1. Chapter 24 – Measuring Domestic Output and National Income

2. Gross Domestic Product (GDP)
GDP is the primary measure of the economy’s performance
GDP is the market value of all final goods and services produced within a nation in a year (Dodge, 2005).
GDP measures Aggregate Spending, Income and Output.

4. Counted or Not Counted?
GDP counts all final, domestic production for which there is a market transaction in that year.
Used and intermediate goods are not counted in order to avoid double-counting.
Non-market production is not counted.
Underground or ‘black market’ activity is not counted.

5. Nonproduction transactions
If there is no production – the transaction is excluded
Financial transactions – transfer payments (social security, welfare…)
Private transfer payments – money for your birthday…
Stock market transactions – they are a swap and create no production

6. Counted or Not Counted?
Which of the following are counted or not counted in U.S. GDP and why?
New U.S. manufactured Goodyear tire sold to the General Motors Corporation
New U.S. manufactured Goodyear tire sold to a consumer
Child care services provided by you for the neighbor’s kid
The ingredients to a cherry pie for sale at a bakery
A new Boeing 787
New Tundra pick-up truck manufactured in San Antonio by Japanese firm Toyota
You pay your stock broker to purchase 20 shares of GOOGLE stock

7. Aggregate Spending The expenditure approach GDP = C + IG + G + XN
C = Consumption
IG = Gross Private Investment
G = Government Spending
XN= Net Exports
= Exports (X) – Imports (M)

8. Consumption Consumer spending on
Durable goods (cars, appliances…)
Non-durable goods (food, clothing…)
Services (plumbing, college…)
Consumer spending is the largest component of U.S. GDP.

9. Gross and Net Private Investment
Gross Investment is spending in order to increase future output or productivity
Business spending on capital
New construction
Change in unsold inventories
Net Investment
Gross investment minus depreciation (capital used up over the course of the year)
If depreciation is more than gross investment, it is called disinvesting

10. Government Spending
All levels of government spending on final goods and services and infrastructure count toward GDP.
Remember!! - Government transfer payments do not count toward GDP.

11. Net Exports Exports – Imports X – M
Exports create a flow of money to the United States in exchange for domestic production.
Imports create a flow of money away from the United States in exchange for foreign production.

12. Aggregate Income Income approach GDP measures spending and income.
Income = r + w + i + p = factor payments
r = rent (payment for natural resources)
w = wages (payment for labor – largest share of national income)
i = interest (payment for capital, also includes interest on savings)
p = corporate profits (payment for entrepreneurship – dividends, corp income tax, undistributed corp profit – also call retained earnings)

13. Figure 24.3 page 496 Review this figure
US domestic output and the flows of expenditures and income

14. Nominal vs. Real GDP
Nominal GDP is current GDP measured at current market prices
Nominal GDP may overstate the value of production because of the effects of inflation or understate due to deflation
Real GDP is current GDP measured with a fixed dollar
You must deflate GDP when prices rise and inflate GDP when prices fall **KEY POINT**
Use a reference year to do this
Real GDP holds the value of the dollar constant and is useful for making year to year comparisons
Real GDP is the IMPORTANT ONE!!!

15. CPI compared to the GDP deflator
Link to Video

16. The adjustment process
Consumer Price Index – market basket of goods (collection of goods and services in a given year compared to an identical collection in the reference year)
PI = (price of the market basket in a specific year/price of the same basket in the base year) x 100
cpi video
Real GDP = nominal GDP/Price index (in 100s)
Work through table 24.5 and worked problem

17. Changes in GDP
GDP is a measure of a nation’s prosperity and economic growth
As GDP grows the burden of scarcity is lessened for a society
GDP per capita provides a better measure of individual well-being than GDP

18. Shortcomings of GDP
Nonmarket activities – except the portion of a farmers output that he consumes is estimated and included
Leisure time, although increased in the last century, is ignored
Improved product quality – this improves economic well being but this is not reflected
Underground economy – this includes tips, off the books or cash transactions, barters
Environment – air pollution, water, etc. not counted so GDP may over state our national well being
Composition/distribution of GDP is not revealed (nuclear waste)
GDP doesn’t measure total well being – crime, war, reduction of addictive goods