2009 Income Tax Guide for Foreigners by xma18619

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									Production, Income and Employment
   Two main concepts:
       Gross Domestic Product (GDP)
       Unemployment Rate
   How does the government get these statistics?
   What do they tell us about the economy?
       What do they NOT tell us about the economy?
   How are they used (and sometimes misused)?




                                                      1
GDP: A Definition
   The nation’s gross domestic product (GDP)
   Total value of all final goods and
    services produced for the marketplace
    during a given period within the
    nation’s borders




                                                2
Production and Gross Domestic Product,
GDP: A Definition
   The total value
       Add up dollar value of every good or service—the number
        of dollars each product is sold for
           Using the dollar prices at which goods and services actually sell could create
            a problem
             If prices rise, then GDP will rise, even if we are not actually producing
                more
             GDP must be adjusted to take away the effects of inflation

   …of all final…
       We do not count every good/service produced in the
        economy
           Only those that are sold to their final users
           Avoids over-counting intermediate products when measuring GDP
             Value of all intermediate products is automatically included in value of final
               products they are used to create




                                                                                         3
Figure 1: Stages of Production




                                 4
Production and Gross Domestic Product,
GDP: A Definition
   …goods and services…
       We all know a good when we see one
       Final services count in GDP in the same way as
        final goods
   …produced…
       In order to contribute to GDP, something must be
        produced
           During the period being considered



                                                         5
Production and Gross Domestic Product,
GDP: A Definition
   …for the marketplace…
     GDP does not include all final goods and services produced in

      the economy, just those that are sold
   …during a given period…
       GDP measures production during some specific period
         Only goods produced during that period are counted
         GDP is actually measured for each quarter, and then reported as an
          annual rate for the quarter
         Once 4th quarter figures are in, government reports official GDP figure
          for entire year




                                                                                    6
Production and Gross Domestic Product,
GDP: A Definition
   …within the nation’s borders
       GDP measures output produced within
        U.S. borders
       regardless of whether it was produced by
        Americans
             Americans abroad are not counted
             However, foreigners producing goods or services
              within the country are


                                                           7
Who measures GDP?
   Bureau of Economic Analysis (BEA) www.bea.gov
       National Income and Product Accounts
   GDP in $Billions. Quarterly, Seasonally Adjusted
    Annual Rates in 2005 dollars
       2009-QI        12,832.612,832.
                                     6

       2009-QII       12,810.0
       2009-QIII      12,860.8
       2009-QIV       13,019.0
   Actual GDP for 2009 is the last figure. The other
    three are projections.


                                                        8
How is GDP measured?
   The BEA calculates GDP in several ways
     The Expenditure Approach
           Sum of all expenditures on final goods and services in the economy
       The Value Added Approach
           Sum of all value added in the economy
       The Factor Payment (or Income) Approach
           Sum of all payments made to factors of production in the economy
   Different approaches are good for cross checking
       They also tells us something about the structure of the
        economy.




                                                                                 9
The Expenditure Approach
   Output is divided into four categories according to
    which group in the economy purchases it as final
    users
       Consumption goods and services (C)—purchased by
        households
       Private investment goods and services (I)—purchased by
        businesses
       Government goods and services (G)—purchased by
        government agencies
       Net exports (NX)—purchased by foreigners


                                                             10
The Expenditure Approach to GDP
   Everyone who purchases a good or service included
    in U.S. GDP must be either a
       U.S. household
       U.S. business
       U.S. government agency (including state and local
        government)
       Part of the foreign sector
   When we add up the purchases of all four groups
    we get GDP
           GDP = C + I + G + NX


                                                            11
Consumption Spending
   Consumption is the part of GDP purchased by households as
    final users
     Almost all goods and services bought by households during the
       year is included as part of consumption spending
     Except…

        Construction of new private homes counted as private
           investment
     Non-market goods and services included in GDP

        Total value of all food products that farm families produce and
           consume themselves
        Total value of the housing services provided by owner-
           occupied homes



                                                                     12
Consumption Spending
   All household spending is not part of GDP
       Purchase of a used car
       Purchase of a previously owned house
       Purchase of stocks and bonds
       Charitable donation
   Only expenditures on final goods and
    services are considered


                                                13
Private Investment
   The three components of private investment
       Business Purchases of Plant, Equipment, and Software
           These are not intermediate goods-they last for several years
           Are regarded as final goods, and firms that buy them as final users of those goods
       New Home Construction
           House will continue to provide services into the future, so it is more like capital than
            like consumption.
       Changes in Inventories
           We count the charge in firms’ inventories as part of investment in measuring GDP
           Why?
               When goods are produced but not sold during the year, they end up in some firm’s
                inventory stocks
               Will provide services in the future, when they are finally sold and used
               If change in inventories is negative, some goods produced in the past are being sold
                now and should be subtracted from GDP




