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Chapter 7

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					 [16th Ed.]   National Income Accounting
        [GDP and its four cousins]

                                    -

C   +Ig + G + Xn [X-M] =
    [“Replacement capital”]
GDP–Depreciation=           [what is for sale]

NDP +NFFIEUS–Indirect Business Taxes =
NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP=
     [PI is what you can spend, save, or pay in taxes]

PI – Personal Income Taxes =
    [DI is what you can spend           or save       ]
Gross Domestic Product – market value of all final
legal output produced in a country in one year.
                                           Nominal (money) GDP
Year one                                        =$6.00
                                           Nominal GDP measures
            $2.00     $2.00     $2.00      current output valued at
The base year is the benchmark year            current prices.
 to which other years are compared.
                                          Nominal (money) GDP
Year Two                                        =$6.10
                                [Recession - decrease in real output]
            $3.05       $3.05
 Real GDP – measures only output.
 [measures current output at base-year
 prices ($4), not current prices ($6.10)].
      GNP – Ownership
All goods/services produced                    China         Europe
legally for pay by citizens of a country.
[Citizenship mattered, not geography]                        Nike in
                                             Plano, TX      Indonesia




    GDP - Location                           Provo,UT     in Chicago

All goods/services produced                 BMW in Waco
legally for pay in a country’s borders.                   Honda in Ohio
[Geography matters, not citizenship]

The difference between GDP & GNP is about 2/10 of 1%.
                   [U.S.A. Profits Overseas]

                    Rest of World
                          $220 bil.




                  Foreign Profits in   U.S.A.
                    $209 billion
         N.F.F.I. = $11 billion
If U.S. Profits in the ROW are greater [$220] than
foreign profits in the U.S. [$209], add the difference.
                   [U.S.A. Profits Overseas]

                     Rest of World
                          $200 bil.



                   Foreign Profits in   U.S.A.
                        $209 bill.

       N.F.F.I.E.U.S. = -$9 billion
If foreign profits in the U.S. [$209] are greater than
U.S. profits in the ROW [$200], subtract the difference.
 Yes, if there is Full Employment.
The speed limit for GDP growth is 4%.

  But, if the economy is in recession,
There is no speed limit for GDP growth.
 Economy’s Speed Limit at F ull Employment is 4%, instead of 2.5%.
Can sustain a much greater increase in AD if the AS curve is
also shifting to the right, due to increasing productivity.
In the early 90’s, at FE, 2.5%
was the speed limit. AS shifted      AD1 AD2 AS1 AS
                                                   2
slowly due to low productivity.
                   PL2
                   PL3
                   PL1
So, at FE, the “goldilocks                      Increasing productivity
                                                of the late 90’s allowed
economy” has expanded.
                                                more growth at FE GDP.


                Real GDP under 4% Y*1 Y2 Y3
                     0                                 Real GDP

                                                17 increases
                          4%
             “Goldilocks Economy”
                [not too fast or slow]
              <10 years without a recession>




*Represents “GDP Speed Limit” at full employment
  Billions of
1996 Dollars
     $10,000

       9,000

       8,000

       7,000

       6,000

       5,000

       4,000
       3,000
           1970   1975   1980   1985   1990   1995   2000
   GDP = C(66%) + Ig(18%) + G(17%) + Xn
Personal Consumption Expenditure ( C )
•Durable Consumer Gproduced here
                 Maytag
                        oods[12%]
     Ferrari produced here
                             Spending by HH on all g/s
                             except for new housing.


•Nondurables[29%][soup & soap]

•Consumer Expenditures for Services[59%]
COMPOSITION OF CONSUMER Spending, 2005

        Total of $8,746 billion
                     Services
                   $5,155 billion
                       (59%)
 Durable Goods
  $1,027 billion
      (12%)
                                Nondurable Goods
                                  $2,564 billion
                                      (29%)
Personal Consumption Expenditure ( C )
                                            Let’s say this Porsche is
                                            produced by a foreign co.
                                            in Plano, Texas.

Gross Private Domestic Investment                    (IG)

3 Subcategories [*spending on output not consumed]
A. Business spending on real capital - tools, machinery, & plants
B. New construction investment – construction of new
   houses and apartments [can rent for financial return].
C. Unsold inventory investment – change in inventories
    [A net increase in inventories is investment; a net
    decrease in inventories is negative investment or
   disinvestment (disinvestment represents
   sale of output produced in a previous year)
  U.S. capital stock is over $30 trillion.
Personal Consumption Expenditure ( C )

Gross Private Domestic Investment ( Ig )

Government Purchases (G)           [state, local & federal]
[“G” purchases of goods/svcs produced (not   transfer payments)




3 Subcategories of Government
 A. Federal government [40%]
 B. 50 State governments
 C. 88,000 local governments [60% for state and local]
Personal Consumption Expenditure (C)


Gross Private Domestic Investment (Ig)


Government Purchases ( G )

Net Exports( Xn)
Net Exports (Xn)=Exports (X)–Imports (M)
[M represents production outside a country]
          Government Purchases
                  18%
Investment                 Net Exports
   16%                         -3 %



