GAO-21-260, SUBMINIMUM WAGE PROGRAM: Factors Influencing ...
Four Factors of Production Labor Land Capital Payments to Factors of Production Interest Wage Rent...
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Transcript of Four Factors of Production Labor Land Capital Payments to Factors of Production Interest Wage Rent...
Four Factors of ProductionLaborLand
Capital
Payments to Factors of Production
Payments to Factors of ProductionInterestW
age
Rent
Profit
Entrepreneurship
Produce
Goods and Services
Sold
Total Income
Rent
Wage
Profit
Interest
Should be determined by the “free market” Capitalism
Should be determined by the government Communism
Should be determined by free market and the government Socialism
Factors of Production
How should be
distributed?
Capitalism
Economic system in which the means of production are privately owned and operated for private profit
Decisions are made by private actors in a free market
Not owned by Government
Laissez-faire: free market
A market in which there is no economic intervention and regulation by the government,
Except to enforce private contracts and the ownership of property.
Households
Goods and Services
InterestRent
WagesProfits
Firms
Circular Flow Diagram
Buys goods and
services
Foreig
n Goods
$ $$
$
$
$
Why is this number important?
The more goods and services we produce, the more Income is generated and the better our ability to satisfy needs.
7
Goods and
Services 17T
InterestRent
WagesProfits
GDPSum of expenditures on new, final goods and services produced in the U.S during the year.
GDP includes ONLY NEW production
GDP includes ONLY NEW production
GDP is NOT the sum of total sales!
GDP is NOT the sum of total sales!
Excludes used goods
GDP = Total sales of new goods…
Car Manufacturer purchase new tires from tire manufacturer at
$200 each
Car Manufacturer purchase new windows from window manufacturer at $300 each
Consumer buys new car for
$16,000.
GDP = Total sales of new goods…
4 Windows : $1200
4 tires : $800
1 car: $16,000
$18,000Total Sales of New Goods
Include twice the value of the tires and the windows
+
+
=
Intermediate GoodsIntermediate Goods
GDP = Total sales of new goods…
GDP excludes sales of intermediate goods to avoid double counting.
Final GoodFinal Good
Intermediate Good
A good (or service) that is used as an input or component in the production of another good.
A good that will be further processed before sold as final good.
Goods and services purchased by firms…
11
ExcludedExcluded
Final Good
A good (or service) purchased by the final user
With no further transformation, use or as an input in the production of other goods.
12
Included
Included
GDP
Sum of expenditures on new, final goods and services produced in the
U.S during the year.
13
GDP includes ONLY Final goods
GDP includes ONLY Final goods
Excludes goods purchased by firms to produce final goods…
Firms purchase Capital Goods
Capital good: A manufactured factor of production used to produce other goods…
Examples: factories, buildings, trucks, tools, machinery, and equipment.
14
GDP excludes goods purchased by firms to produce final goods…
GDP
Sum of expenditures on new, final goods and services produced in the
U.S during the year.
17
GDP includes goods purchased by consumsers
and capital gods purchased by firms
GDP includes goods purchased by consumsers
and capital gods purchased by firms
Excludes Intermediate goods purchased by
firms
Households Firms
Unsol
d
goods
are
Inve
stm
ent
Unsol
d
goods
are
Inve
stm
ent
Goods and Services
Goods and Services
UnsoldInventory+
Inve
stm
ent
Purchase of Capital
Goods
Government
Purchases
Investment = Purchase of
• Equipment, tools, software.
• Non-residential construction: shopping malls, factories, airports.
• Inventories and
• New homes and Condominiums purchased by consumers
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Households
Goods and Services
Saving = purchase of paper goods
Saving = purchase of paper goods
Stocks, FundsBonds, CD’s,Life Insurance
Stocks, FundsBonds, CD’s,Life Insurance
Goods Produced by the Government are NOT sold
• All goods and services purchased by the government are FINAL goods.
• Government production is included when the government purchase the inputs necessary to produce: services of government employees, raw materials, tools, equipment.