                                                                                                14
Other Investment
   In practice, apart from private investment, we also have
       Government Investment
           Capital stock owned and operated by government—federal, state, and local: police
            cars, schools, military equipment etc.
               Measured in government expenditure
       Consumer durables
           Goods such as furniture, automobiles, washing machines, home computers are
            capital goods
               Provide services for many years. Measured in consumption expenditure
       Human capital
           To measure the increase in capital stock most broadly we include the additional
            skills and training acquired by workforce during the year.
               Measured in consumption expenditure.
   Some capital stock is used up every year (depreciation)
       That is subtracted from investment to get net investment




                                                                                          15
Government Purchases
   Can be consumption or investment
   Government purchases include
       Goods such as fighter jets, police cars, school
        buildings, spy satellites, etc.
       Services such as those performed by police,
        legislators, and military personnel
   Government is considered to be a purchaser even if
    it actually produces the goods or services itself



                                                          16
Government Purchases
   Important to distinguish between
     Government purchases

           Which are counted in GDP
       Government outlays
           As measured by local, state, and federal budgets Transfer payments
            represent money redistributed from one group of citizens (taxpayers) to
            another (poor, unemployed, elderly)
       Transfers are included in government budgets as outlays
       NOT AS GDP
           They are not purchases of currently produced goods and services




                                                                                 17
Net Exports
   We also trade with the rest of the world
   Many items we spend on are imported and some
    U.S. goods exported
       Deduct all U.S. imports during the year, leaving us with just
        output produced in United States
       Add U.S. exports during the year, including output
        produced in the U.S. but not consumed here
   Add Net Exports (exports-imports) to other
    expenditure.



                                                                  18
The Composition of GDP: 2010 Q2

      G, 20.53%

       NX, -
      3.68%

   I, 12.62%
                     C, 70.53%




                                  19
The Value-Added Approach
   Value added
       Firm’s contribution to a product or
       Revenue it receives for its output
       Minus cost of all the intermediate goods
        that it buys
   GDP is sum of values added by all firms
    in economy


                                                   20
Figure 1: Stages of Production




                                 21
The Factor Payments Approach
   In any year, value added by a firm is equal to total factor payments
    made by that firm
   GDP equals sum of all firms’ value added
       Each firm’s value added is equal to its factor payments
           GDP must equal total factor payments made by all firms in the economy
           All of these factor payments are received by households in the form of wages
            and salaries, rent, interest or profit
             GDP is measured by adding up all of the income—wages and salaries,
                rent, interest, and profit—earned by all households in the economy
   Gives us an important insight into the macroeconomy
       Total output of economy (GDP) is equal to total income
        earned in the economy




                                                                                     22
Measuring GDP: A Summary
   Different ways to calculate GDP
       Expenditure Approach
           GDP = C + I + G + NX
       Value-Added Approach
           GDP = Sum of value added by all firms
       Factor Payments Approach
           GDP = Sum of factor payments made by all firms
           GDP = Wages and Salaries + interest + rent + profit
           GDP = Total household income




                                                                  23
Real Versus Nominal GDP
   Since GDP is measured in dollars, a serious problem exists
    when tracking change in output over time
     Value of the dollar—its purchasing power—is changing

   Usually need to adjust our measurements to reflect changes in
    the value of the dollar
     Nominal—when a variable is measured over time with no
       adjustment for the dollar’s changing value
     Real—when a variable is adjusted for the dollar’s changing
       value
   Most government statistics are reported in both nominal and
    real terms
     Economists focus almost exclusively on real variables




                                                               24
Real Versus Nominal GDP
   The distinction between nominal and real values is crucial in
    macroeconomics
   The public, the media, and sometimes even government officials
    have been confused by a failure to make this distinction
     Since our economic well-being depends, in part, on the goods
      and services we can buy
           It is important to translate nominal values—which are measured in
            current dollars—to real values—which are measured in purchasing
            power
       We will learn to do this next week




                                                                                25
Real and Nominal GDP
14200


12200


10200


 8200


 6200


 4200


 2200


  200
    1950   1960   1970   1980         1990    2000

                                Real GDP     Nominal GDP
                                                           26
How GDP Is Used
   Government’s reports on GDP are used to steer the
    economy over both short-run and long-run
       In short-run, to alert us to recessions and give us a chance
        to stabilize the economy
       In long-run, to tell us whether our economy is growing fast
        enough to raise output per capita and our standard of
        living, and fast enough to generate sufficient jobs for a
        growing population
   Many (but not all) economists believe that, if alerted
    in time
       Government can design policies to help keep the economy
        on a more balanced course



