
Federal
693.7
6.6
State and local
1279.2
12.2
Net exports (EX – IM)
- 4.1
Exports (EX)
1014.9
9.8
Imports (IM)
1438.5
13.8
Total gross domestic product (GDP)
100.0
Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

13. Personal Consumption Expenditures
Personal consumption expenditures (C) are expenditures by consumers on the following:
Durable goods: Goods that last a relatively long time, such as cars and appliances.
Nondurable goods: Goods that are used up fairly quickly, such as food and clothing.
Services: Things that do not involve the production of physical things, such as legal services, medical services, and education.

14. Gross Private Domestic Investment
Investment refers to the purchase of new capital.
Total investment by the private sector is called gross private domestic investment. It includes the purchase of new housing, plants, equipment, and inventory by the private sector.

15. Gross Private Domestic Investment
Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on.
Residential investment includes expenditures by households and firms on new houses and apartment buildings.
Change in inventories computes the amount by which firms’ inventories change during a given period. Inventories are the goods that firms produce now but intend to sell later.
The relationship between total production and total sales is:
GDP = final sales + change in business inventories

16. Gross Private Domestic Investment
Remember that GDP is not the market value of total sales during a period—it is the market value of total production.
The relationship between total production and total sales is:
The relationship between total production and total sales is:
GDP = final sales + change in business inventories
GDP = final sales + change in business inventories

17. Gross Investment versus Net Investment
Gross investment is the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period.
Depreciation is the amount by which an asset’s value falls in a given period.
Net investment equals gross investment minus depreciation.
capitalend of period = capitalbeginning of period + net investment

18. Government Consumption and Gross Investment
Government consumption and gross investment (G) counts expenditures by federal, state, and local governments for final goods and services.

19. Net Exports
Net exports (EX – IM) is the difference between exports and imports. The figure can be positive or negative.
Exports (EX) are sales to foreigners of domestic goods and services.
Imports (IM) are purchases of goods and services from abroad).

20. The Income Approach
National income is the total income earned by the factors of production owned by a country’s citizens.
The income approach to GDP breaks down GDP into four components:
GDP = national income + depreciation + (indirect taxes – subsidies) + net factor payments to the rest of the world + other

21. The Income Approach Components of GDP, 2002: The Income Approach
BILLIONS OF DOLLARS
PERCENTAGE OF GDP
National income
8,199.9
80.3
Compensation of employees
6,010.0
58.9
Proprietors’ income
943.5
7.3
Corporate profits
748.9
Net interest
554.8
5.4
Rental income
142.7
1.4
Depreciation
1,351.3
13.2
Indirect taxes minus subsidies
739.4
7.2
Net factor payments to the rest of the world
11.1
0.1
Other
- 96.1
- 0.9
Gross domestic product
10,205.6
100.0
Source: See Table 18.2.

22. From GDP to Disposable Personal Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
DOLLARS (BILLIONS)
GDP
10,205.6
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
10,194.5
Less: depreciation
- 1,351.3
Equals: net national product (NNP)
8,843.2
Less: indirect taxes minus subsidies plus other
Equals: national income
8,199.9
Less: corporate profits minus dividends
Less: social insurance payments
Plus: personal interest income received from the government and consumers
Plus: transfer payments to persons
+1,148.7
Equals: personal income
8,723.9
Less: personal taxes
- 1,306.2
Equals: disposable personal income
7,417.7
Source: See Table 18.2.

23. From GDP to Disposable Personal Income
Net national product equals gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock.
Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes.

24. Disposable Personal Income and Personal Saving
DOLLARS (BILLIONS)
Disposable personal income
7,417.7
Less:
Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
- 31.3
Equals: personal saving
118.6
Personal savings as a percentage of disposable personal income:
1.6%
Source: See Table 18.2.
Disposable personal income or after-tax income equals personal income minus personal income taxes.
Personal saving is the amount of disposable income that is left after total personal spending in a given period.

25. Nominal Versus Real GDP
Nominal GDP is GDP measured in current dollars, or the current prices we pay for things. Nominal GDP includes all the components of GDP valued at their current prices.
When a variable is measured in current dollars, it is described in nominal terms.

26. Calculating Real GDP
A weight is the importance attached to an item within a group of items.
A base year is the year chosen for the weights in a fixed-weight procedure.
A fixed-weight procedure uses weights from a given base year.

27. Calculating Real GDP A Three-Good Economy (1) (2) (3) (4) (5) (6) (7)
(8)
GDP IN
YEAR 1
YEAR 2 IN
PRODUCTION
PRICE PER UNIT
PRICES Q1 Q2 P1 P2
P1 x Q1
P1 x Q2
P2 x Q1
P2 X Q2
Good A 6 11
$.50
$ .40
$3.00
$5.50
$2.40
$4.40
Good B 7 4
.30
1.00
2.10
1.20
7.00
4.00
Good C 10 12
.70
.90
8.40
9.00
10.80
Total
$12.10
$15.10
$18.40
$19.20
Nominal GDP in year 1
Nominal GDP in year 2

28. GDP and Social Welfare
Society is better off when crime decreases, however, a decrease in crime is not reflected in GDP.
An increase in leisure is an increase in social welfare, but not counted in GDP.
Nonmarket and household activities are not counted in GDP even though they amount to real production.

29. GDP and Social Welfare
GDP accounting rules do not adjust for production that pollutes the environment.
GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP.
GDP is neutral to the kinds of goods an economy produces.

30. The Underground Economy
The underground economy is the part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.

31. Gross National Income per Capita
To make comparisons of GNP between countries, currency exchange rates must be taken into account.
Gross National Income (GNI) is a measure used to make international comparisons of output. GNI is GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.
GNI divided by population equals gross national income per capita.