• Government production is calculated at the value of the inputs used.
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Government is
the final user
Government is
the final user
Households
U.S. Goods and
Services
Firms
U.Sgoods
U.Sgoods
Imports
Impo
rts Im
portsExp
orts
Purchase of Foreign Goods (IMPORTS)
should not be added as U.S. production
GDP does not include Non-Market Production
Goods or services produced but not paid for.
Cleaning, cooking, home improvement projects, child care, volunteering
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Non M
arke
t
GDP does not include unreported production
Goods or services produced and paid for but not reported
Illegal goods and services
Legal unreported goods and services
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Underground
GDP is NOT equal to total sales GDP excludes:• Sales of intermediate goods• Sales of paper goods• Sales of used goods• Sales of illegal goods• Non- market goods and services.
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Limitations of GDP
• Excludes non-market production of goods or services– Child care, elderly care, cooking, cleaning,
gardening, home projects, farming.
• Excludes underground production of goods or services– Illegal and legal goods and services not
reported to tax authority.
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Limitations of GDP continued…GDP does not ”subtract”.
Deforestation.Contamination.Destruction of animal and plant life.Destruction of assets.
32
China 9T
Germany
3TChina
9T
China 9T
China 9T
Limitations of GDP continued…
Leisure is not accounted for.
USA17T
EU17T
Worked 12 monthsWorked 11 months
GDP alone is not a good measure of wellbeing
We need to know how this income is distributed.
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Can not be used for cross country comparisons unless we add both: income distribution and population size.
Ger
man
y
Spain
Fran
ce
England
Italy
Japa
n
GDP excludes goods and services produced by Americans outside the U.S
GDP includes goods and services produced by other countries inside the U.S.
U.S. P
rodu
ction
Includes goods and services produced by U.S. companies anywhere in the world
Includes goods and services produced by U.S. companies anywhere in the world
Excludes goods and services produced by other countries inside the U.S.
Excludes goods and services produced by other countries inside the U.S.
Foreign Production in the US
Ger
man
y
Spain
Fran
ce
England
Italy
Japa
n
Add Income earned abroad
Add Income earned abroad
Subtract Income earned by foreign companies in the
U.S.
Subtract Income earned by foreign companies in the
U.S.From Domestic to National
Investment
Purchase of new capital goods.
Net I = Gross I – Depreciation
Purchase of new capital goods
minus Depreciation.
Gross Investment
NetInvestment
Gross Domestic Product
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GDP = C + I + G + NXGDP = C + I + G + NX
Includes all purchases
of new capital goods
GG II
From Gross to Net
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Gross Domestic Product
Net Domestic Product
Subtract DepreciationSubtract Depreciation
Gross Domestic Product
Net Domestic Product
Add DepreciationAdd Depreciation
GDPWe want to know quantity produced We can not add quantities produced because We can not add apples and computers and web pages…One pear is not the same as one computer: there is more value embodied in the computer…
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Calculating GDPNominal GDPNominal GDP
Multiply quantities purchased by the price at which they sold on that year.
Example: For 2009 GDP, we use prices paid in 2009.Because we use prices of 2009 to compute GDP for 2009 ,
we say that we used “current” prices.
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GDP at current prices
The Sum of expenditures on all goods produced over the year
Year GDPPrice Quantity Price Quantity
PriceXQuantity
$1 100 $3 50 (1X100)+(3X50) = 250
Good X Good Y
2009
If prices rise…
Year GDPPrice Quantity Price Quantity PriceXQuantity
$1 100 $3 50 (1X100)+(3X50) = 250Price Quantity Price Quantity PriceXQuantity
$2 100 $6 50 (2X100)+(6X50) = 500
Good X Good Y
2009
2010
Quantities produced are
the sameBut GDP Increased!