            Consumption
                69%
                5
                                                     Pos. Net
 Capital and    4
                                                    Investment
                              Deprec- Gross          Initial
 Investment
                    Initial
                    Capital    iation Investment     Capital
                3
 [Ig(3)>D(2)]                                                    5
                2
                               Initial    Initial
                              capital    capital
                1               less       less
                              deprec.    deprec.
                0
                     1/1/07    During 2007          12 /31/07

Cal’s CD’s has a capital stock[5 machines] at the end of 2004
that equals its capital stock at the beginning of the year[4] +
its net investment[+1]. Net investment is equal to Ig[3]-D[2].
Cal’s Ig is the 3 new machines bought during the year, and its
depreciation is the 2 machines that Cal scrapped during the year.
Capital – plant, equipment, buildings, & inventories of raw materials
& semi-finished goods that are used to produce other goods/services.
Investment-increases the capital stock (purchases of capital).
Depreciation-decreases the capital stock(worn out/obsolete).
Net Investment-change in a nation’s capital stock in one year.
Investment[Ig(3)>depreciation(2)]; Disinvestment[Depreciation(2)>Ig(1)].
 Capital and Disinvestment [D(2)>Ig(1)]
                4
                  Initial Deprec-                     Neg. Net
                                                     Investment
                3 Capital
                           iation
                                         Gross
 [D(2)>Ig(1)]   2
                                        Investment    Initial
                              Initial    Initial      Capital
                             capital    capital                   3
                1
                               less       less
                             deprec.    deprec.
                0
                    1/1/07    During 2007            12 /31/07

Cal’s CD’s has a capital stock[5 machines] at the end of 2004
that equals its capital stock at the beginning of the year[4] +
its net investment[+1]. Net investment is equal to Ig[3]-D[2].
Cal’s Ig is the 3 new machines bought during the year, and its
depreciation is the 2 machines that Cal scrapped during the year.
Capital – plant, equipment, buildings, & inventories of raw materials
& semi-finished goods that are used to produce other goods/services.
Investment-increases the capital stock (purchases of capital).
Depreciation-decreases the capital stock(worn out/obsolete).
Net Investment-change in a nation’s capital stock in one year.
Investment[Ig(3)>depreciation(2)]; Disinvestment[Depreciation(2)>Ig(1)].
Consumption
9,429,300
  [70%]



                           Government
              Investment   purchases
                                        Export
              $2,186       $2,570       Spending
               [16%]        [19%]       $1.210      -5%
                                                   Import
                                                   Spending
                                                   $2.238
      The key is to keep the economy growing. At 2.5% growth, the U.S.
     economy will expand to $23 trillion in 25 years. But – at 3%, it would reach
5%   $26 trillion, which is like another Germany, with Saudi Arabia thrown in.
            4.5%
4%                          3.8%
                                                                     3.5
                    3.3%                            3.2%
3%                                  2.8% 2.7%                          Long
                                                              2.6%     Term
                                                                      Growth

2%

1% 0.8%

     1929   1940    1950    1960    1970     1980    1990     1929    1900
 0    To     To      To      To      To       To      To       To      To
     1940   1950    1960    1970    1980     1990    2000     2000    2007
     Comparative GDPs in Trillions, 2007
             0         1         2     3   4     5   6   7   8   9   10 11 12   13 14
      U.S.                                                                      13.8
   Japan                                   4.5
Germany                          2.8
   China                     2.7
      U.K.                  2.2
  France                    2.2
     Italy                 1.7
 Canada            1.1
   Spain           1.1
   Brazil        795
S. Korea      790
    India    780
  Mexico     770
  Russia     763
Australia    708
     Comparative GDPs in Trillions, 2006
             0         1     2    3   4     5   6   7   8   9   10 11 12    13    14
      U.S.                                                                 13.8
   Japan                              4.5
Germany                     2.8
   China                    2.7
      U.K.                 2.2
  France                   2.2
     Italy    Calif. 1.7
 Canada       TX1.1
                 1.1
   Spain           1.1
   Brazil        795
S. Korea     .790
    India    780
  Mexico     770
  Russia     763
Australia    708
                        [Selected Countries]
Country     Per Capita             Country            Per Capita
Luxembourg 80,800                  Sweden             36,900
Qatar       75,900                 U.K.               35,300
Bermuda     60,000                 Germany            34,400
Norway      55,600                 France             33,800
Kuwait      55,300                 Japan              33,800
U.A.E.      55,200                 Italy              31,000
U.S.      $46,000                  Australia          24,000
Ireland     45,600                 Russia             14,600
Hong Kong 42,000                   Mexico             12,500
Switzerland 39,800                 China               5,300
Iceland     39,400                 Swaziland           4,800
Canada      38,200                 Liberia               500
Australia   37,500                 Zimbabwe              500
Denmark     37,400                 Congo, Rep of         300

China and India are still poorer than he U.S. was in 1900.
75% of Africans live on less than $2 a day & it is getting worse.
13 tril.
12 tril.                                                         13.8 tril.
10 tril.
                                                             Per
9 tril.                                                     Capita
8 tril.    [If GDP increases, per capita income increases] $46,000
7 tril.

6 tril.

5 tril.

4 tril.
                                                         4,152
3 tril.                                          3,187
2 tril.                                  2,416

1 tril.                          1,665
            709   773    1,204
   0
           1929   1940   1950    1960    1970    1980     1990    2007
                                                                           $46,000
There are 6.6 billion people on our planet; 5 billion are in the Third
World. 2.5 billion live on less than $2 a day. The direst poverty
is in Africa, home of the world’s 10 poorest countries. Over ½
the people of Sub-Sahara Africa live on less than $2 a day.