                                                                  27
Problems With GDP: Quality Changes
   Quality changes
       While BEA includes impact of quality changes for many
        goods and services (such as automobiles and computers)
           Does not have the resources to estimate quality changes for
            millions of different goods and services
   By ignoring these quality improvements, GDP
    probably understates true growth from year to year




                                                                      28
Problems with GDP: The Underground
Economy
   Some production is hidden from government
    authorities
       Either because it is illegal
           Drugs, prostitution, most gambling
       Because those engaged in it are avoiding taxes
           Production in these hidden markets cannot be measured
            accurately
               BEA must estimate it
                 Many economists believe that BEA’s estimates are too low
                 As a result, GDP may understate total output




                                                                             29
Problems with GDP: Non-Market
Production

   GDP does not include non-market production
       Goods and services that are produced, but not sold in the
        marketplace
           Childcare
           Housework
       Whenever a non-market transaction becomes a market
        transaction GDP will rise
       Even though total production has remained the same
           Can exaggerate the growth in GDP over long periods of time



                                                                         30
Interpret with Caution!!
   What do these problems tell us about value of GDP?
     For certain purposes—especially interpreting long-run changes in

      GDP—we must exercise caution
   GDP works much better as a guide to short-run performance of
    economy
     A significant quarter-to-quarter change in real GDP virtually

      always indicates a change in actual production; rather than a
      measurement problem
   This is why policy makers, business people, and the media pay
    such close attention to GDP as a guide to the economy from
    quarter to quarter



                                                                   31
Types of Unemployment
   In United States, people are considered
    unemployed if they are not working and actively
    seeking a job
       Unemployment can arise for a variety of reasons, each with
        its own policy implications
       Useful to classify unemployment into four different
        categories
             Frictional unemployment
             Seasonal unemployment
             Structural unemployment
             Cyclical unemployment
             Each arises from a different cause and has different
              consequences

                                                                     32
Frictional Unemployment
   Short-term joblessness experienced by people who are
    between jobs or who are entering the labor market for
    first time or after an absence
   Because frictional unemployment is, by definition, short-
    term, it causes little hardship to those affected by it
   By spending time searching rather than jumping at the
    first opening that comes their way
     People find jobs for which they are better suited and in
       which they will ultimately be more productive




                                                           33
Seasonal Unemployment
   Joblessness related to changes in weather, tourist
    patterns, or other seasonal factors
   Is rather benign
     Short-term

     Workers are often compensated in advance for
       unemployment they experience in off-season
   To prevent any misunderstandings, government usually
    reports the seasonally-adjusted rate of unemployment
     Rate that reflects only those changes beyond normal
       for the month


                                                        34
Structural Unemployment
   Joblessness arising from mismatches
    between workers’ skills and employers’
    requirements
       Or between workers’ locations and employers’
        locations
   Generally a stubborn, long-term problem
       Often lasting several years or more




                                                       35
What can the government do?
   These types of unemployment are due to
    “microeconomic” causes, i.e. changes in
    particular markets.
       Job training programs
       Programs to match job seekers with employers
       Unemployment Benefits
   Solutions are changes in labor policy, not
    macroeconomic policy


                                                       36
Cyclical Unemployment
   When the economy goes into a recession and total output falls, the
    unemployment rate rises
   Since it arises from conditions in the overall economy, cyclical
    unemployment is a problem for macroeconomic policy
   Macroeconomists say we have reached full employment when cyclical
    unemployment is reduced to zero
     But the overall unemployment rate at full employment is greater than
       zero
          Because there are still positive levels of frictional, seasonal, and
           structural unemployment
   How do we tell how much of our unemployment is cyclical?
     Many economists believe that today, normal amounts of frictional,
      seasonal, and structural unemployment account for an unemployment
      rate of between 4 and 4.5% in United States


                                                                                  37
              0.0
                    2.0
                          4.0
                                6.0
                                      8.0
                                            10.0
                                                   12.0
     Jan-50

     Jan-55

     Jan-60

     Jan-65
                                                          Rate, 1950–2010




     Jan-70

     Jan-75

     Jan-80

     Jan-85

     Jan-90

     Jan-95

     Jan-00

     Jan-05
                                                          Figure 3: U.S. Monthly Unemployment




     Jan-10
38
    The Costs of Unemployment: Economic
    Costs
   Chief economic cost of unemployment is the opportunity cost of lost
    output
     Goods and services the jobless would produce if they were working