Prices distort our view of true
quantity produced
The Short vs. The Long Run
Time
Total Production
Every
year w
e produce m
ore than th
e previous y
ear
Full Employment: z
ero
unemployment, no excess
capacity
Above Full employment
Below Full employment
At Full employment
Potential GDPGDP at Full
Employment
Three Ways of Calculating GDP
The Expenditures Approach
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C + I + G + X - M
Interest +Rent +
Wages +Profits
The Incomes Approach
Value Added ApproachProduced Sold it for:
Value Added:
Indian community owns forest
tree $2 2-0=$2
Logging Company buys tree transforms into log
log $10 10-2=$8
Wood Company buys logs transforms into plywood
plywood $15 15-10=$5
Furniture Manufacturer buys plywood makes table
table $30 30-15=$15
Macy's buys table places on showroom for display
table in showroom $35 35-30=$5
Sum of Value Added $35
Sum of Value Added = Price paid by final user = $35
Growth
Increases in GDP come from:
Increases in the number of workers and/or
Increases in the number of factories and/or
Improvements in technology
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Growth in GDP come from:
Growth in the labor force and/or
Growth in the country’s stock of capital and/or
Improvements in technology
Growth in GDP come from:
Growth in the labor force and/or
Growth in the country’s stock of capital and/or
Improvements in technology
6464
Real GDP = Hours of work X Output per hour Real GDP = Hours of work x Labor productivity
Growth rate of potential GDP = Growth rate of labor force x Growth rate of labor productivity
Real GDP ~$ 14THours of work per year ~250 BLabor productivity ~$14T/250 B = $ 56 per hour.
Personal Consumption Expenditures 9,734 CDepreciation 1,687
Wages 7,874 Domestic and foreign wages
Indirect Business Taxes 1,041
Rental Income 65 Domestic and foreign Rent
Gross Private Domestic Investment 2,125 I
Profits 2,638 Domestic and foreign Profits
Exports 1,643 XGovernment Purchases 2,690 G
Interest 603 Domestic and foreign Interest
Imports 2,351 MIncome received from other countries 818 Income paid to other countries 722 GDP = C + I + G + X -M 13,841 National Income = Wages + Interest+Rents+Profits+Indirect Business Taxes 12,221 Domestic and
foreign IncomeGNP = GDP - income paid to other countries + income received from other countries 13,937 Income received
by U.S. NationalsNNP = GNP - Depreciation 12,250
Should be equal
Statistical Discrepancy = NNP – NI =29
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Personal Consumption Expenditures 9,734Depreciation 1,687Wages 8,031Indirect Business Taxes 1,062Rental Income 66.3Gross Private Domestic Investment 2,168Profits 2,691Exports 1,676Government Purchases 2,744Interest 615.06Imports 2,398Income received from other countries 834.36Income paid to other countries 736.44
GDP = C + I + G + X -MNational Income = Wages + Interest+Rents+Profits+Indirect Business TaxesGNP = GDP - income paid to other countries + income received from other countries
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Personal Consumption Expenditures 9,734Depreciation 1,687Wages 8,031Indirect Business Taxes 1,062Rental Income 66.3Gross Private Domestic Investment 2,168Profits 2,691Exports 1,676Government Purchases 2,744Interest 615.06Imports 2,398Income received from other countries 834.36Income paid to other countries 736.44
GDP = C + I + G + X -M 14,118
National Income = Wages + Interest+Rents+Profits+Indirect Business Taxes
12,465
GNP = GDP - income paid to other countries + income received from other countries
14,216
A bakery’s purchases
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Did you use it entirely into the pie?
No: Capital Good Include this purchase in GDP
Yes: Intermediate Good. Do not include this purchase in GDP
Sugar Flour Apples Coffee Water Scotch tape Pens Notepads Scissors Shredder Phone Computer Oven
1. Bullet proof vests purchased by military.
2. Bullet proof vest purchased by Security Company.
3. Leather4. Bicycle purchased by
Gym.5. Computer6. Newly produced goods
no one purchased7. House8. Tools9. Cash for clunkers
10.Computer purchased by the City of Santa Monica.
11.Coffee and pastries purchased LAPD.
