principles of economics chapter 6

8/13/2019 principles of economics chapter 6

1/38

C

HAPTE

R

6

Prepared by: Fernando Quijanoand Yvonn Quijano

2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair

Measuring National Output

and National Income


2/38


3/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIn

come

2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 3 of 38

National Incomeand Product Accounts

National income and p rodu ct

accountsare data collected andpublished by the government

describing the various componentsof national income and output in theeconomy.

The U.S. Department of Commerce

is responsible for producing andmaintaining the National Income

and Product Accounts that keep

track of GDP.


4/38


5/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIn

come


Value Added

Value addedis the differencebetween the value of goods as theyleave a stage of production and thecost of the goods as they enteredthat stage.

In calculating GDP, we can either sum

up the value added at each stage ofproduction, or we can take the value offinal sales.


6/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIn

come


Value Added

Value Added in the Production of a Gallon of Gasoline

(Hypothetical Numbers)

STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED

(1) Oil drilling $ .50 $ .50

(2) Refining .65 .15

(3) Shipping .80 .15

(4) Retail sale 1.00 .20

Total value added $ 1.00


7/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIn

come


Exclusions of Used Goodsand Paper Transactions

GDP ignores all transactions inwhich money or goods change

hands but in which no newgoods and services areproduced.


8/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIn

come


Exclusion of Output Produced Abroadby Domestically Owned Factors of Production

GDP is the value of output producedby factors of production located

w i th in a country. Output producedby a countrys citizens, regardless of

where the output is produced, ismeasured by gross national

p roduct (GNP).


9/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIn

come


Calculating GDP

GDP can be computed in two ways:

The expenditu re approach: A method ofcomputing GDP that measures the total

amount spent on all final goods during agiven period.

The income app roach: A method ofcomputing GDP that measures the

incomewages, rents, interest, andprofitsreceived by all factors ofproduction in producing final goods.


10/38

C

HAPTER

6:M

easuringNationalO

utputandNationalIncome


The Expenditure Approach

Expenditure categories:

Personal con sumpt ion

expend itures (C)householdspending on consumer goods.

Gross pr ivate domest ic

investment (I)spending by firmsand households on new capital:plant, equipment, inventory, and newresidential structures.


11/38

C

HAPTER

6:M

easuringNationalO




Government consumpt ion and

gross investment (G)

Expenditure categories:

Net exports (EX IM)netspending by the rest of the world, orexports (EX) minus imports (IM)


12/38

C

HAPTER

6:M

easuringNationalO




The expenditure approach calculatesGDP by adding together the fourcomponents of spending. Inequation form:

GDP C I G EX IM ( )


13/38

C

HAPTER

6:M

easuringNationalO



Components of GDP, 1999:The Expenditure Approach

Components of GDP, 2002: The Expenditure ApproachBILLIONS OF

DOLLARS

PERCENTAGE

OF GDP

Person al consum pt ion exp endi tures (C) 7303.7 69.9

Durable goods 871.9 8.3

Nondurable goods 2115.0 20.2Services 4316.8 41.3

Gross p r ivate dom est ic investment ( l ) 1543.2 14.8

Nonresidential 1117.4 10.7Residential 471.9 4.5Change in business inventories 3.9 0

Government con sum pt ion and gross investment (G) 1972.9 18.9

Federal 693.7 6.6State and local 1279.2 12.2

Net exports (EX IM) 423.6 4.1

Exports (EX) 1014.9 9.8

Imports (IM) 1438.5 13.8Total gross d omest ic produ ct (GDP) 10446.2 100.0

Note: Numbers may not add exactly because of rounding.Source: U.S. Department of Commerce, Bureau of Economic Analysis.


14/38

C

HAPTER

6:M

easuringNationalO



Personal Consumption Expenditures

Personal consumption expenditures (C)are expenditures by consumers on thefollowing:

Durable good s: Goods that last a relativelylong time, such as cars and appliances.

Nondurable good s: Goods that are used upfairly quickly, such as food and clothing.

Services: Things that do not involve theproduction of physical things, such as legalservices, medical services, and education.


15/38

C

HAPTER

6:M

easuringNationalO



Gross Private Domestic Investment

Investmentrefers to the purchase ofnew capital.

Total investment by the privatesector is called gros s pr ivatedomest ic investment. It includesthe purchase of new housing, plants,

equipment, and inventory by theprivate sector.


16/38

C

HAPTER

6:M

easuringNationalO




Nonresident ial investmentincludesexpenditures by firms for machines, tools,plants, and so on.

Residential investmentincludesexpenditures by households and firms onnew houses and apartment buildings.