 8 million people die each year because they are too poor to stay alive.

                                           ½ of the world’s      $25,989
T he Poorest Nations                       population have
                                           yet to make their
Nation           Per Capita                first phone call.
1.    Congo, Rep. of    $300
2.    Zimbabwe          $500      GDP Per Capita
3.    Liberia           $500       [in 1992 dollars]
4.    Somalia           $600                           $15,931
5.    Ethiopia          $700
6.    Niger             $700
7.    Cen. African Rep. $700
8.    Gambia, The       $800                 $6,538
9.    Sierra Leone      $800
10.   Malawi            $800
      Djibouti        $1,000                                               2007
                                              1929      1967      1996
GDP – measures legal production in U.S.
       in one year.
GDP measures all final goods/services
produced by workers and capital located
in the U.S., regardless of ownership.
[Domestically located resources]
Final goods are goods ready for consumption.
1. Intermediate Goods – components of the final good.
  A. Ford buys batteries or tires for its cars.




 B. KFC buys chickens to eventually sell to customers.
Only Final Sales($20) Count [to prevent “multiple counting”($38)]
                                        Value Added – increase in the
$20 “Wife-beater”                       market value at each stage
    Shirt from Kohls                 Final Good
     $20                             Retail Shirt
                                         $8
                                Intermediate Good
                                                                         8




                                                                             Value Added ($)
  Value of Output($)




                                                Wholesale
                       $12                       Shirt
                                                   $7           $7

                                                                         7
                                      Cloth
                       $5
                                        $4          $4          $4
                                                                        4
                       $1    Cotton
                               $1       $1          $1          $1       1
                         0
          Cotton                      Textile      Shirt       Retail   $20 = sum
Sum = $38 Farmer                       Mill     Manufacturer   Store
So, to avoid “multiple counting”, we count the $20 final price, not $38.
2. 2nd Hand Sales
   – no current production.
  A. 1957 Chevy bought in 2007




                                                  Salesman
     57 Chevy
  [It has not been produced again in 1963 & would not count.]
  The salesman is doing productive work. His commission would count.
  B. Boots produced in 1980 are bought in a Thrift Store in 07.
   They also have not been produced again.
   Salesman’s commission would count.
   You are buying his services.
                                              Shoe salesman
3. Purely Financial Transactions – stocks, bonds, CDs.
  There is no current production.
   Ex: If 100 shares of Dell stock is bought

   Buying stock is not buying a product but buying
   ownership of the firm.

  I’m not buying a Dell computer
  but part ownership of Dell.

                   Exchanging one financial asset for another
4. Transfer Payments –welfare, unemployment, social security.
   [There is no contribution to final production]
                               “Now that I’ve gotten my
                               welfare check, I can get an
                               iPhone”
       Unreported “legal” business activity does not count.
       This is two-thirds of the “underground economy.”


Before LASIK Surgery




Then he has LASIK but the                      And what if the
                            And what if this   dentist doesn’t
surgeon doesn’t report      waitress doesn’t   report $400 for
$500 of his $3,400 bill?    report all tips?   teeth whitening?
Illegal business activity, because it goes unreported, also does
not count. Making up 1/3 of the “underground economy,” it
includes murder for hire, gambling, drugs, and prostitution.
   “I’m getting $1,000 to kill
   you, Ziggy, but at least it
   will not count in GDP.”




                    And, what about
                      “Jane Ho”?
  Illegal                                            Legal
   $300 B                                            $600 B




                             Wages and
                            Salaries $185
What doesn’t get reported                   What gets reported is
is the “Underground”                        the “Above Ground”
         Underground Economy [compared to “above ground”]
         Unreported exchanges that take place - legal and
         Illegal [Hidden – “off the books”]
         Total illegal activities - $300 billion
         Total legal activities - $600 billion
         Total legal and illegal - $900 billion
         Underground Economy
          1. Illegal business activities (1/3) – gambling,
             narcotics trade, prostitution, loan sharking, etc.
          2. Unreported legal business activities (2/3)
            a. waitresses not reporting all of her tips
            b. Cabdriver not reporting all of his income
            c. Self employed cheat the most. Off-the-books cash transactions
            d. $300 billion
         *IRS estimates that about $300 billion in income taxes from
$300 B    the underground economy escapes federal taxes each year.
[as a Percentage of GDP for Select Nations]
                                 Percentage of GDP
                         0   5   10   15       20          25           30
              Greece
                 Italy
               Spain
            Portugal
             Belgium
             Sweden
            Germany
              France
             Holland
     United Kingdom
               Japan
       United States
         Switzerland                       Source: Journal of Economic Literature
Work in your own household or volunteer work in
the community does not count because there was no
payment.
       You need to do some of
      this housework.
Work in your own household or volunteer work in
the community does not count because there was no
payment.