     But do not produce because they cannot find work

   The unemployed are often given government assistance
     Costs are spread among citizens in general

   Potential output
     Level of output economy could produce if operating at full
      employment
     Actual output-potential output is the measure of the cost of
      unemployment




                                                                   39
Figure 4: Actual And Potential Real GDP,
1950–2010
16000


14000


12000


10000


 8000


 6000


 4000


 2000


      0
      1


                1


                          1


                                    1


                                              1


                                                        1


                                                                  1


                                                                            1


                                                                                      1


                                                                                                1


                                                                                                          1


                                                                                                                    1


                                                                                                                              1
     Q


               Q


                         Q


                                   Q


                                             Q


                                                       Q


                                                                 Q


                                                                           Q


                                                                                     Q


                                                                                               Q


                                                                                                         Q


                                                                                                                   Q


                                                                                                                             Q
 50


           55


                     60


                               65


                                         70


                                                   75


                                                             80


                                                                       85


                                                                                 90


                                                                                           95


                                                                                                     00


                                                                                                               05


                                                                                                                         10
19


          19


                    19


                              19


                                        19


                                                  19


                                                            19


                                                                      19


                                                                                19


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                                                                                                    20


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                                                                                                                                  40
Broader Costs
   Unemployment—especially when it lasts for many
    months or years
       Can have serious psychological and physical effects
       Also causes setbacks in achieving important social goals
   Burden of unemployment is not shared equally
    among different groups in the population
       Tends to fall most heavily on minorities, especially minority
        youth and/or on people with low education




                                                                   41
How Unemployment is Measured
   The unemployed are those willing and able to work, but who do
    not have jobs
   Others were able to work, but preferred not to
     Including millions of college students, homemakers, prisoners
      and retired people
     Still others were in the military and are counted in the population
          But not counted when calculating civilian employment statistics
   To be counted as unemployed, you must have recently searched
    for work
     But how can we tell who has, and who has not, recently searched
       for work?




                                                                             42
The Census Bureau’s Household Survey
   Every month, thousands of interviewers from United States
    Census Bureau—acting on behalf of the U.S. Bureau of Labor
    Statistics (BLS)—conduct a survey of 60,000 households
    across America
       Household members who are under 16, in the military, or
        currently residing in an institution like a prison or hospital are
        excluded from survey
   Official unemployment rate
       Percentage of the labor force that is unemployed

                                    Unemployed       Unemployed
             Unemployme nt rate               
                                    Labor Force (Unemploye d  Employed)



                                                                             43
Figure 5: How BLS Measures
Employment Status




                             44
Problems In Measuring Unemployment
   The official measure underestimates extent of unemployment in
    our society due to
     Treatment of involuntary part-time workers
           Should be regarded as partially employed and partially unemployed?
       Treatment of discouraged workers
           Individuals who would like to work but, because they feel little hope of
            finding a job, have given up searching
               How many discouraged workers are there?
                  No one knows for sure
   Still, the unemployment rate—as currently measured—tells us
    something important
     Number of people who are searching for jobs, but have not yet
       found them


                                                                                       45
  Broader Measures of Unemployment
  (1994-2010)
20.0


18.0


16.0


14.0


12.0                Unemployed+Discouraged+Involuntary Part Time (U6)

10.0


 8.0
                                                                                        Unemployed+Discouraged (U5)

 6.0
                                                                                        Unemployed
 4.0


 2.0


 0.0
       Jan-94


                Jan-95


                         Jan-96


                                  Jan-97


                                           Jan-98


                                                    Jan-99


                                                             Jan-00


                                                                      Jan-01


                                                                               Jan-02


                                                                                         Jan-03


                                                                                                  Jan-04


                                                                                                           Jan-05


                                                                                                                    Jan-06


                                                                                                                             Jan-07


                                                                                                                                      Jan-08


                                                                                                                                               Jan-09


                                                                                                                                                        Jan-10
                                                                                                                                                        46
Figure 6: Employment Status of the U.S.
Population (Millions)—Aug 2009

                     Under 16, Military or
                       Institutionalized
                              69.44

                       Not in labor force
                              81.51


  Unemployed 14.93


                                             Employed 139.65


                                                  Civilian labor force
                                                         154.58
                                                                             Civilian
                                                                          noninstitutional
                                                                         population 236.09




                                                                                    47
Of the Total Population:

     Under 16, Military or
       Institutionalized
              23%




                                          Employed
                                            45%




     Not in labor force
            27%


                             Unemployed
                                5%




                                                     48

								
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