Measuring Domestic Output and National Income

Chapter 24

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

24-2

Chapter Objectives

• Define and measure GDP• GDP and income relationships• The GDP price index• Nominal GDP vs. real GDP• Limitations of the GDP measure

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• Bureau of Economic Analysis compiles National Income and Product Accounts–Assess health of economy–Track long run course–Formulate policy

National Income Accounting

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Gross Domestic Product

• Measure of aggregate output

• Monetary measure

• Avoid multiple counting–Market value final goods

–Ignore intermediate goods

–Count value added

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Gross Domestic Product

• Exclude financial transactions–Public transfer payments–Private transfer payments–Stock (and bond) market

transactions

• Second hand sales–Sell used car to a friend

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Two Approaches to GDP

• Income approach–Count income derived from

production–Wages, rental income, interest

income, profit• Expenditure approach

–Count sum of money spent buying the final goods

–Who buys the goods?

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GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

+

+

+++

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

Two Approaches to GDP

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Expenditure Approach

• Personal consumption expenditures (C)–Durable consumer goods–Nondurable consumer goods–Consumer expenditures for

services–Domestic plus foreign produced

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Expenditure Approach

• Gross private domestic investment (I)–Machinery, equipment, and tools–All construction–Changes in inventories

• Creation of new capital asset• Noninvestment transactions

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Expenditure Approach

January 1 Year’s GDP December 31

Consumption& Government

Spending

Depreciation

NetInvestment

GrossInvestment

Stock ofCapital

Increase

Stock ofCapital

Gross InvestmentDepreciationNet Investment

-=

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Expenditure Approach

• Government purchases (G)– Expenditures for goods and services

– Expenditures for social capital

– Excludes transfer payments

• Net exports (Xn)

– Add exported goods

– Subtract imported goods

– NX = exports - imports

• GDP = C+Ig+G+Xn

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Compensation

Rents

Interest

Proprietor’s Income

Corporate Profits

Taxes on Production and

Imports

National Income

Net Foreign Factor Income (-)

Statistical Discrepancy (+)

Consumption of Fixed

Capital (+)

Gross Domestic Product

$ 7874

65

603

1043

1627

1009

$12,221

96

29

1687

$ 13,841

Personal Consumption (C)

Gross Private Domestic

Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Gross Domestic Product

in Billions ReceiptsExpenditures Approach

AllocationsIncome Approach

$ 9734

2125

2690

-708

$ 13,841

U.S. Economy 2007

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Comparative GDP

Source: World Bank

Selected Nations GDPs, 2007

United StatesJapan

GermanyChina

United KingdomFrance

ItalyCanada

SpainBrazil

RussiaIndia

South KoreaMexico

Australia

0 1 2 3 4 5 6 7 8 9 10 12 13GDP in Trillions of Dollars

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Components of National Income

• Compensation of employees• Rents• Interest• Proprietor’s income• Corporate profits

– Corporate income taxes– Dividends– Undistributed corporate profits

• Taxes on production and imports

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Income Approach

• From national income to GDP– Net foreign factor income– Statistical discrepancy– Consumption of fixed capital

• Other national accounts– Net domestic product (NDP)– National income (NI)– Personal income (PI)– Disposable income (DI)– DI = C + S

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U.S. Income Relationships 2007

Gross Domestic Product (GDP)Less: Consumption of Fixed CapitalEquals: Net Domestic Product (NDP)Less: Statistical DiscrepancyPlus: Net Foreign Factor IncomeEquals: National Income (NI)Less: Taxes on Production and ImportsLess: Social Security ContributionsLess: Corporate Income TaxesLess: Undistributed Corporate ProfitsPlus: Transfer PaymentsEquals: Personal Income (PI)Less: Personal TaxesEquals: Disposable Income (DI)

$ 13,8411687

$ 12,1542996

$ 12,2211009

979467344

2237$ 11,659

1482$ 10,177

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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

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GDP Price Index

• Use price index to determine real GDP

PriceIndexIn GivenYear

= x100Price of Market Basket

In Specific Year

Price of Same BasketIn Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

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Shortcomings of GDP

• Nonmarket activities• Leisure• 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

Source: Open Assessment, E-Journal

As a percentage of GDP, Selected Nations, 2007

MexicoSouth Korea

IndiaItaly

SpainChina

SwedenGermany

FranceUnited Kingdom

JapanSwitzerland

United States

0 5 10 15 20 25 30 Percentage of GDP

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Sources of BEA Data

• Consumption– Census Bureau’s Retail Trade Survey– Census Bureau’s Survey of Manufacturers– Census Bureau’s Service Survey

• Investment– All Consumption data sources– Census Bureau’s Housing Starts Survey and

Housing Sales Survey– Retail Trade Survey– Wholesale Trade Survey– Survey of Manufacturing

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• Government Purchases– Office of Personnel Management

– Construction Surveys

– Census Bureau’s Survey of Government Finance

• Net Exports– U.S. Customs Service

– BEA Surveys and Analysis

Sources of BEA Data

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Key Terms

• national income accounting

• gross domestic product• intermediate goods• final goods• multiple counting• value added• expenditures approach• income approach• personal consumption

expenditures• gross and net private

domestic investment

• government purchases

• net exports • taxes on production

and imports• national income• consumption of fixed

capital• net domestic product • personal income • disposable income• nominal GDP• real GDP• price index

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