   So, don’t marry your maid, gardener, or
   fitness instructor, or you will hurt GDP.
             GM in        Nike in
             France     Indonesia




If U. S. corporations produce goods overseas,
it does not count in GDP, but would count in GNP.
Remember, we are measuring production inside
the U.S. Imports represent production outside of
the U.S.
1. Second Hand Sales[no production]
2. Public/Private Transfer Payments
3. Purely Financial Transactions
4. Intermediate Goods
5. U.S. Corporations producing overseas
6. Non-market transactions
   [household or volunteer work]
Underground Economy
7. Illegal business activity
8. Unreported legal business activity
- When Outback buys potatoes for baked potatoes
- When a tattoo business buys
  ink for tattoos
- When Tom Thumb buys
  spam to sell it to you
- When the popsicle maker buys the sticks
- Dell buys a computer monitor frame

- Ice cream that      Braums buys for sundaes
- A bakery buys an apple     to put in its pies
- When Ford buys a windshield wiper        for a car
- When hooker, J-Lo Ho, is paid $200.00
On the next slide, read each sentence and determine,
“To Be or Not To Be Counted?” That is the question.
If “Yes”, put “Y” and tell if it is “C”, “Ig”, “G”, or “X”.
If “No”, put “N” and give the number from below on
why it is not counted in GDP.
GDP DOES NOT INCLUDE
1. Second hand sales [no current production] [but the salesman’s commission counts]
2. Public/Private transfer payments [no current production]
3. Purely financial transactions [no current production] [broker’s fees do count]
4. Intermediate goods [component of final good]
5. U.S. corporations producing overseas.
6. Non-market transactions [ household or volunteer work.
  Underground Economy [not reported]
7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.]
8. Unreported legal business activity [“off the books”]
 Example:
  C Y
 ___ ___ 1. New Toyota Tundra truck manufactured in San Antonio and
            sold to your economics teacher the year it was produced.
  1 N
 ___ ___ 2. You buy a new Wii at GameStop in 2007. Does it
            count if you resell it on eBay in March of 2008?
 C Y
___ ___ 1. You buy a purple “Tinky Winky” from Wal-Mart.
  6 N
___ ___ 2. You and your family paint your house. [labor involved]
  6 N
___ ___ 3. You marry your housemaid. [“working-for-love”] [her services]
  3 N
___ ___ 4. You buy 100 shares of Microsoft Corporation.
  6 N
___ ___ 5. You volunteer to babysit your little sister to help your parents while they work.
  1 N
___ ___ 6. Bob buys a 1965 ford Mustang convertible which is in mint condition.
 C Y
___ ___ 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2008.
  6 N
___ ___ 8. You and your friend volunteer to cook at the senior class picnic.
  8 N
___ ___ 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it.
           Does the $500 the dentist keeps and doesn’t report count?
  7 N
___ ___ 10. You are given s suitcase full of $100 bills from the sale of smuggled drugs.
  6 N
___ ___ 11. Your mother is teaching you to read [and not having much success].
  6 N
___ ___ 12. Your dad bakes you a home-baked loaf of bread. [his labor]
 C Y
___ ___ 13. You buy a loaf of bread from Kroger’s Grocery Store.
 G Y
___ ___ 14. The U.S. government purchases 5 more B-2 Bombers for $2 billion each.
  4 N
___ __ 15. Ford buys a ton of sheet metal used in making car doors.
 C Y
___ ___ 16. You buy a new “iPod Video” from the Apple store,
  C Y
___ ___ 17. You send in a $90 check to your dentist for cleaning your teeth.
 Ig Y
___ ___ 18. Your family buys a new house which sits next to the mansion of Bill Gates.
 G Y
___ ___ 19. 100 additional teachers are hired by the Frisco ISD.
 Ig Y
___ ___ 20. GM invest in $500 million worth of robots to assemble their cars.
  6 N
___ ___ 21. You volunteer 10 hours a week of your time to work for senior citizens.
 Ig Y
___ ___ 22. Ford produces 25,000 new F150s which are not sold by the end of the year.
  X Y
___ ___ 23. Russia buys 3,000 Dell computers as they become Rusky Dell Dudes.
___ ___ 24. A man’s wife does all his cooking and sewing, working for him 16 hours per day.
  6 N
___ ___ 25. Nike produces $10 million worth of Nike Air Jordan’s in Vietnam.
  5 N
  $7,304        -Depreciation                “U Can See Thunderducks”
   [“C”]           $1,393
                                                        -$141 Undis Cor Pro
Consumption                           +N.F.F.I.                               Y earned/not received
                                                         -$213 Corp Inc Tax
   [66%]           $9,053               $10              -$748 Soc Sec Con
                [Replacement -Indirect bus. Tax          +$1,683 Trans Pay    Y received/not earned
                                   $695
                  capital]                                   $8,929           -Personnel
                                 $8,018
                                                                              Taxes
                                     ROW[$220]                                -$1,113
Gross Private                        U.S. [$230]
 Domestic                                                PI is what we             $7,816
Investment                           NFFI = -$10        can spend, save,

                                   For NI
                                                        or pay in taxes.
   $1,593
                                   [“indirect” tax]
Government                        (Tax on the NI
                                  SubtractG/S,             “Income
                                    not on profits)                                 DI
Purchases                                               received by
  $1,973
                                  N = NFFI
                                   [sales, property,                          is what we can
                                                         households,
                                  I
                [births-deaths]    excise, tariffs, &
                                       = Indirect
                                     license fees]                               SPEND
                 “Available                                whether
                                                                                      or
  Xn(X-M)         for sale”         business
                                  “Income earned
                                                          earned or
   -$424                              taxes
                                  by U.S. resources”      unearned”               SAVE.