12.Coffee and pastries purchased by Ford for their offices.
13.Goods manufactured in other countries.
14.The State of Florida purchase oil from Venezuela
15.Venezuela purchase corn from Iowa farmers.
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new
5. Determine if the following items are included in GDP and under what component C, I, G, X or M?
a. Jane buys newly issued shares of stock in Macro.com. Inc.b. Ross buys a new pair of jeans at a local department store.c. Joey has his mustache trimmed at his hair salon.d. Rachel buys an antique chest at a resale shop.e. Phoebe grows her own herbs on her apartment balcony.f. Michael travels to France and buys French wine.g. John, a stay-at-home dad, takes care of his 4 year old twins.h. Mary sends her 3 year old to pre-school.i. Rose volunteers at a homeless shelter.j. Government pays farmers a 10 cent/pound subsidy.k. Amazon. COM buys books from a publisher.l. Mark buys a book from a publisher. m. Mitsubishi Co. builds a car in Illinois and ships it to Japan for sale.n. Mike bets $500 on a basketball game.o. You buy land to build a home.
Good A Good B
Year Quantity Price per unit Quantity Price per unit
1 2,000 0.1 75 1
2 2,400 0.15 60 1.1
3 2,600 0.25 75 1.2
6. Calculate: Nominal GDP for year 2, Real GDP for year 2 (use year 1 as base), GDP growth rate in
Real GDP for year 2.
Item Billions $Personal Consumption Expenditures 9,734Depreciation 1,687Wages 7,874Indirect Business Taxes 1,041Rental Income 65Gross Private Domestic Investment 2,125Profits 2,638Exports 1,643Government Purchases 2,690Interest 603Imports 2,351Income received from other countries 818Income paid to other countries 722
GNP = National Income (NNP) = GDP =
Practice
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1. What is GDP? What is included? What is excluded? What are its limitations?2. Explain the difference between GDP & GNP, NDP & GDP, between real GDP and nominal GDP. Provide an example to illustrate your answer.3. Explain how a loaf of bread can be considered both a final good and an intermediate good. Provide an example to illustrate your answer.4. Is the purchase of a home included in the calculation of GDP? If yes how and why? If not, why not?
5. What would happen in a country in which the value of depreciation is larger than the value of gross investment?
6. Why do we calculate GDP in dollars instead of computing GDP in pounds or units produced?
7. When would NX be a negative number and what implication does this have for the computation of GDP?
8. Why do we have to subtract imports in the calculation of GDP? Hint: We could simply not add M into GDP = C+I +G +X. But why do we have to subtract them from the above calculation
GDP = C + I + G + X – M?
9. What would be the effect on GDP with legalization of marijuana, cocaine, prostitution and gambling?
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10.Are there key differences between an increase in the capital stock and an improvement in the level of technology?
11.Describe how the labor force, the nation's capital stock, and the rate of technical progress contribute to potential GDP growth and labor productivity.
12.During the course of the twentieth century, the average workweek in the United States has gotten shorter and Americans have enjoyed greater amounts of leisure time. How has this development affected potential GDP and labor productivity?
Why NNP and income are not the same?
• They are constructed using different sources of information which produce different results due to:– Sampling errors– Coverage differences– Timing differences when expenditures and incomes
are recorded.
• The overall difference between GDP and GDI is known as the statistical discrepancy
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1. Net Investment includes all business’ purchases of new equipment, buildings, software. ______
2. Gross Investment includes only business’ purchases of new equipment which add to the stock of capital. ______
3. Gross Domestic product includes all business’ purchases of new equipment, buildings and software as part of the Investment component______
4. Net Domestic Product includes only production inside U.S. borders regardless of national ownership. ______
5. Gross National Product includes production of goods and services by U.S. nationals regardless of where in the world production takes place. ______
6. If the value of depreciation is greater than the value of gross investment, then the stock of capital will decrease. ______
7. If the value of depreciation is greater than the value of gross investment, then Net Investment is negative. ______