Measuring Domestic Output, Measuring Domestic Output, National Income and the Price National Income and the Price

LevelLevel

Krugman Section 3 Krugman Section 3 Modules 10 and 11Modules 10 and 11

Assessing the EconomyAssessing the Economy

National income accounts serve a purpose National income accounts serve a purpose just as income statements do for a just as income statements do for a businessbusinessCompare conditions with other countriesCompare conditions with other countriesProvides a basis for public policies to Provides a basis for public policies to improve economic performanceimprove economic performance

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDPGDP = the total market value of all final = the total market value of all final goods and services goods and services produced within a produced within a countrycountry in one year in one yearMeasured in quarters (every 3 months)Measured in quarters (every 3 months)– 11stst = January - March = January - March– 22nd nd = April - June = April - June – 33rdrd = July – September = July – September– 44thth = October - December = October - December

GDPGDP

Includes only Includes only final goodsfinal goods = g & s that are = g & s that are purchased for final use by the consumerpurchased for final use by the consumerDoes Does notnot include include intermediate goodsintermediate goods = g & = g & s that are resold or go on for further s that are resold or go on for further processing or manufacturingprocessing or manufacturing– This avoids This avoids multiple countingmultiple counting

Is the value of what has been produced, Is the value of what has been produced, not what was actually soldnot what was actually sold

GDP GDP ExcludesExcludes Nonproduction Nonproduction TransactionsTransactions

Existing assets or property that is sold or Existing assets or property that is sold or transferred, including used items, is NOT transferred, including used items, is NOT countedcountedPublic or private transfer paymentsPublic or private transfer payments--public = SS or welfare payments--public = SS or welfare payments--private = student allowance or alimony--private = student allowance or alimony--sale of stocks and bonds--sale of stocks and bonds

--broker services rendered ARE counted--broker services rendered ARE counted

More Nonproduction TransactionsMore Nonproduction Transactions

Secondhand salesSecondhand salesUnreported business activities done in Unreported business activities done in cash (ie unreported tips)cash (ie unreported tips)Illegal activitiesIllegal activities““Non-market” activities like volunteering or Non-market” activities like volunteering or family workfamily workUS corporation’s production in overseas US corporation’s production in overseas plantsplants

2 ways to look at GDP2 ways to look at GDPExpenditures ApproachExpenditures Approach

GDP has 4 componentsGDP has 4 components

GDP = C + GDP = C + IIg + G + Xng + G + Xn

C = Personal ConsumptionC = Personal Consumption – durable & nondurable finished g & s (but durable & nondurable finished g & s (but

not houses)not houses)

Expenditures ApproachExpenditures Approach

IIg = Gross Private Domestic g = Gross Private Domestic Investment (Gross Investment)Investment (Gross Investment)

– Purchases of machinery, equipment & Purchases of machinery, equipment & toolstools

– Factory equipment maintenanceFactory equipment maintenance– All construction (including houses)All construction (including houses)– Unsold inventory of productsUnsold inventory of products

Expenditures ApproachExpenditures Approach

G = Government SpendingG = Government Spending– Government purchase of resources Government purchase of resources

(mainly labor)(mainly labor)– Again, it excludes transfer payments like Again, it excludes transfer payments like

SSSS

Expenditures ApproachExpenditures Approach

Xn = Net Exports (exports – imports)Xn = Net Exports (exports – imports)--All spending on g & s produced in the US --All spending on g & s produced in the US must be included in the GDP, whether the must be included in the GDP, whether the purchase is made here or abroadpurchase is made here or abroad--For decades, --For decades, XnXn has been a negative has been a negative (= trade deficit)(= trade deficit)

Expenditures ApproachExpenditures Approach

C + C + IIg + G + Xng + G + Xn= GDP= GDP

Income ApproachIncome Approach

W + R + I + PW + R + I + P– WagesWages– Rents receivedRents received– Interest earnedInterest earned– ProfitsProfits