Measuring Domestic Output, and National Income

1. Measuring Domestic Output, and National Income

2. Assessing the Economy’s Performance National Income Accounting: • Health of the Economy • Comparisons Over Time • Formulation of Public Policy

3. National Income accounting: measuring overall performance of the economy √ The idea was created by Simon Kuznets (1901-1985) beginning in 1930 shortly after the beginning of the Great Depression.He received the Nobel Prize in Economics in 1971 for his effort. √ The tools of collection of the data were developed by the team led by Dr. Kuznets. √ The Bureau of Economic Analysis(part of the Commerce Department) compiles the numbers (http://www.bea.gov/).

4. GROSS DOMESTIC PRODUCT Market Value of the total goods and services produced within the boundaries of the US whether by Americans or foreigners in one year. Defining…

5. GROSS DOMESTIC PRODUCT • uses monetary measure √ attach a “price tag” to products produced √ use market value of FINAL goods and services • avoid multiple counting- √ ignore transactions involving intermediate goods.

6. GROSS DOMESTIC PRODUCT • Excludes Non-productive Transactions • Financial Transactions • Public Transfer Payments • Private Transfer Payments • Security Transactions • Secondhand Sales

7. GROSS DOMESTIC PRODUCT Expenditures Approach Income Approach Consumption by Households Wages + + Rents + G D P Investment by Businesses = = + Interest + Government Purchases Profits + + Expenditures by Foreigners Statistical Adjustments

8. GDP = C + G + Ig + Xn Consumption Spending Government Spending Investment Spending Net Export Spending

9. √ Non durable consumption (less than 3 yrs use) √ Durables consumption (more than 3 yrs use) √ Services C for Consumption Spending Largest portion of GDP — about 65%

10. G for Government Spending Federal Spending State and Local Spending

11. 1. new residential construction 2. new commercial construction 3. tools and machines Ig for Investment Spending 4. change in business inventories

12. Gross Investment — Depreciation = Net Investment Net Investment Gross Investment Depreciation Increased Consumption and Government Spending Stock of Capital Stock of Capital December 31 Year’s GDP January 1

13. Xn for Net Export Spending Xn = Exports-Imports √ Exports (goods and services from America purchased by citizens of other countries. √ Imports (goods and services from other countries purchased by American citizens)

14. GLOBAL PERSPECTIVE Comparative GDPs in Trillions, 2001 0 1 2 3 4 5 6 7 8 9 10 United States Japan Germany United Kingdom France China Italy Canada Mexico Spain Brazil India Korea, Rep. Netherlands Australia Source: World Bank

15. THE INCOME APPROACH • Compensation of Employees • Rents • Interest • Proprietors’ Incomes • Corporate Profits • Corporate Income Taxes • Dividends • Undistributed Corporate Profits National Income

16. THE INCOME APPROACH From National Income to GDP • From National Income, subtract: • Indirect Business Taxes • Consumption of Fixed Capital (Depreciation) • Net Foreign Factor Income

17. Net Domestic Product By subtracting DEPRECIATION or Consumption of Fixed Capital from the GDP, a figure for the true amount of new goods and services can be determined.

18. Personal Income Subtracting losses to income (Social Security contribution, corporate profits and retained earnings) and adding a source of income (transfer payments) to the National Income, a figure is determined that shows the personal income available to the nation.

19. Disposable Income By subtracting from Personal Income, the dollars lost to taxes, we have the Disposable Income. This is the “bottom” line of national income accounting. This figure of Disposable Income gives us the funds available for spending and/or saving.

20. U.S. GDP, NDP, NI, PI, & DI, 2002 Gross Domestic Product $10,446 (GDP) Consumption of fixed capital -1,393 Net Domestic Product $9,053 (NDP) Net foreign factor income earned in the U.S. - 10 Indirect business taxes -695 National Income $8,348 (NI) Social security contributions -748 Corporate income taxes -213 Undistributed corporate profits -141 Transfer payments +1,683 Personal Income $8,929 (PI) Personal Taxes -1,113 Disposable Income $7,816 (DI)

21. NOMINAL GDP vs. REAL GDP Nominal GDP … reflects the current price level of goods and services and ignores the effect of inflation on the growth of GDP. … this measure is called Current Dollar GDP.

22. NOMINAL GDP vs. REAL GDP Real GDP … measures the value of goods and services adjusted for change in the price level. It will reflect the real change in output. … This measure is called the Constant Dollar GDP. … indicates what the GDP would be if the purchasing power of the dollar has not changed from what it was in a base year. The government currently uses 2000 as its base year for Real GDP measurement.

23. NOMINAL GDP vs. REAL GDP • Nominal Values • Deflate GDP when prices rise • Inflate GDP when prices fall Calculating Real GDP (4) Unadjusted, or Nominal, GDP, (1)x(2) (3) Price Index Year 1 = 100 (2) Price Pizza Per Unit (5) Adjusted, Or Real, GDP (1) Units of Output Year 1 2 3 4 5 5 7 8 10 11 $ 10 20 25 30 28 100 200 250 - - $ 50 140 200 - - $ 50 70 80 - -

24. Price of market basket in specific year Price Index in a given year x 100 = Price of same market basket in base year Nominal GDP = Real GDP Price Index (in hundredths) Nominal GDP Price Index (in hundredths) = Real GDP NOMINAL GDP vs. REAL GDP GDP Price Index An Alternative Method

25. GDP Index Numbers