Measuring Domestic Output, Measuring Domestic Output, National Income and the Price National Income and the Price

LevelLevel

Chapter 7Chapter 7

Time period = 2-3 weeksTime period = 2-3 weeks

Assessing the EconomyAssessing the Economy

National income accounts serve a purpose National income accounts serve a purpose just as income statements do for a just as income statements do for a businessbusiness

Compare conditions with other countriesCompare conditions with other countries

Provides a basis for public policies to Provides a basis for public policies to improve economic performanceimprove economic performance

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDPGDP = the total market value of all final = the total market value of all final goods and services goods and services produced within a produced within a countrycountry in one year in one year

Measured in quarters (every 3 months)Measured in quarters (every 3 months)– 11stst = January - March = January - March– 22nd nd = April - June = April - June – 33rdrd = July – September = July – September– 44thth = October - December = October - December

GDPGDP

Includes only Includes only final goodsfinal goods = g & s that are = g & s that are purchased for final use by the consumerpurchased for final use by the consumer

Does Does notnot include include intermediate goodsintermediate goods = g & = g & s that are resold or go on for further s that are resold or go on for further processing or manufacturingprocessing or manufacturing– This avoids This avoids multiple countingmultiple counting

Is the value of what has been produced, Is the value of what has been produced, not what was actually soldnot what was actually sold

GDP GDP ExcludesExcludes Nonproduction Nonproduction TransactionsTransactions

Existing assets or property that is sold or Existing assets or property that is sold or transferred, including used items, is NOT transferred, including used items, is NOT countedcounted

Public or private transfer paymentsPublic or private transfer payments

--public = SS or welfare payments--public = SS or welfare payments

--private = student allowance or alimony--private = student allowance or alimony

--sale of stocks and bonds--sale of stocks and bonds

--broker services rendered ARE counted--broker services rendered ARE counted

More Nonproduction TransactionsMore Nonproduction Transactions

Secondhand salesSecondhand sales

Unreported business activities done in Unreported business activities done in cash (ie unreported tips)cash (ie unreported tips)

Illegal activitiesIllegal activities

““Non-market” activities like volunteering or Non-market” activities like volunteering or family workfamily work

US corporation’s production in overseas US corporation’s production in overseas plantsplants

2 ways to look at GDP2 ways to look at GDPExpenditures ApproachExpenditures Approach

GDP has 4 componentsGDP has 4 components

GDP = C + Ig + G + XnGDP = C + Ig + G + Xn

C = Personal ConsumptionC = Personal Consumption – durable & nondurable finished g & s (but durable & nondurable finished g & s (but

not houses)not houses)

Expenditures ApproachExpenditures Approach

Ig = Gross Private Domestic Ig = Gross Private Domestic Investment (Gross Investment (Gross

Investment)Investment)– Purchases of machinery, equipment & Purchases of machinery, equipment &

toolstools

– Factory equipment maintenanceFactory equipment maintenance

– All construction (including residential)All construction (including residential)

– Unsold inventory of productsUnsold inventory of products

Expenditures ApproachExpenditures Approach

G = Government SpendingG = Government Spending– Government purchase of resources Government purchase of resources

(mainly labor)(mainly labor)

– Again, it excludes transfer payments like Again, it excludes transfer payments like SSSS

Expenditures ApproachExpenditures Approach

Xn = Net Exports (exports – imports)Xn = Net Exports (exports – imports)

--All spending on g & s produced in the US --All spending on g & s produced in the US must be included in the GDP, whether the must be included in the GDP, whether the purchase is made here or abroadpurchase is made here or abroad

--For decades, --For decades, XnXn has been a negative has been a negative

(= trade deficit)(= trade deficit)

Expenditure ApproachExpenditure Approach

C + Ig + G + XnC + Ig + G + Xn

= GDP= GDP

GDP to DIGDP to DI

Using the expenditure approachUsing the expenditure approach C + Ig + G + Xn = GDPC + Ig + G + Xn = GDP

C = about 67% of GDPC = about 67% of GDP

If In is given, In+CFC=IgIf In is given, In+CFC=Ig

GDP to DIGDP to DI

GDP toGDP to

NDP toNDP to

NI toNI to

PI toPI to

DI toDI to

C and SC and S

GDP to DIGDP to DI

Start with Start with GDPGDP – – consumption of fixed capital consumption of fixed capital (CFC) or depreciation(CFC) or depreciation=now we have net domestic product (NDP)=now we have net domestic product (NDP)

Take Take NDPNDP – – indirect businesses taxes (sales, indirect businesses taxes (sales, excise & property taxes, licenses, duties)excise & property taxes, licenses, duties)Also Also –– net foreign factor income net foreign factor income

(income earned by foreigners in the US – income (income earned by foreigners in the US – income earned by Americans abroad—also known as earned by Americans abroad—also known as remittances)remittances)

=now we have National Income (NI)=now we have National Income (NI)

GDP to DIGDP to DITake Take NINI and subtract and subtract-- social security contribution (a tax) social security contribution (a tax)-- corporate income taxes paid corporate income taxes paid- - undistributed corporate profitsundistributed corporate profits(total profits – corporate taxes = profits (total profits – corporate taxes = profits

not given out as dividends but kept fornot given out as dividends but kept for reinvestment at a later date)reinvestment at a later date)

++ back transfer payments back transfer payments (SS payments, unemployment (SS payments, unemployment compensation, disability pay)compensation, disability pay)

Now we have Personal Income (PI)Now we have Personal Income (PI)

GDP to DIGDP to DI

Take Take PIPI and and –– personal income taxes personal income taxes

Now we have DISPOSABLE INCOME (Now we have DISPOSABLE INCOME (DIDI))

Disposable income can only be used for Disposable income can only be used for consumption or savings (C or S)consumption or savings (C or S)

Income Approach to GDPIncome Approach to GDP

Compensation of Employees (Wages)Compensation of Employees (Wages)

--largest part of the GDP--largest part of the GDP

--includes wages, salaries, fringe --includes wages, salaries, fringe benefits, health care and pension benefits, health care and pension plansplans

Income ApproachIncome Approach

RentsRents–Tenant and lease paymentsTenant and lease payments

Income ApproachIncome Approach

InterestsInterests–Money paid by private businesses Money paid by private businesses

to suppliers of money capitalto suppliers of money capital

– Includes interests households Includes interests households receive on savings and bond receive on savings and bond paymentspayments

Income ApproachIncome Approach

Proprietor’s Income and corporate Proprietor’s Income and corporate profits (Profits)profits (Profits)–Net income of unincorporated Net income of unincorporated

businessesbusinesses

–Corporate profits, corporate income Corporate profits, corporate income tax, dividends and undistributed tax, dividends and undistributed corporate profitscorporate profits

Income ApproachIncome ApproachStatistical AdjustmentsStatistical Adjustments– Indirect business taxes (IBT)Indirect business taxes (IBT)

General sales tax, business property tax, license General sales tax, business property tax, license fees and custom dutiesfees and custom duties

– Consumption of Fixed Capital (CFC) Consumption of Fixed Capital (CFC) (depreciation)(depreciation)

Statistical Adjustment continuedStatistical Adjustment continued

–Net foreign factor income in US Net foreign factor income in US (NFF)(NFF)

Income ApproachIncome Approach

W + R + I + P + SA = W + R + I + P + SA = GDPGDP