 GDP             NDP                   NI                     PI                   DI
 Depreciation, Investment & Disinvestment
Negative Net Investment                 Positive Net Investment
Depreciation exceeds Ig                 Ig exceeds Depreciation


                       Disinvestment   Investment          Ig
                       of $6 billion   of $531 bil. $2,105 Trillion
                        Declining                      Expanding
                                        Depreciation
                        productive                     productive
Depreciation             capacity          2005
                                       $1,574 Trillion  capacity
    1933
 $7.6 billion
                            Ig
[in current dollars]

                       $1.6 billion
Ig($1.6) - D($7.6) = (Disinv. of $6) Ig($2,105) - D($1,574) = (In of $531)
(Disinvest. of $6) + D($7.6)=($1.6) In($531) + D($1,574) = (Ig of $2,105)
Ig($1.6)–Disinv.($6)=(Depr. of $7.6) Ig($2,105)-In($531)=(Depr. of $1,574)
 THE MIX OF OUTPUT IN 1900                 THE MIX OF OUTPUT IN 2000
                        Construction and                   Construction and
Manufacturing 22%         Mining 9%          Government      Mining 6%
                                                18%
                                                             Farming 2%
 Services 22%       Farming 37%
                                                      Manufacturing 20%
                                       Services 54%
Government 10%
                   [U.S.A. Profits Overseas]

                     Rest of World
                           $220 bil.



                  Foreign Profits in   U.S.A.
                    $210 billion
      N.F.F.I. = -$10 billion
 If U.S. profits in the ROW [$220] are greater than
foreign profits in the U.S. [$210], add the difference.
                   [U.S.A. Profits Overseas]

                    Rest of World
                         $200 bil.



                   Foreign Profits in   U.S.A.
                        $212 bill.
       N.F.F.I.E.U.S. = $12 billion
If foreign profits in the U.S. [$212] are greater than
U.S. profits in the ROW [$200], subtract the difference.
    [GDP and its four cousins]
                                         iPod Videos are imports
                                         because they are
                                         produced in China.

                                -
C   +Ig + G + Xn[X-M] =
    [“Replacement capital”]
GDP–Depreciation=           [what is for sale]

NDP +NFFIEUS–Indirect Business Taxes =
NI–Undis Corp Profits–Corp Inc Taxes -Soc Secur+TP=
     [PI is what you can spend, save, or pay in taxes]

PI – Personal Income Taxes =
    [DI is what you can spend         or save            ]
Elaborate Circular Flow Showing NIA



     G                          DI
               NDP   NI    PI
     D
     P
          16th Ed. NIA Practice – “How To Do It”
Personal taxes          403            -Undistributed corp. profits        46
 Imports                362            -Social Security contrib.          169
+Transfer payments      283            Personal consumption            2,316
-Corporate Income Taxes 88             Gross private domes invest.        503
Indirect business taxes 231            Government purchases               673
 Exports                465            Depreciation [Capital consumption] 307
         I’m going through an
         academic recession.
                                       N.F.F.I.E. in the U.S.              12
         Report Card
                                  C = $_______
                                          ______
                                            2,316
      English          C          Ig = $_______
                                          ______
                                              503
      Accounting       C
                                  G = $_______
                                          ______
                                              673
      American History
      Economics
                       D
                       F          Xn = $_______
                                          ______
                                            +103           ROW
 Gross Domestic Product (GDP)
   -Consumption of fixed capital
                                        $_____
                                           3,595
                                             -307
                                          ______
                                                          $  100
 Net Domestic Product (NDP)               3,288
                                       $______
   -Net For. Factor Inc. Earn. U.S.           -12
                                          ______
   -Indirect business taxes                  -231
                                          ______
 National Income (NI)                   $_____
                                            3,045           $112
   -Undistributed Corporate Profits      ______
                                              -46
                                         ______ -303
   -Corporate income taxes
   -Social Security Contributions
                                              -88
                                         ______
                                             -169       NFFI = $12
  +Transfer payments                        +283
                                        _______
 Personal Income (PI)                   $_____
                                           3,025
   -Personal Taxes                           -403
                                        _______
 Disposable Income (DI)                 $_____
                                            2,622
                 [17th Edition]        NIA Practice – “How To Do It”
Personal taxes           403                    -Undistributed corp. profits        46
  Imports                362                    -Social Security contrib.         169
+Transfer payments       283                    Personal consumption            2,316
-Corporate Income Taxes 88                      Gross private domes invest.        503
-Taxes on prod. & imports 231                   Government purchases               673
  Exports                465                    Depreciation [Capital consumption] 307
Statistical Discrepancy   10                    N.F.F.I.E. in the U.S.             -12
     I’m going through an
     academic recession.
                                           C = $_______
                                                     2,316
       English          C                  Ig = $_______
                                                       503
       Accounting
       American History
                        C
                        D
                                           G = $_______673
                                           Xn = $_______
                                                     +103
                                                                    ROW
       Economics        F

