Lecture ThreeLecture Three

Measuring National Measuring National Output and National Output and National

IncomeIncome

GDPGDP

GDPGDP is the market valuemarket value of all finalfinal goods and services produced within a given period of timegiven period of time by factors of production located within a countrywithin a country.

Expenditure ApproachExpenditure Approach

The expenditure approachexpenditure approach is a method of computing GDP that measures the amount spent on all final goods during a given time period.

Expenditure ApproachExpenditure Approach

GDP = C + I + G + (EX - IM)

Consumption - CConsumption - C

Durable goodsDurable goods: goods that last a relatively long timeNondurable goodsNondurable goods: goods which are perishable ServicesServices: goods which do not involve the production of physical things

Investment - IInvestment - I

NonresidentialNonresidential: expenditures by firms on machines, factories, tools, etc.ResidentialResidential: expenditures by households on new houses and apartment buildingsBusiness inventoriesBusiness inventories: goods that firms produce now with the intent to sell later

Government Purchases - GGovernment Purchases - G

Expenditures by federal, state and local governments on final goodsDoes not include transfer payments (social security, unemployment benefits, etc.)

Net Exports - (EX-IM)Net Exports - (EX-IM)

Exports: sales to foreigners of U.S. produced goodsImports: purchases by U.S. citizens of foreign produced goodsNet Exports = Exports - Imports

Income ApproachIncome Approach

A method of computing GDP that measures the incomes - wages, rents, interest, and profits - received by all factors of production in producing final goods.

National IncomeNational IncomeCompensation of employees: wages, salaries, etc., paid to householdsProprietors’ income: income of unincorporated businessesCorporate profits: income of corporationsNet interest: interest paid by businessesRental income: income received by property owners

DepreciationDepreciation

DepreciationDepreciation is the decline in value of capital assets as they wear out or become obsolete.

Indirect Taxes and SubsidiesIndirect Taxes and Subsidies

Indirect TaxesIndirect Taxes: sales taxes, custom duties, license fees, etc.SubsidiesSubsidies: payments made by the government for which it receives goods or services

Net Factor Payments to Rest Net Factor Payments to Rest of Worldof World

Payments of factor income to the rest of the world minus the receipt of factor income from the rest of the world

Gross National ProductGross National Product

Add to GDP any income earned abroad by US firms or residentsSubtract any income earned in the US by foreign firms or residents.

Net National Product - NNPNet National Product - NNP

NNP = GDP - depreciation

National Income - NINational Income - NI

NI = NNP - indirect taxes + subsidies

Personal Income - PIPersonal Income - PI

PI = NI - (corporate profits - dividends) - social insurance payments

Disposable Personal Income - Disposable Personal Income - DPIDPI

DPI = PI - personal income taxes

Nominal GDPNominal GDP

Nominal GDPNominal GDP is GDP measured in current dollars Current dollarsCurrent dollars: the current prices that one pays for goods and services

Real GDPReal GDP

Real GDPReal GDP is measured in constant year pricesReal GDP is adjusted for inflationConstant yearConstant year: an arbitrary base year from which prices are derived

Real GDPReal GDP

GDP adjusted for inflation.Base year will be year 1.

GDP DeflatorGDP Deflator

A measure of the prices of all goods and services produced= (Nominal GDP/Real GDP) * 100

Rate of InflationRate of Inflation

Rate of change in price level

Inflation (year 2) = GDP deflator (year 2) - GDP deflator (year 1)

GDP deflator (year 1)

Limitations of the GDP ConceptLimitations of the GDP Concept

Social WelfareUnderground EconomyPer Capita GDP

Review Terms & ConceptsReview Terms & Concepts

Base year Business inventories Compensation of

employees Corporate profits Current dollars Depreciation Disposable personal

income

Durable goods Expenditure approach Final goods & services Fixed-weight procedure Government consumption

& investment Gross Domestic Product

(GDP) Gross investment

Review Terms & Concepts Review Terms & Concepts (cont.)(cont.)

Gross National Product (GNP)

Gross private investment

Income approach Indirect taxes Intermediate goods National income Net exports

Net factor payments Net interest Net investment Net National Product

(NNP) Nominal GDP Nondurable goods Nonresidential

investment

Review Terms & Concepts Review Terms & Concepts (cont.)(cont.)

Per capita GDP Personal consumption

expenditures Personal income Personal saving Personal saving rate Proprietors’ income

Rental income Residential investment Services Subsidies Underground economy Value added Weight