Measuring the Nation’s Measuring the Nation’s OutputOutput

Chapter 13, Section 1Chapter 13, Section 1

Gross Domestic ProductGross Domestic Product(GDP)(GDP)

Most important measure of economy’s Most important measure of economy’s overall performanceoverall performance

GDP= final goods + final services + final structures GDP= final goods + final services + final structures (pg 342, Figure 13.1)(pg 342, Figure 13.1)

Production in U.S. plants located in Production in U.S. plants located in Mexico, Canada or other countries is not Mexico, Canada or other countries is not countedcounted

What is excluded?What is excluded? Intermediate productsIntermediate products – products that are used – products that are used

to make other productsto make other products

Secondhand salesSecondhand sales – sales of used goods – sales of used goods

Nonmerchant transactionsNonmerchant transactions – transactions that – transactions that do not take place in the marketdo not take place in the market

Underground economyUnderground economy – illegal and – illegal and unreported activity (gambling, smuggling, drugs, unreported activity (gambling, smuggling, drugs, and counterfeiting)and counterfeiting)

Limitations of GDPLimitations of GDP

Tell us nothing about Tell us nothing about composition of composition of outputoutput

Tells us little about the impact of the Tells us little about the impact of the quality of lifequality of life

Despite limitations it is still our best overall Despite limitations it is still our best overall measure of economic healthmeasure of economic health

Measure of National IncomeMeasure of National Income(pg.345, Figure 13.2)(pg.345, Figure 13.2)

Gross National Product (GNP):Gross National Product (GNP): the the dollar value of all final goods, services and dollar value of all final goods, services and structures produced in one yearstructures produced in one year Income of all AmericansIncome of all Americans

Payments to Americans – Payments to Payments to Americans – Payments to Foreign Countries = GDP -> GNPForeign Countries = GDP -> GNP

GNP – Measure of National IncomeGNP – Measure of National Income

Net National Product (NNP):Net National Product (NNP): GNP less GNP less depreciationdepreciation

National Income (NI):National Income (NI): income left after all taxes income left after all taxes (except corporate profits tax) subtracted from (except corporate profits tax) subtracted from NNPNNP

Personal Income (PI):Personal Income (PI): total income going to total income going to consumers before individual income taxes are consumers before individual income taxes are subtractedsubtracted

National Income -> Personal IncomeNational Income -> Personal Income

1. Subtract income that does not go to the consumer

2. Subtract corporate income

3. Subtract Social Security contributions

4. Add back Social Security, Medicaid, etc.

Disposable Personal Income (DI)

Total income the consumer sector has at its disposal after personal income taxes

Circular Flow of Economic ActivityPage 347, Figure 13.3

Output-Expenditure Model

Macroeconomic model used to show demand by the consumer, investment, government and foreign sectors

GDP= C + I + G + (X-M)