  Gross Domestic Product (GDP)                  $_____
                                                   3,595
    -Consumption        of fixed capital
  Net Domestic Product (NDP)
                                                     -307
                                                  ______
                                                  3,288
                                                $______
                                                                    $100
    +Net For.   Factor Inc. Earn. U.S.                -12
                                                  ______
    -Statistical Discrepancy                          -10
                                                  ______
  National Income (NI)                          $_____
                                                    3,266              $112
    -Undistributed Corporate Profits             ______
                                                      -46
   -Corporate income taxes                            -88
                                                 ______      -534
   -Social Security Contributions
   -Taxes on prod. & imports
                                                     -169
                                                 ______
                                                     -231
                                                  ______
                                                                 NFFI = -$12
   +Transfer payments                               +283
                                                  ______
  Personal Income (PI)                          $_____
                                                   3,015
    -Personal     Taxes                              -403
                                                  ______
  Disposable Income (DI)                        $_____
                                                    2,612
Personal taxes          382           -Undistributed corp. profits        65
 Imports                348           -Social Security contrib.          158
+Transfer payments      330           Personal consumption            1,820
-Corporate Income Taxes 98            Gross private domes invest.        447
Indirect business taxes 265           Government purchases               587
 Exports                377           Depreciation [capital consumption] 317
                                      N.F.F.I.E. in the U.S.              10
   C=     $                                1,820
   Ig =   $                                  447
   G=     $                                  587
   Xn =   $                                  +29            ROW
 Gross Domestic Product (GDP)            $2,883
   -Consumption of fixed capital            -317            $110
 Net Domestic Product (NDP)               $2,566
   +Net For. Factor Inc. Earn. U.S.          +10
   -Indirect business taxes
 National Income (NI)
                                            -265
                                         $2,311            $100
   -Undistributed Corporate Profits          -65
   -Corporate income taxes
   -Social Security Contributions
                                             -98
                                            -158
                                                        NFFI = $10
   +Transfer payments                       +330
 Personal Income (PI)                    $2,320
   -Personal Taxes                          -382
 Disposable Income (DI)                  $1,938
                          [17th Edition]
Personal taxes            370               -Undistributed corp. profits         65
Statistical Discrepancy    12              -Social Security contrib.            158
+Transfer payments        330               Personal consumption              1,820
-Corporate Income Taxes 98                  Gross private domes invest.         447
-Taxes on prod. & imports 265               Government purchases                587
 Exports                  377               Depreciation [capital consumption] 317
 Imports                  348               N.F.F.I.E. in the U.S.               10
     C= $                                         1,820
     Ig = $                                         447
     G= $                                           587
     Xn = $                                         +29
 Gross Domestic Product (GDP)                  $2,883             ROW
   -Consumption of fixed capital
 Net Domestic Product (NDP)
                                                   -317
                                                $2,566
                                                                  $110
   +Net For. Factor Inc. Earn. U.S.                +10
   -Statistical Discrepancy                        -12
 National Income (NI)
   -Undistributed Corporate Profits
                                               $2,564
                                                   -65
                                                                  $100
    -Corporate income taxes                        -98
    -Social Security Contributions
   -Taxes on prod. & imports
                                                  -158
                                                  -265
                                                              NFFI = $10
   +Transfer payments                             +330
 Personal Income (PI)                          $2,308
   -Personal Taxes                                 -370
 Disposable Income (DI)                        $1,938
                                       [16th Ed.]
Personal taxes           60            -Undistributed corp. profits     37
 Imports                 75            -Social Security contrib.        25
+Transfer payments       24            Personal consumption           310
-Corporate Income Taxes  55            Gross private domes invest.      85
Indirect business taxes  15            Government purchases           130
 Exports                 95            N.F.F.I.E.                      -18
Depreciation [Cap. Con.] 25
    C=     $                                 310
    Ig =   $                                  85
    G=     $                                 130
    Xn =   $                                 +20           ROW
  Gross Domestic Product (GDP)             $545
   -Consumption     of fixed capital         -25
                                                           $100
  Net Domestic Product (NDP)               $520
   +Net For.  Factor Inc. Earn. U.S.         -18
   -Indirect business taxes
  National Income (NI)
                                             -15
                                           $487
                                                          $118
   -Undistributed  Corporate Profits         -37
   -Corporate income taxes
   -Social Security Contributions
                                             -55
                                             -25
                                                      NFFI = -$18
   +Transfer payments                        +24
  Personal Income (PI)                     $394
   -Personal   Taxes                         -60
  Disposable Income (DI)                   $334
                     [17th Edition]
 Exports                  95            -Undistributed corp. profits     37
 Imports                  75            -Social Security contrib.        25
+Transfer payments        39            Personal consumption           310
-Corporate Income Taxes   55            Gross private domes invest.      85
-Taxes on prod. & imports 15            Government purchases           130
Personal taxes            60            N.F.F.I.E.                      -18
Statistical Discrepancy 15              Depreciation                     25
     C=     $                             310
