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Published byEvan Cannon Modified over 9 years ago
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Measuring Domestic Output, National Income and the Price Level Chapter 7 Time period = 2 to 3 weeks
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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
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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) –1 st = January - March –2 nd = April - June –3 rd = July – September –4 th = October - December
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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
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GDP Excludes Nonproduction Transactions Existing assets or property that is sold or transferred, including used items, is NOT counted 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
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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
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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)
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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
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Expenditures Approach G = Government Spending –Government purchase of resources (mainly labor) –Again, it excludes transfer payments like SS
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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)
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Expenditures Approach C + Ig + G + Xn = GDP
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GDP to DI Using the expenditure approach C + Ig + G + Xn = GDP C + Ig + G + Xn = GDP C = about 67% of GDP Xn = mostly negative since WWII Ig = In (net investment) + CFC
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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)
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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 not given out as dividends but kept for reinvestment at a later date) reinvestment at a later date) + back transfer payments (SS payments, unemployment compensation, disability pay) Now we have Personal Income (PI)
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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)
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GDP to DI GDP to NDP to NI to PI to DI to C and S
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Income Approach W + R + I + P + SA = GDP
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Income Approach to GDP Compensation of Employees (Wages) --largest part of the GDP --includes wages, salaries, fringe benefits, health care and pension plans
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Income Approach Rents –Tenant payments –Lease payments
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Income Approach Interests –Money paid by private businesses to suppliers of money capital –Includes interests households receive on savings and bond payments
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Income Approach Proprietor’s Income and corporate profits (Profits) –Net income of unincorporated businesses –Corporate profits: corporate income tax, dividends and undistributed corporate profits
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Income Approach Statistical Adjustments –Indirect business taxes General sales tax, business property tax, license fees and custom duties –Consumption of Fixed Capital (CFC) (depreciation)
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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
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Income Approach W + R + I + P + SA = GDP
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