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Measuring Domestic Outputand National Income

Week: 8 & 9

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National Income Accounting measureseconomys overall performance

U.S. Bureau of Economic Analysis compilesNational Income and Product Accounts

Assess health of economy

Track long run courseFormulate policy

Assessing the Economys Performance

LO1

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Gross Domestic Product

Measure of aggregate output

Monetary measure

Avoid multiple counting

Market value final goods

Ignore intermediate goodsCount value added

LO1

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Exclude financial transactions

Public transfer payments

Private transfer paymentsStock (and bond) market transactions

Exclude second hand sales

Sell used car to a friend

LO1

Gross Domestic Product

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Two Approaches to GDP

Income approachCount income derived from

production

Wages, rental income, interestincome, profit

Expenditure approach

Count sum of money spent buying thefinal goods

Who buys the goods?

LO2

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G

D

P

= =

+

Consumption by

Households

Investment byBusinesses

Government

Purchases

Expenditures

By Foreigners

+

+

+

+

+

Wages

Rents

Interest

Profits

Statistical

Adjustments

+

Two Approaches to GDPExpenditures or Output

Approach

Income or

Allocations Approach

LO2

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Expenditures Approach

Personal consumption expenditures

(C)

Durable consumer goodsNondurable consumer goods

Consumer expenditures for services

Domestic plus foreign goods

produced

LO2

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Expenditures Approach

Gross private domestic investment (Ig)

Machinery, equipment, and tools

All construction

Changes in inventories

Creation of new capital assets

Noninvestment transactions excluded

LO2

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Government purchases (G)Expenditures for goods and services

Expenditures for publicly owned capital

Excludes transfer payments

Net exports (Xn)

Add exported goods

Subtract imported goods

Xn= exportsimports

GDP = C+ Ig+ G+XnLO2

Expenditures Approach

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Compensation

Rents

Interest

Proprietors Income

Corporate Profits

Taxes on Production and Imports

National Income

Net Foreign Factor Income (-)

Statistical Discrepancy (+)

Consumption of Fixed Capital (+)

Gross Domestic Product

$ 7792

268

788

1041

1309

1090

$12,288

105

209

1864

$ 14,256

Personal Consumption (C)

Gross Private Domestic

Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Gross Domestic Product

In BillionsReceipts

Expenditures ApproachAllocations

Income Approach

$10,089

1628

2931

-392

$ 14,256

U.S. Economy 2009

LO2

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Comparative GDP

LO2

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The Income Approach

Compensation of employeesRents

Interest

Proprietors incomeCorporate profits

Corporate income taxes

DividendsUndistributed corporate profits

Taxes on production and imports

LO2

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The Income Approach

From national income to GDPSubtract net foreign factor income

Statistical discrepancy

Consumption of fixed capitalOther national accounts

Net domestic product (NDP)

National income (NI)

Personal income (PI)

Disposable income (DI)

LO2

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U.S. Income Relationships 2009

Gross Domestic Product (GDP)Less: Consumption of Fixed Capital

Equals: Net Domestic Product (NDP)

Less: Statistical Discrepancy

Plus: Net Foreign Factor IncomeEquals: National Income (NI)

Less: Taxes on Production and Imports

Less: Social Security Contributions

Less: Corporate Income Taxes

Less: Undistributed Corporate Profits

Plus: Transfer Payments

Equals: Personal Income (PI)

Less: Personal Taxes

Equals: Disposable Income (DI)

$ 14,2561864

$ 12,392

209

105$ 12,288

1090

967

315

418

2528

$ 12,026

1102

$ 10,924LO2

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Nominal vs. Real GDP

GDP is a dollar measure of production

Using dollar values creates problems

Nominal GDP

Use prevailing price

Real GDP

Reflect changes in price

Use base year price

LO3

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GDP Price Index

PriceIndexin GivenYear

= x 100

Price of Market Basket

in Specific Year

Price of Same Basketin Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

LO3

Use price index to determine real GDP

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Shortcomings of GDP

LO4

Nonmarket activitiesLeisure

Improved product quality

The underground economy

GDP and the environment

Composition and distribution of the

output

Noneconomic sources of well-being

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Underground Economy

LO4

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