     Ig =   $                              85
     G=     $                             130
     Xn =   $                             +20
  Gross Domestic Product (GDP)          $545
                                                            ROW
    -Consumption     of fixed capital      -25              $100
  Net Domestic Product (NDP)            $520
    +Net For. Factor Inc. Earn. U.S.       -18
    -Statistical Discrepancy
  National Income (NI)
                                           -15
                                        $487               $118
    -Undistributed  Corporate Profits     -37
    -Corporate income taxes               -55
    -Social Security Contributions        -25          NFFI = -$18
   -Taxes on prod. & imports              -15
   +Transfer payments                     +39
  Personal Income (PI)                  $394
    -Personal   Taxes                      -60
                                        $334
Personal taxes               58         -Undistributed corp. profits        23
Exports                     109         -Social Security contrib.           40
Imports                      89         Personal consumption              358
+Transfer payments           41         Gross private domes invest.       130
-Corporate income taxes      38         Government purchases              165
Indirect business taxes      21         Depreciation [capital consumption] 45
                                        N.F.F.I.E. in the U.S.             -23
     C=     $                                358
     Ig =   $                                130
     G=     $                                165
     Xn =   $                                +20             ROW
  Gross Domestic Product (GDP)            $673
    -Consumption     of fixed capital        -45
                                                             $100
  Net Domestic Product (NDP)               $628
    +Net For.  Factor Inc. Earn. U.S.        -23
    -Indirect business taxes
  National Income (NI)
                                             -21
                                          $584              $123
    -Undistributed Corporate Profits        -23
   -Corporate income taxes                  -38
   -Social Security Contributions           -40           NFFI = -$23
   +Transfer payments                        +41
  Personal Income (PI)                    $524
    -Personal   Taxes                        -58
  Disposable Income (DI)                  $466
                        [17th Edition]
Personal taxes                    50     -Undistributed corp. profits          23
Exports                          109     -Social Security contrib.             40
Imports                           89     Personal consumption                 358
+Transfer payments                41     Gross private domes invest.          130
-Corporate income taxes           38     Government purchases                 165
-Taxes on prod. & imports         21     Depreciation [capital consumption]    45
Statistical Discrepancy            8     N.F.F.I.E. in the U.S.               -23
      C= $                                 358
      Ig = $                               130
      G= $                                 165
      Xn = $                               +20
  Gross Domestic Product (GDP)           $673                ROW
    -Consumption     of fixed capital      -45
                                                              $100
  Net Domestic Product (NDP)             $628
    +Net For. Factor Inc. Earn. U.S.       -23
    -Indirect business taxes                -8
  National Income (NI)
    -Undistributed  Corporate Profits
                                         $597
                                           -23
                                                             $123
    -Corporate income taxes                -38
    -Social Security Contributions         -40
   -Taxes on prod. and imports             -21             NFFI = -$23
   +Transfer payments                     +41
  Personal Income (PI)                   $516
    -Personal   Taxes                      -50
  Disposable Income (DI)                 $466
Personal taxes              60             -Undistributed corp. profits    16
Exports                     37             -Social Security contrib.       32
Imports                     23             Personal consumption           312
+Transfer payments          26             Ig                             104
-Corporate income taxes     42             Government purchases           110
Indirect business taxes     24             N.F.F.I.E. in the U.S.          -30
                                           Depreciation                     24
       C=     $                                 312
       Ig =   $                                 104
       G=     $                                 110
       Xn =   $
    Gross Domestic Product (GDP)
                                                +14
                                                               ROW
                                             $540
      -Consumption     of fixed capital         -24            $100
    Net Domestic Product (NDP)                $516
      +Net For.  Factor Inc. Earn. U.S.         -30
      -Indirect business taxes
    National Income (NI)
                                                -24
                                             $462
                                                              $130
      -Undistributed   Corporate Profits       -16
       -Corporate income taxes                 -42          NFFI = -$30
       -Social Security Contributions          -32
      +Transfer payments                        +26
    Personal Income (PI)                     $398
      -Personal   Taxes                         -60
    Disposable Income (DI)                   $338
                        [17th Edition]
Personal taxes                  60           -Undistributed corp. profits    16
Exports                         37           -Social Security contrib.       32
Imports                         23           Personal consumption           312
+Transfer payments              50           Gross Investment               104
-Corporate income taxes 42                   Government purchases           110
-Taxes on prod. & imports       34           N.F.F.I.E. in the U.S.         -30
Depreciation [cap. Consumption] 24           Statistical Discrepancy         14
        C= $                                       312
        Ig = $                                     104
        G= $                                       110
        Xn = $                A “streaker”        +14
     Gross Domestic Product (GDP)               $540
       -Consumption     of fixed capital          -24
                                                                 ROW
     Net Domestic Product (NDP)                 $516             $100
       +Net For.   Factor Inc. Earn. U.S.         -30
       -Statistical Discrepancy                   -14
     National Income (NI)
       -Undistributed  Corporate Profits
                                                $472
                                                  -16
                                                                 $130
       -Corporate income taxes                    -42
       -Social Security Contributions             -32          NFFI = -$30
      -Taxes on prod. and imports                 -34
      +Transfer payments                          +50
     Personal Income (PI)                       $398
       -Personal   Taxes                          -60
     Disposable Income (DI)                     $338
• GDP can be measured either by total
  spending on U.S. production or by total
  income received from that production.