Change in inventor iescomputes theamount by which firms inventories change

during a given period. Inventories are thegoods that firms produce now but intend tosell later.


17/38

C

HAPTER

6:M

easuringNationalO




Remember that GDP is not themarket value of total sales during aperiodit is the market value of total

production.

The relationship between totalproduction and total sales is:

GDP = final sales + change in business inventories


18/38

C

HAPTER

6:M

easuringNationalO



Gross Investmentversus Net Investment

Gross investmentis the total value of allnewly produced capital goods (plant,equipment, housing, and inventory)

produced in a given period. Depreciationis the amount by which an

assets value falls in a given period.

Net in vestmentequals gross investment

minus depreciation.

capitalend of period= capitalbeginning of period+ net investment


19/38

C

HAPTER

6:M

easuringNationalO



Government Consumptionand Gross Investment

Government

consumpt ion and gross

investment (G) countsexpenditures by federal,state, and localgovernments for final

goods and services.


20/38

C

HAPTER

6:M

easuringNationalO



Net Exports

Net exports (EX IM)is thedifference between exports andimports. The figure can be positive

or negative.

Expo rts (EX)are sales to foreigners ofU.S.-produced goods and services.

Impo rts (IM)are U.S. purchases ofgoods and services from abroad).


21/38

C

HAPTER

6:M

easuringNationalO



The Income Approach

Nat ional incomeis the total incomeearned by the factors of productionowned by a countrys citizens.

The income app roachto GDPbreaks down GDPinto fourcomponents:

GDP= national income+ depreciation+ (indirecttaxessubsidies) + net factor payments to the restof the world + other


22/38

C

HAPTER

6:M

easuringNationalO



The Income Approach

Components of GDP, 2002: The Income Approach

BILLIONS OF

DOLLARS

PERCENTAGE

OF GDP

National income 8,199.9 80.3

Compensation of employees 6,010.0 58.9Proprietors income 943.5 7.3

Corporate profits 748.9 7.3

Net interest 554.8 5.4

Rental income 142.7 1.4

Depreciation 1,351.3 13.2Indirect taxes minus subsidies 739.4 7.2

Net factor payments to the rest of the world 11.1 0.1

Other 96.1 0.9

Gross domestic product 10,205.6 100.0

Source: See Table 18.2.


23/38

C

HAPTER

6:M

easuringNationalO



From GDP to Disposable Personal Income

GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002

DOLLARS

(BILLIONS)

GDP 10,205.6

Plus: receipts of factor income from the rest of the world + 342.1

Less: payments of factor income to the rest of the world353.2

Equals: GNP 10,194.5Less: depreciation 1,351.3

Equals: net national product (NNP) 8,843.2Less: indirect taxes minus subsidies plus other 643.3

Equals: national income 8,199.9Less: corporate profits minus dividends 332.6

Less: social insurance payments 731.2

Plus: personal interest income received from the government and consumers + 439.1

Plus: transfer payments to persons +1,148.7

Equals: personal income 8,723.9Less: personal taxes 1,306.2

Equals: disposable personal income 7,417.7

Source: See Table 18.2.


24/38

C

HAPTER

6:M

easuringNationalO



From GDP to Disposable Personal Income

Net national productequals grossnational product minus depreciation;a nations total product minus what is

required to maintain the value of itscapital stock.

Personal incomeis the income

received by households after payingsocial insurance taxes but beforepaying personal income taxes.


25/38

C

HAPTER

6:M

easuringNationalO



Disposable PersonalIncome and Personal Saving

Disposable Personal Income and Personal Saving, 2002

DOLLARS

(BILLIONS)

Disposable personal income 7,417.7

Less:Personal consumption expenditures 7063.5

Interest paid by consumers to business 204.3

Personal transfer payments to foreigners 31.3

Equals: personal saving 118.6

Personal savings as a percentage of disposable personal income: 1.6%Source: See Table 18.2.


26/38

C

HAPTER

6:M

easuringNationalO



Disposable Personal Income andPersonal Saving

The personal saving rateis thepercentage of disposable personalincome that is saved.

If the personal saving rate is low,households are spending a largeamount relative to their incomes; if it

is high, households are spendingcautiously.


27/38

C

HAPTER

6:M

easuringNationalO

utputandNationalI

ncome


Nominal Versus Real GDP

Nom inal GDPis GDP measured incu rrent dol lars, or the current priceswe pay for things. Nominal GDP

includes all the components of GDPvalued at their current prices.

When a variable is measured in

current dollars, it is described innominal terms.


28/38

C

HAPTER

6:M

easuringNationalO

utputandNationalI

ncome


Calculating Real GDP

A weightis the importance attachedto an item within a group of items.

