1. Chapter 7 Measuring Domestic Output and National Income Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 7-2 Assessing the Economy’s Performance National Income Accounting measures economy’s overall performance Bureau of Economic Analysis compiles National Income and Product Accounts Assess health of economy Track long run course Formulate policy LO1

3. 7-3 Gross Domestic Product Measure of aggregate output Monetary measure Avoid multiple counting Market value final goods Ignore intermediate goods Count value added LO1

4. 7-4 Gross Domestic Product LO1 (1) Stage of Production (2) Sales Value Of Materials Or Product $ 0 Firm A, sheep ranch120 Firm B, wool producer180 Firm C, coat manufacturer220 Firm D, clothing manufacturer270 Firm E, retail clothier350 Total Sales Value$1140 Value Added (total income) (3) Value Added ]--------$120 (= $120 - $ 0) ]-------- 60 (= 180 - 120) ]-------- 40 (= 220 - 180) ]-------- 50 (= 270- 220) ]-------- 80 (= 350 – 270) $350

5. 7-5 Gross Domestic Product Exclude financial transactions Public transfer payments Private transfer payments Stock market transactions Exclude second hand sales Sell used car to a friend LO1

6. 7-6 Two Approaches to GDP Income approach Count income derived from production Wages, rental income, interest income, profit Expenditure approach Count sum of money spent buying the final goods Who buys the goods? LO1

7. 7-7 GDPGDP == + Consumption by Households Investment by Businesses Government Purchases Expenditures By Foreigners + + + + + Wages Rents Interest Profits Statistical Adjustments + Two Approaches to GDP Expenditures or Output Approach Income or Allocations Approach LO1

8. 7-8 Expenditures Approach Personal consumption expenditures (C) Durable goods Nondurable goods Consumer expenditures for services Domestic plus foreign goods produced LO2

9. 7-9 Expenditures Approach Gross private domestic investment (I g ) Machinery, equipment, and tools All construction Positive and negative changes in inventories Creation of new capital assets Noninvestment transactions excluded LO2

10. 7-10 Expenditures Approach January 1Year’s GDPDecember 31 Consumption, government expenditures, and net exports Depreciation Net Investment Gross Investment Stock of Capital Stock of Capital Gross Investment Depreciation Net Investment - = LO2

11. 7-11 Expenditures Approach Government purchases (G) Expenditures for goods and services Expenditures for publicly owned capital Excludes transfer payments Net exports (X n ) Add exported goods Subtract imported goods X n = exports (X) – imports (M) GDP = C + Ig + G + Xn LO2

12. 7-12 Accounting Statement for the U.S. Economy, 2012 (in Billions) LO2

13. 7-13 Comparative GDP LO2

14. 7-14 The Income Approach Compensation of employees Rents Interest Proprietor’s income Corporate profits Corporate income taxes Dividends Undistributed corporate profits Taxes on production and imports LO3

15. 7-15 The Income Approach From national income to GDP Subtract net foreign factor income Statistical discrepancy Consumption of fixed capital Other national accounts Net domestic product (NDP) National income (NI) Personal income (PI) Disposable income (DI) LO3

16. 7-16 U.S. Income Relationships 2012 LO4

17. 7-17 Circular Flow Revisited LO4

18. 7-18 Nominal GDP vs. Real GDP GDP is a dollar measure of production Using dollar values creates problems Nominal GDP Based on prices that prevailed when output was produced Real GDP Reflect changes in the price level Use base year price LO5

19. 7-19 GDP Price Index Use price index to determine real GDP Price Index In Given Year =x 100 Price of Market Basket In Specific Year Price of Same Basket In Base Year Real GDP = Nominal GDP Price Index (in hundredths) LO5

20. 7-20 GDP Price Index Year (1) Units of Output (2) Price of Pizza Per Unit (3) Price Index (Year 1 = 100) (4) Unadjusted, or Nominal, GDP (1) X (2) (5) Adjusted, or Real, GDP 15$10100$ 50 2720200 14070 3825250 20080 41030--- 51128--- Calculating Real GDP (Base Year = Year 1) LO5

21. 7-21 Shortcomings of GDP Nonmarket activities Leisure Improved product quality The underground economy GDP and the environment Composition and distribution of the output Noneconomic sources of well-being LO6

22. 7-22 Underground Economy LO6

23. 7-23 Sources of BEA Data Consumption Census Bureau’s Retail Trade Survey Census Bureau’s Survey of Manufacturers Census Bureau’s Service Survey Industry Trade Sources LO4

24. 7-24 Sources of BEA Data Investment All consumption data sources Census Bureau’s Housing Starts Survey and Housing Sales Survey Retail Trade Survey Wholesale Trade Survey Survey of Manufacturing LO4

25. 7-25 Sources of BEA Data Government Purchases Office of Personnel Management Construction Surveys Census Bureau’s Survey of Government Finance Net Exports U.S. Customs Service BEA Surveys and Analysis LO4