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TCO 4

TCO 4. Given current National Income accounts data, calculate the Gross Domestic Product using both income and expenditure methods used by the U.S. Commerce Department. Define Gross Domestic Product (GDP). Analyze the measurement of GDP using the income and expenditure approaches.

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TCO 4

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  1. TCO 4 • Given current National Income accounts data, calculate the Gross Domestic Product using both income and expenditure methods used by the U.S. Commerce Department. • Define Gross Domestic Product (GDP). • Analyze the measurement of GDP using the income and expenditure approaches. • Explain the difference between nominal and real GDP. • Demonstrate how to look up and interpret the current GDP. • Evaluate the limitations of GDP as a measure of the overall economic health of a country.

  2. Formula for the Circular Wheel of Income C + Ig + G + Xn = GDP Consumption (C) People spending on goods and services. Consumption is 2/3 of the gross domestic product (GDP) in the United States. Gross Investment (Ig) All the money spent on investments by United States businesses (not government or individuals). Government Spending (G) Government expenditure minus transfer payments, like social security and welfare. The government gets the money to spend from taxes. Net Exports (Xn) Subtract imports from exports (this can very easily be a negative number). Gross Domestic Product (GDP) The market value of all final goods and services produced within an economy during one year.

  3. Terms used when determining consumption (C) Circular Flow of Goods and Services and Income includewages(from labor), rent(from land), interest (from capital goods), and profit (from entrepreneurs-Proprietors profit is individuals, NOT businesses). Corporate Profit consists of profit from businesses, NOT individuals. Corporate Dividends are paid by companies to their stockholders. The amount paid is decided by the company and is based upon the company profits. Earned Income is all the money earned. Transfer Payments are payments made to individuals or companies that are NOT for services currently performed. Social Security Tax is money earned, but not collected immediately. It is used by the government to fund retirement programs. Personal Income Tax is a progressive tax based on income (ability to pay). Disposable Income is personal savings + consumption. A tax cut will increase disposable Income in the United States. It is fiscal policy.

  4. Wages = 2373 Rent = ? Interest = 288 Profits = 541 National Income= 3216 Indirect Business Tax = 388 NDP = 3554 Depreciation = 439 GDP = ? Corporate Profits = 299 Proprietors profits = ? Corp Dividends= 84 Transfer Payments= 648 Social Security Tax = 355 Personal Income Tax= 493 Personal Savings= 219 C = 2582 Ig = ? G = ? Xn = ? Deficit/Surplus= (117) Personal Income Tax = 493 Corporate Income Tax =160 Indirect Business Tax =338 Social Security Tax= 335 Personal Savings = 219 Corporate Savings= 129 Use these figures to find the ? Below. Try using the Determining GDP worksheet first. Then follow up to see if you are right.

  5. Formula to determine Consumption (C) ADD Wages 2373 ADD Rent 14 ADD Interest 288 ADD Proprietors Profit 242 ADD Corporate Dividends 84 EQUALS Earned Income 3001 ADD Transfer Payments 648 SUB Social Security Tax 355 EQUALS Personal Income 3294 SUB Personal Income Tax 493 EQUALS Disposable Income 2801 SUB Personal Savings 219 EQUALS Consumption 2582 2582 (C) + Ig + G + Xn = GDP

  6. Terms used when determining Gross Investment (Ig) and Gross Savings (Sg) Gross Savings (Sg) is all the money saved by United States businesses, NOT government. Gross Investment (Ig) is all of the money spent on investments by United States businesses (NOT government or individuals). It is done by producing physical products like building or renovation, research (which may or may not have an immediate payback), and depreciation, where the value of an item you have is used up in a one year period. Companies can borrow money from banks, sell stock, or get money from their corporate saving accounts (Sg). Deficit is a shortfall each year where income is less then expenditures. This is different from national debt where all the unpaid deficits are added up over time. Surplus is when sellers place larger quantities of a good or service per unit of time on the market then buyers will take. Net Savings (Sn) Net Investment (In)

  7. Gross Investment (Ig) = Gross Savings (Sg) Formula to determine Gross Investment (Ig) ADD Net Investment (In) ??? ADD Depreciation 439 EQUALS Gross Investment 670 Formula to determine Gross Savings (Sg) ADD Personal Savings 219 ADD Corporate Savings 129 ADD/SUB Surplus OR Deficit (117) EQUALS Net Savings (Sn) 231 ADD Depreciation 439 EQUALS Gross Savings (Sg) 670 2582 (C) + 670 (Ig) + G + Xn = GDP

  8. Terms used when determining Government Spending (G) Government expenditures minus transfer payments like social security and welfare. The government gets the money to spend from taxes. When the government has a surplus the money pool gets larger and more money is available for businesses and individuals to borrow to increase their economic structure. When the government has a deficit the money pool gets smaller and less money is available for businesses and individuals to borrow to increase their economic structure. Supply decreases, interest rates increase. Less goods and services are produced and crowding out, where the government keeps businesses and individuals from getting the money, occurs. Corporate Income Tax is paid by businesses to the government. Indirect Business Tax is sales tax paid by businesses and can be collect from consumers (i.e.: sales tax).

  9. Formulas to determine Government Spending (G) First determine income ADD Personal Income Tax 493 ADD Corporate Income Tax 160 ADD Indirect Business Tax 338 ADD Social Security Tax 355 EQUALS Government Income 1346 Then determine expenditures Govt. Expenditures = Govt. Income + Deficit OR - Surplus ADD Deficit 117 EQUALS Government Expenditures 1463 G = Government Expenditures - Transfer Payments SUB Transfer Payments 648 EQUALS Government Spending (G) 815 2582 (C) + 670 (Ig) + 815 (G) + Xn = GDP

  10. Terms used when determining Gross Domestic Product (GDP) Gross Domestic Product (GDP)is the market value of all final goods and services produced within an economy during one year. Used goods, illegal activities, and Imputed income (stay at home mom, garden in backyard) is not included. National Income is rent + wages + profits + interest. Net Domestic Product is national income + indirect business tax. Net Domestic Product + depreciation = GDP

  11. Formula to determine Gross Domestic Product (GDP) ADD Wages 2373 ADD Rent 14 ADD Interests 288 ADD Profits (Corporate 299)(Proprietors 242) 541 EQUALS National Income 3216 ADD Indirect Business Tax 338 EQUALS Net Domestic Product 3554 ADD Depreciation 439 EQUALS GDP 3993 2582 (C) + 670 (Ig) + 815 (G) + Xn = 3993 (GDP)

  12. Are you right? So far we have 2582 (C) + 670 (Ig) + 815 (G) + (Xn) = 3993 (GDP) Net Exports (Xn) is the only category left to identify and we can do that with by solving for (Xn) 4067 (2582 (C) +670 (Ig) + 815 (G)) + (Xn) = 3993 (GDP) (Xn) = 3993 (GDP) - 4067 (C + Ig + G) (Xn) = -74 Check your work and make sure these numbers actually equal the GDP you found. 2582 (C) + 670 (Ig) + 815 (G) + -74 (Xn) = 3993 (GDP)

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