Chapter 27: Measuring Domestic Output and National Income

Thursday, January 6, 2022 9:17 AM

Assessing the Economy's Performance

- National income accounting
- Bureau of Economic Analysis Compiles National Income and Product Accounts for US
GDP
- Aggregate output of all final goods and services.
○ Goods sold directly to households
○ Products purchased by end users
○ Not being used to make something else.
- Applies to goods produced within the borders of a country.
A Monetary Measure
- Price tag must be attached.
Avoiding Multiple Counting
- Includes only the market value of final goods and ignores intermediate goods
- Intermediate goods: goods produced for resale
- Value of final goods includes value of intermediate goods.
- Can find total value by adding together the various value added amounts
GDP Excludes Nonproduction Transactions
- Purely Financial Transactions
○ Public transfer payments
 Payments government makes to households
 Including these in GDP would inflate output
○ Private Transfer Payments
 Parents giving money to their kid
 Produces no output
 Doesn’t factor into GDP
○ Stock market Transactions
 Creating nothing
Secondhand Sales
- Generates no current production
- Not included
Two Ways of Looking at GDP: Spending and Income
- See how much final user paid for something to determine market value
- GDP is the sum of money spent in buying a coat
- GDP can be viewed in terms of income derived
- Expenditures all final goods produced in the economy are bought by either domestic sectors or
foreign buyers
- On the income side the total recipts required from the sale of that total output are allocated to
thhe suppliers of resources as wage, rent, interest, and profit.
The Expenditures Approach
- Add up all spending on final goods and services that has taken place in a year
Personal Consumption Expenditures ( C )
- All expenditures by households on goods and services
- 10% of expenditures is in durable goods
○ Products lasting 3 years or more
- 30% nondurable
○ Food, ect
- 60% on services
Gross Private Domestic Investment
- Purchases of machinery and equipment used by businesses
- Construction
- Changes in inventories
Positive and Negative Changes in Inventories
 Positive Change
□ Overproduction of inventory counts towards GDP
 Negative Change
□ If a firm sells inventory from a previous year, it is substracted from the GDP
Noninestment Transactions
- Stocks arent investments
- Houses arent investments
- Creation of new capital assests is invesment
○ Transfer doesn’t produce new goods, isn't investment in GDP sense
Gross Investment vs Net Investment
- Priavte and domestic means we are speaking of spending by private businesses
- Gross means were are talking about all invesmtnet.
- Net private domestic investment
○ Only investment in the form of added capital
- Net investment = gross investment - depreciation
- Gross invesmtnet is usually more than dpereciation
- Private domestic spending: I
- Net investment: only investment in the form of added capital: In
- Gross investment: Ig
Government Purchases (G)
- Government consumption expenditures
- 1Expenditures for goods and services that government consumers in providing public services
- 2Expenditures for publicly owned capital which have long lifetimes.
- All government expenditures on final goods and direct purchases of resources, including labor
Net Exports
- Add in exports because they are produced within the borders of the US
- Some expenditures in the catergories listed above include spending on imports
Calculating GDP
- GDP = C + Ig + G + X - M (imports)
The Income Approach
- Most expenditures are wages, rent, interest, profit
- Some expenditures flow to other recipients
- Need to know these to balance expenditures and income sides of the overall account
National Income
Compensation of Employees
Rents
- Income received by households and businesses supplying property resources.
- Include monthly payments from tenants to landlords.
- In national accounts net rent is used; rent - depreciation
Interest
- Money paid by private businesses to the suppliers of loans
Proprietors Income
- One part of profit, other is corporate profits
- Net income of sole proprietorship
Corporate Profits
- Earning of corporations
○ Corporate income taxes
○ Dividends
 Given to stockholders
○ Undistributed corporate profits
  Saved, retained earnings
Taxes on Production and Imports
- Sales taxes, excise taxes, business property taxes, license fees
- This is added to determine national income because expenditures diverted to the government
need to be checked.
National Income to GDP
- National income: the total of all sources of private income plus government revenue from taxes
on productions and imports
- Numbers are different, so one item must be subtracted from national income, and 2 other must
be added
Net Foreign Factor Income
- National income includes product of americans no matter where they live.
- Need to add the product being made by foreigners in the US
- This gives us net foreign factor income
Statistical Discrepancy
- They add a slight discrepancy to make the results match
Consumption of Fixed Capital
- Cost of machines must be allocated over its lifetime.
- This is accounting for depreciation
- The money allocated to the consumption of fixed capital is a cost and is included in the gross value
of output
Other National Accounts
- Net Domestic Product
○ Gdp doesn’t tell us how much new output was availiable for consumption and for additons
to stock and capital
○ Subtract from GDP the capital the was consumed in producing the GDP and that had to be
replaced.
○ Subtract depreciation from GDP
○ NDP = GDP - consumption of fixed capital (depreciation)
○ NDP is GDP adjusted for depreciation
- National Income
○ NI= NDP - Statistical discrepancy + foreign factor income (income earned by americans
overseas)
- Personal Income
○ All income received earned or unearned.
○ Differs from national income because some income doesn’t go to households
○ Need to add things like social security which arent earned.
○ PI = NI - income earned but not received + income received but not earned.
- Disposable Income
○ Amount of income left over after paying taxes
○ Divide that income between consumption and savings
 DI = C + S
- The Circular Flow Revisted
Nominal GDP vs. Real GDP
- We must deflate GDP when inflation occurs and inflate GDP when deflation occurs
- Nominal GDP isn't adjusted
- Real GDP has been adjuted
Adjustment Process in a One-Product Economy
- Market basket: measure of a price of a specified collection of goods and services
- Price index in year given = price of market basket in specific year/price of same market basket in
base year x 100
- Price index for first year is always 100
Dividing Nominal GDP by the Price Index
- Use the indexes to deflate GDP
- Real GDP= nominal GDP/price index in hundreths (divide the index by 100)
An Alternative Method
- Gather separate data on physical outputs and their prices
- Determine market outputs in successive years if base year price had prevailed.
○ This gives us real GDP
- Price index = nominal GDP/real GDP
Real World Considerations and Data
- Government must assign "weights" to each of several categories of goods and services based on
the relative proportion of each category in total output
Shortcoming of GDP
- Nonmarket Activities
○ Some productive activites that don’t have visible economic effect arent accounted for
 Stay at home moms
○ Understates a nations output because it doesn’t account for unpaid activities
- Leisure
○ GDP ignores the importance of leisure, makes it seem like work all the time is better
- Improved product Quality
○ Only monetary, doesn’t focus on improvements of a $200 cell phone today versus years ago.
- The Underground Economy
○ Isn't included
 ○ IRS cheats arent included
○ Underground transactions is about 8 percent of GDOP
- GDP and Environment
○ Overstates national well being
○ Doesn’t account for the pollution hitting economy as a result of growht
- Composition and Distribution of Output
○ GDp doesn’t tell us whtere the current mixture of goods and services is good or bad.
○ Doesn’t tell us how output is distributed.
- Noneconomic Sources of Well-Being
○ Doesn’t measure total well being
○ Things help happiness and not GDP