Measuring Domestic Output_ National Income and the Price Level

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					 Measuring Domestic Output,
National Income and the Price
            Level
            Chapter 7
    Time period = 2 to 3 weeks
   Assessing the Economy
National income accounts serve a purpose
just as income statements do for a
business
Compare conditions with other countries
Provides a basis for public policies to
improve economic performance
Gross Domestic Product (GDP)
GDP = the total market value of all final
goods and services produced within a
country in one year
Measured in quarters (every 3 months)
 – 1st = January - March
 – 2nd = April - June
 – 3rd = July – September
 – 4th = October - December
                  GDP
Includes only final goods = g & s that are
purchased for final use by the consumer
Does not include intermediate goods = g &
s that are resold or go on for further
processing or manufacturing
– This avoids multiple counting
Is the value of what has been produced,
not what was actually sold
   GDP Excludes Nonproduction
         Transactions
Existing assets or property that is sold or
transferred, including used items, is NOT
counted
Public or private transfer payments
--public = SS or welfare payments
--private = student allowance or alimony
--sale of stocks and bonds
    --broker services rendered ARE counted
More Nonproduction Transactions
Secondhand sales
Unreported business activities done in
cash (ie unreported tips)
Illegal activities
“Non-market” activities like volunteering or
family work
US corporation’s production in overseas
plants
     2 ways to look at GDP
     Expenditures Approach
GDP has 4 components
GDP = C + Ig + G + Xn

C = Personal Consumption
– durable & nondurable finished g & s (but
  not houses)
   Expenditures Approach
Ig = Gross Private Domestic
       Investment (Gross
Investment)
– Purchases of machinery, equipment &
  tools
– Factory equipment maintenance
– All construction (including residential)
– Unsold inventory of products
   Expenditures Approach
G = Government Spending
– Government purchase of resources
  (mainly labor)
– Again, it excludes transfer payments like
  SS
      Expenditures Approach
  Xn = Net Exports (exports – imports)
  --All spending on g & s produced in the US
  must be included in the GDP, whether the
  purchase is made here or abroad
  --For decades, Xn has been a negative
(= trade deficit)
 Expenditures Approach

C + Ig + G + Xn
     = GDP
           GDP to DI
Using the expenditure approach
        C + Ig + G + Xn = GDP
C = about 67% of GDP
Xn = mostly negative since WWII

Ig = In (net investment) + CFC
                GDP to DI
Start with GDP – consumption of fixed capital
(CFC) or depreciation
=now we have net domestic product (NDP)

Take NDP – indirect businesses taxes (sales,
excise & property taxes, licenses, duties)
Also – net foreign factor income
  (add US income earned overseas and sent back
  home and subtract foreigner’s income earned in the
  US and sent back home as remittances)
=now we have National Income (NI)
                GDP to DI
 Take NI and subtract
 - social security contribution (a tax)
 - corporate income taxes paid
 - undistributed corporate profits
     (total profits – corporate taxes = profits
      not given out as dividends but kept for
      reinvestment at a later date)
 + back transfer payments
     (SS payments, unemployment
     compensation, disability pay)
Now we have Personal Income (PI)
            GDP to DI
Take PI and – personal income taxes

Now we have DISPOSABLE INCOME (DI)
Disposable income can only be used for
consumption or savings (C or S)
          GDP to DI
GDP to
NDP to
NI to
PI to
DI to
C and S
   Income Approach

W + R + I + P + SA =
       GDP
  Income Approach to GDP
    Compensation of Employees
              (Wages)
--largest part of the GDP
--includes wages, salaries, fringe
benefits, health care and pension
plans
     Income Approach

Rents
–Tenant payments
–Lease payments
      Income Approach

Interests
–Money paid by private businesses
 to suppliers of money capital
–Includes interests households
 receive on savings and bond
 payments
      Income Approach
Proprietor’s Income and corporate
profits (Profits)
–Net income of unincorporated
 businesses
–Corporate profits: corporate income
 tax, dividends and undistributed
 corporate profits
        Income Approach
Statistical Adjustments
– Indirect business taxes
   General sales tax, business property tax, license
   fees and custom duties
– Consumption of Fixed Capital (CFC)
  (depreciation)
Statistical Adjustment continued
 –Net foreign factor income in US
    Income of foreign nationals must
    be +
    Income of American income
    earned abroad must be –
     –GDP measures the output of
      geographical US regardless of the
      nationality of the contributors
   Income Approach

W + R + I + P + SA =
       GDP

				
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