A base yearis the year chosen forthe weights in a fixed-weightprocedure.

A f ixed-weigh t pro cedureusesweights from a given base year.


29/38

C

HAPTER

6:M

easuringNationalO

utputandNationalI

ncome


Calculating Real GDP

A Three-Good Economy

(1) (2) (3) (4) (5) (6) (7) (8)

GDP IN GDP IN GDP IN GDP IN

YEAR 1 YEAR 2 YEAR 1 YEAR 2

IN IN IN IN

PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2

YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES

Q1 Q2 P1 P2 P1x Q1 P1x Q2 P2x Q1 P2X Q2

GoodA 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40

Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00

Good C 10 12 .70 .90 7.00 8.40 9.00 10.80

Total $12.10 $15.10 $18.40 $19.20

NominalGDP

in year 1

NominalGDP

in year 2


30/38

C

HAPTER

6:MeasuringNationalO

utputandNationalI

ncome


Calculating the GDP Deflator

The GDP deflator is one measure ofthe overall price level. The GDPdeflator is computed by the Bureau

of Economic Analysis (BEA).

Overall price increases can besensitive to the choice of the base

year. For this reason, using fixed-price weights to compute real GDPhas some problems.


31/38

C

HAPTER


utputandNationalI

ncome


The Problems of Fixed Weights

1. Structural changes in theeconomy.

2. Supply shifts, which cause large

decreases in price and largeincreases in quantity supplied.

3. The substitution effect of priceincreases.

The use of fixed price weights toestimate real GDP leads to problemsbecause it ignores:


32/38

C

HAPTER


utputandNationalI

ncome


GDP and Social Welfare

Society is better off when crimedecreases, however, a decrease incrime is not reflected in GDP.

An increase in leisure is an increasein social welfare, but not counted inGDP.

Nonmarket and household activitiesare not counted in GDP even thoughthey amount to real production.


33/38

C

HAPTER


utputandNationalI

ncome


GDP and Social Welfare

GDP accounting rules do not adjustfor production that pollutes theenvironment.

GDP has nothing to say about thedistribution of output. Redistributiveincome policies have no direct

impact on GDP.

GDP is neutral to the kinds of goodsan economy produces.


34/38

C

HAPTER


utputandNationalI

ncome


The Underground Economy

The underground economyisthe part of an economy in

which transactions take placeand in which income isgenerated that is unreportedand therefore not counted in

GDP.


35/38

C

HAPTER




Gross National Income per Capita

To make comparisons of GNP betweencountries, currency exchange rates mustbe taken into account.

Gross National Income (GNI)is ameasure used to make internationalcomparisons of output. GNI is GNPconverted into dollars using an average of

currency exchange rates over severalyears adjusted for rates of inflation.

GNI divided by population equals grossnational income per capita.


36/38

C

HAPTER




Gross National Income per Capita

Per Capita Gross National Income for Selected Countries, 2002

COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS

Switzerland 36,970 Portugal 10,670Japan 35,990 South Korea 9,400Norway 35,530 Argentina 6,860United States 34,870 Mexico 5,540Denmark 31,090 Czech Republic 5,270Ireland 28,880 Brazil 3,060Sweden 25,400 South Africa 2,900United Kingdom 24,230 Turkey 2,540Netherlands 24,040 Colombia 1,910

Austria 23,940 Jordan 1,750Finland 23,840 Romania 1,710

Germany 23,700 Philippines 1,050Belgium 23,340 China 890France 22,640 Indonesia 680Canada 21,340 India 460

Australia 18,770 Pakistan 420Italy 18,470 Nepal 250Spain 14,860 Rwanda 220Greece 11,780 Ethiopia 100

Source: The World Bank Atlas, 2002.


37/38

C

HAPTER




Review Terms and Concepts

base year

change in business inventories

compensation of employees

corporate profits

current dollars

depreciation

disposable personal income, or after-taxincome

durable goodsexpenditure approach

final goods and services

fixed-weight procedure

government consumption and grossinvestment (G)

gross domestic product (GDP)

gross investment

gross national income (GNI)

gross national product (GNP)

gross private domestic investment (I)

income approach

indirect taxesintermediate goods

national income

national income and product accounts


38/38

C

HAPTER



Review Terms and Concepts

personal saving

personal saving rate

proprietors income

rental income

residential investment

services

subsidies

underground economy

value added

weight

net exports (EXIM)

net factor payments to the rest of theworld

net interest

net investment

net national product (NNP)

nominal GDP

nondurable goods

nonresidential investmentpersonal consumption expenditures (C)

personal income

principles of economics chapter 6

Documents

Transcript of principles of economics chapter 6