CHAPTER 7: MEASURING DOMESTIC OUTPUT AND NATIONAL INCOME

ASSESSING THE ECONOMY’S PERFORMANCE

• National Income Accounting – measures the economy’s overall performance. It enables policymakers to:

·         Assess the health of the economy by comparing levels of production at regular intervals.

·         Track the long-run course of the economy to see whether it has grown, been constant or declined.

·         Formulate policies that will safeguard and improve the economy’s health.

GROSS DOMESTIC PRODUCT

-          Is the total market value of all final goods and services in a given year.

• A Monetary Measure

Without such a measure we would have no way of comparing the relative values of the vast number of goods and services produced in different years.

•  Avoid Multiple Counting

-Intermediate Goods – are goods and services that are purchased for resale or for further processing or manufacturing.

-Final Goods – are goods and services that are purchased for final use by the consumer, not for resale or for further processing or manufacturing.

-Value Added – is the market value of a firm’s output less the value of the inputs the firm has brought from others.

GDP Excludes Nonproduction Transactions

2 Types of Nonproduction Transactions:

• Financial Transactions

·         Public  transfer payments

·         Private transfer payments

·         Stock Market transactions

• Secondhand Sales

TWO WAYS OF LOOKING AT GDP: SPENDING AND INCOME

• Expenditures Approach – or output approach. View GDP as the sum of all money spent in buying it.

·         Personal Consumption Expenditures (C) –“consumption expenditures by households”. That term covers all expenditures by households on durable consumer goods, nondurable consumer goods and consumer expenditures for services.

·         Gross Private Domestic Investment (I_g)

-All final purchases of machinery, equipment, and tools by business enterprises.

-All final construction

-Changes in inventories.

·         Government Purchases (G) – officially labeled “government consumption expenditures and gross investment.”These expenditures have two components: (1) expenditures for goods and services that government consumes in providing public services and (2) expenditures for social capital such as school and highways, which have long lifetimes.

·         Net Exports – exports less imports.

·         Putting It All Together: GDP = C + I_g + G + x_n

• Income Approach – earnings or allocations approach. View GDP in terms of the income derived or created from producing it.

·         Compensation of Employees

- Rents – consists of the income received by the households and businesses that supply property resources.

-Interest – consists of the money paid by private businesses to the suppliers of money capital.

-Proprietor’s Income – consists of the net income of sole proprietorships, partnerships, and other unincorporated businesses, and corporate profits.

·         Corporate Profits – are the earnings of the owners of corporations.

-Corporate income taxes – these taxes are levied on corporations’ net earnings and flow to the government.

-Dividends – these are the part of corporate profits that are paid to the corporate stockholders and thus flow to the households – the ultimate owners of all corporations.

-Undistributed corporate profits – these are monies saved by corporations to be invested later in new plants and equipment.

·         Indirect Business Taxes – include general sales taxes, excise taxes, business property taxes, license fees and customs duties.

·         Consumption Fixed Capital – the huge depreciation charge made against private and social capital each year.

·         Net foreign factor income – is the factor income earned by foreigners in U.S. in excess of factor income earned by Americans abroad.

OTHER NATIONAL ACCOUNTS

• Net Domestic Product – gross domestic product less consumption of fixed capital.

• National Income

To derive NI from NDP, we must make this adjustments:

-Subtract net foreign factor income from NDP

-Subtract indirect business taxes from NDP

•  Personal Income – includes all income received whether earned or unearned.

• Disposable Income – is all income received by households minus personal taxes.

NOMINAL GDP VERSUS REAL GDP

• Nominal GDP – GDP based on the prices that prevailed when the output was produced

• Real GDP – GDP that has been deflated or inflated to reflect changes in the price level.

ADJUSTMENT PROCESS IN A ONE-PRODUCT ECONOMY

• GDP Price Index – is the measure of the price of a specified collection of goods and services called a market basket; in a given year as compared to the price of an identical collection of goods and services in a reference year.

SHORTCOMINGS OF GDP

• Nonmarket Activities

• Leisure

• Improved Product Quality