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National-Income Accounting

National-Income Accounting. Chapter 5. Measures of Output. National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components. Gross Domestic Product (GDP).

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National-Income Accounting

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  1. National-Income Accounting Chapter 5

  2. Measures of Output • National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components.

  3. Gross Domestic Product (GDP) • Gross domestic product (GDP) is the total dollar value of final output produced within a nation’s borders in a given time period. LO1

  4. Gross Domestic Product (GDP) • Each good and service produced and brought to market has a price. That price serves as a measure of value for calculating total output. LO1

  5. The Measurement of Output LO1

  6. The Measurement of Output LO1

  7. GDP Versus GNP • Gross National Product (GNP) refers to output produced by American-owned factors regardless of location. • GDP refers to output produced within America’s borders. LO1

  8. GDP Versus GNP • GDP is geographically focused, including all output produced within a nation’s borders regardless of whose factors of production are used to produce it. LO1

  9. International Comparisons • The geographic focus of GDP facilitates international comparisons of economic activity. LO1

  10. GDP per Capita • GDP per capita is total GDP divided by total population–average GDP. • GDP per capita is commonly used as a measure of a country’s standard of living.

  11. GDP per Capita • Measures of per capita GDP tell us nothing about the way GDP is actually distributed or used – they are only a statistical average.

  12. Measurement Problems • The methods of calculating GDP create a few problems.

  13. Non-Market Activities • GDP measures exclude most goods and services produced that are not sold in the market. • Exclusion of non-market activities causes problems when comparing living standards over time or between countries. LO1

  14. Unreported Income • The GDP statistics fail to capture market activities that are not reported to tax or census authorities. • The underground economy is motivated by tax avoidance or to conceal illegal activities. LO1

  15. Value Added • The production of most goods and services involves a series of stages. • To accurately measure GDP we must distinguish intermediate goods from final goods. LO1

  16. Value Added • Intermediate goods are goods or services purchased for use as input in the production of final goods or services. Value added is the increase in the market value of a product that takes place at each stage of the production process. LO1

  17. Value Added in Various Stages of Production LO1

  18. Two Ways to Calculate GDP • Compute the value of the final output. • Count only the value added at each stage of production. LO2

  19. Real Versus Nominal GDP • Distinguishing increases in quantity from increases in prices is done by distinguishing between real GDP and nominal GDP.

  20. Real Versus Nominal GDP • Nominal GDP is the value of final output produced in a given period, measured in the prices of that period (current prices). Real GDP is the value of final output produced in a given period, adjusted for changing prices.

  21. Real Versus Nominal GDP • The distinction between nominal and real GDP is important whenever the price level changes.

  22. Computing Real GDP • The base period is the time period used for comparative analysis. • It is the basis for the indexing of price changes.

  23. Computing Real GDP (2005 prices) • The general formula for computing real GDP is:

  24. Computing Real GDP

  25. Computing Real GDP • Inflation tends to obscure actual declines in real output. Inflation is the increase in the average level of prices of goods and services.

  26. Changes in GDP: Nominal Versus Real

  27. Chain-Weighted Price Adjustments • Chain-weighted indices use a moving average of price levels in consecutive years as an inflation adjustment. LO3

  28. Net Domestic Product • We won’t be able to produce as much output next year unless we replace factors of production we use this year. • Depreciationis the consumption of capital in the production process — the wearing out of plant and equipment. LO3

  29. Net Domestic Product • Net domestic product is the amount of output we could consume without reducing our stock of capital. NDP = GDP – depreciation LO3

  30. Net Domestic Product • Investment is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories. LO3

  31. Net Domestic Product • The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment. • Gross investment is total investment expenditure in a given time period. • Net investment is gross investment less depreciation. LO3

  32. Net Domestic Product • The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation. LO3

  33. The Uses of Output • The major uses of total output conform to the four sets of market participants: • Households - consumption • Business Firms - investment • Government - government spending • Foreigners - net exports

  34. Consumption • Goods and services used by households are called consumption goods. • Consumer spending claims over two-thirds of our annual output.

  35. Investment • Investment goods are the plant, machinery, and equipment that we produce. • Also includes net inventory changes and new residential construction. • Investment spending claims about one-sixth of our annual output.

  36. Government Spending • Resources purchased by the government sector are unavailable for consumption or investment purposes. • Government spending on goods and services (excludes income transfers) claims about one-fifth of our annual output.

  37. Net Exports • Net exports are the value of exports minus the value of imports. • Exportsare goods and services sold to foreign buyers. • Importsare goods and services purchased from foreign sources.

  38. GDP Components • The value of GDP can be computed by adding up expenditures of market participants: GDP = C + I + G + (X – M) Where: C = Consumption expenditureX = exports I= investment expenditure M = imports G = government expenditure

  39. Measures of Income • GDP accounts have two sides. • One side focuses on expenditure – the demand side. • The other side focuses on income – the supply side. LO2

  40. Measures of Income • The total value of market incomes must equal the total value of final output, or GDP. LO2

  41. Output = Income VALUE OF OUTPUT VALUE OF INCOME Consumer spending Wages Investment spending Profits Factor market Product market Interest Government spending Rent Net exports Sales taxes Depreciation LO2

  42. The Equivalence of Expenditure and Income (2006 data in billions of dollars) LO2

  43. National Income • By charting the flow of income through the economy, we see FOR WHOM the output is produced. LO2

  44. Depreciation • Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production. NDP = GDP – depreciation LO3

  45. Net Foreign Factor Income • Wages, interest, and profits paid to foreigners are not part of U.S. income. • They need to be subtracted from the income flow. • Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added. LO3

  46. National Income • National income (NI) is total income earned by current factors of production. NI = NDP + net foreign factor income LO3

  47. Personal Income • Personal income (PI) is the income received by households before payment of personal taxes. Personal income = National income – (corporate taxes + retained earnings + Social Security taxes) + (transfer payments + net interest) LO3

  48. Indirect Business Taxes • When goods are sold in the marketplace, their purchase price is typically encumbered with some sort of sales tax. LO3

  49. Corporate Taxes and Retained Earnings • Corporate taxes and retained earnings represent the part of corporate profits not received by households so are subtracted from national income. Social security taxes are also subtracted. Transfer paymentsandnet interestare added. LO3

  50. Disposable Income • Disposable income (DI) is the after-tax income of households. • It is personal income less personal taxes. Disposable income = personal income – personal taxes LO3

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