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Principles of Economics, Case and Fair,8e

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36Chapter Outline2Measuring National Output and National IncomeGross Domestic Product Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output Produced Abroad by Domestically Owned Factors of Production Calculating GDP The Expenditure Approach The Income Approach Nominal versus Real GDP Calculating Real GDP Calculating the GDP Deflator The Problems of Fixed Weights Limitations of the GDP Concept GDP and Social Welfare The Underground Economy Gross National Income Per Capita Looking Ahead

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36MEASURING NATIONAL OUTPUT AND NATIONAL INCOMEnational income and product accounts Data collected and published by the government describing thevarious components of national income and output in the economy.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36GROSS DOMESTIC PRODUCTgross domestic product (GDP) The total market value of all final goods and services produced within a given period by factors of production located within acountry.GDP is the total market value of a countrys output. It is the market value of all final goods and services produced within a given period of time by factors of production located within a country.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36GROSS DOMESTIC PRODUCTfinal goods and services Goods and services produced for final use.FINAL GOODS AND SERVICESintermediate goods Goods that are produced by one firm for use in further processing by another firm.value added The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36GROSS DOMESTIC PRODUCTTires taken from that pile and mounted on the wheels of the new car before it is sold are considered intermediate goods to the auto producer. Tires from that pile to replace tires on your old car are considered final goods. If, in calculating GDP, we included the value of the tires (an intermediate good) on new cars and the value of new cars (including the tires), we would be double counting.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36GROSS DOMESTIC PRODUCTIn calculating GDP, we can either sum up the value added at each stage of production or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.

TABLE 6.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers)STAGE OF PRODUCTIONVALUE OF SALESVALUE ADDED(1)Oil drilling$1.00$1.00(2)Refining1.300.30(3)Shipping1.600.30(4)Retail sale2.000.40Total value added$2.00

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36GROSS DOMESTIC PRODUCTGDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.EXCLUSION OF USED GOODS AND PAPER TRANSACTIONSGDP is concerned only with new, or current, production.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36GROSS DOMESTIC PRODUCTGDP is the value of output produced by factors of production located within a country.EXCLUSION OF OUTPUT PRODUCED ABROAD BY DOMESTICALLY OWNED FACTORS OF PRODUCTIONgross national product (GNP) The total market value of all final goods and services produced within a given period by factors of production owned by acountrys citizens, regardless of where the output is produced.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPexpenditure approach A method of computing GDP that measures the amount spent on all final goods during a given period.income approach A method of computing GDP that measures the incomewages, rents, interest, and profitsreceived by all factors of production in producing final goods.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPTHE EXPENDITURE APPROACHThere are four main categories of expenditure:Expenditure Categories:Personal consumption expenditures (C): household spending on consumer goodsGross private domestic investment (I): spending by firms and households on new capital, i.e., plant, equipment, inventory, and new residential structuresGovernment consumption and gross investment (G)Net exports (EX - IM): net spending by the rest of the world, or exports (EX) minus imports (IM)GDP = C + I + G + (EX - IM)

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDP

TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure ApproachBILLIONS OF DOLLARSPERCENTAGE OF GDPPersonal consumption expenditures (C)8,214.370.0Durable goods987.88.4Nondurable goods2,368.320.2Services4,858.241.4Gross private domestic investment (l)1,928.116.4Nonresidential1,198.810.2Residential673.85.7Change in business inventories55.40.5Government consumption and gross investment (G)2,215.918.9Federal827.67.1State and local1,388.311.8Net exports (EX IM)-624.0- 5.3Exports (EX)1,173.810.0Imports (IM)1,797.815.3Gross domestic product (GDP)11,734.3100.0Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPpersonal consumption expenditures (C) A major component of GDP: expenditures by consumers on goods and services.Personal Consumption Expenditures (C)There are three main categories of consumer expenditures: durable goods, nondurable goods, and services.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPdurable goods Goods that last a relatively long time, such as cars and household appliances.nondurable goods Goods that are used up fairly quickly, such as food and clothing.services The things we buy that do not involve the production of physical things,such as legal and medical services and education.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPgross private domestic investment (I) Total investment in capitalthat is,the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sector.Gross Private Domestic Investment (I)nonresidential investment Expenditures by firms for machines, tools, plants, and so on.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPresidential investment Expenditures by households and firms on new houses and apartment buildings.change in business inventories The amount by which firms inventories change during a period. Inventories arethe goods that firms produce now but intend to sell later.Change in Business InventoriesGDP = final sales + change in business inventories

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPdepreciation The amount by which an assets value falls in a given period.Gross Investment versus Net Investmentgross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period.net investment Gross investment minus depreciation.capitalend of period = capitalbeginning of period + net investment

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPgovernment consumption and grossinvestment (G) Expenditures by federal, state, and local governments for final goods and services.Government Consumption and Gross Investment (G)

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPnet exports (EX - IM) The difference between exports (sales to foreigners of U.S.- produced goods and services) and imports (U.S. purchases of goods and services from abroad). The figure can be positive or negative.Net Exports (EX - IM)

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPnational income The total income earned by the factors of production owned by a countrys citizens.THE INCOME APPROACH

TABLE 6.3 National Income, 2004BILLIONS OF DOLLARSPERCENTAGE OF NATIONAL INCOMENational Income10,275.9100.0Compensation of employees6,687.665.1Proprietors income889.68.7Corporate profits134.21.3Net interest1,161.511.3Rental income505.54.9Indirect taxes minus subsidies809.3Net business transfer paymentsSurplus of government enterprisesSource: See Table 6.2.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPcompensation of employees Includes wages, salaries, and various supplementsemployer contributions to social insurance and pension funds, forexamplepaid to households by firms and by the government.proprietors income The income of unincorporated businesses.rental income The income received by property owners in the form of rent.

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

* of 36CALCULATING GDPcorporate profits The income of corporate businesses.net interest The interest paid by business.indirect taxes minus subsidies