• Expenditure approach [C+Ig+G+Xn]
  – Adds up the aggregate expenditure on all final
    goods and services produced during that year
    Gross Domestic Production

• Income approach [R+I+P+SA+W (RIP SAW)]
  – Adds up the aggregate income earned during the
    year by those who produce that output Gross
    Domestic Income[sales]
  Expenditure Approach        Income Approach
Gross Domestic Production   Gross Domestic Sales
     Consumption by                   Rents
       Households

          +                            +
                                     Interest
      Investment by
       Businesses       G              +
                                    Profits
          +
       Government
                      = D=             +
        Purchases       P    Statistical Adjustments
                              [corporate income taxes,
                               Dividends, undistributed

          +                       Corporate profits]


      Expenditures
      By Foreigners
                                       +
                                     Wages
     The Circular-Flow Diagram
             Resource Market
                 1

             2
                                        $
        $
         A. Goods/services?
         B. Consumer expenditures?
         C. Land, labor, capital and
             entrepreneurial ability?
         D. Rent, wages, interest,
             and profits?
Businesses                         Households
         $
                 3                 $
             4


                 Product Market
THE INCOME APPROACH [RIP SAW]
  Compensation of Employees
   Rents
   Interest
   Profits [Proprietors’ Income]
   SA [statistical adjustments]
      Corporate Income Taxes
      Dividends
      Undistributed Corporate Profits
   Wages
Receipts: Expenditures Approach   Allocations: Income Approach____
C                     $8746       Compensation of employees    $7125
Ig                     2105       Rents                           73
G                      2363       Interest                       498
Xn                     -727       Proprietor’s income            939
                                  Corporate Profits             1352
                                  Taxes on production & imports 917
                                  National Income           $10,904
                                  Net Foreign Factor Inc        -34
                                  Statistical Discrepancy        43
                                  Consumption of fixed capital 1574

GDP               $12,487         GDP                    $12,487
3. [8 pts] Indicate whether each of the following is counted in
   the U.S. GDP for the year 2006. Explain each of your answers.
   (a) The value of used textbook sold through online auction in 2006.
  Answer: No, it was counted the year it was produced. Because it was
  not produced again , it would not be counted. That would be double counting.
  [2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]

  b. Rent paid in 2006 by residents in an apartment building built in 2000
 Answer: Yes, rents consist of the income received by the households and
 businesses that supply property resources. The properties have to be maintained
 or “serviced” each year. It is included in the income approach to GDP.
 [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
 c. Commissions earned in 2006 by a stockbroker
 Answer: Yes, payment is being made for productive services of the
 broker. So the purchase of stocks would not count but his work would.
 [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services]
  d. The value of autos produced in 2006 entirely in South Korea by a
  firm fully owned by U.S. citizens
 Answer: No, GDP measures production inside the U.S. regardless of
           ownership. These autos were produced in South Korea.
 [2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]
      Nominal GDP
  [prices of output in the current year]
    [measures “output and prices”]
                    and
           Real GDP
[base year prices of the year being measured]
          [measures “only output”]
 Importance of Real GDP in Determining a Recession
 Real GDP measures current output at base-year prices.



             Apple GDP Example
A country produces 10 apples in base year x $1;
Nominal and Real GDP both = $10
Year 2: A country produces 10 apples x $1.25;
Nominal GDP=$12.50          (no recession but worse off)
[Real GDP would = $10 (10 apples x $1)]

Or Year 2: A country produces 9 apples x $1.25;
Nominal GDP=$11.25 but real is $9 (9 apples x $1)
(recession although nominal GDP is up)
     Nominal [money] GDP v. Real GDP
An increase in prices and/or output will increase
nominal GDP.

Only an increase in output will increase real GDP.
Nominal GDP could increase even if output falls.

Real GDP = Nominal Y/GDP deflator x 100

So, nominal GDP measures output & prices.

Real measures only output [actual production]

Constant (real) GDP v. current (money) GDP
               Nominal GDP v. Real GDP
Base year[$50/$50=1x100=100] $46/$50x100=92 [deflation of 8%]


                    Price of Market Basket(2001)     [nominal GDP]   $64
                Price of same Market Basket(1998)x100; [Real GDP] $50x100=128
GDP Price Index =
[GDP Deflator] in the base year (1998)                 [$64/128 x 100 = $50]




     Nominal [Current) GDP
               v.
      Real (constant) GDP
          The “GDP” Balloon
      $6,736.9/126.1 x 100 = $5,342.5




        – measured in terms of money.
Nominaltakes

Real–measured in terms of goods/services.
[Real GDP must decline for 6 months]
            Recession
[Real, not nominal GDP has declined]

               Inflation
              component




 Real GDP



                                       1990-91
The Business Cycle in U.S. History
[11 Recessions since WWII, from 6 months to 16 months]
                                                               Recessions
    GROWTH RATE (percent per year)




                                     20
                                                               Annual
                                     15
                                                               growth

                                     10

                                     5
                                     3
                                     0

                                     -5
                                                                Zero growth     Long-term average
                               -10                                                 growth (3%)



                                          1930   1940   1950     1960    1970      1980    1990     2000 2005
Positive Net Investment [Ig>D]
    Gross Investment
       - Depreciation
       =Net Investment
                    Net
        Gross    Investment
   Investment
                 Depreciation    [increasing product. capac.]

                                 Increased
                Consumption
   Stock of         and           Stock of
                Government
   Capital       Spending         Capital
  January 1     Year’s GDP      December 31
 Depreciation, Investment & Disinvestment
Negative Net Investment                 Positive Net Investment
Depreciation exceeds Ig                 Ig exceeds Depreciation


                       Disinvestment   Investment          Ig
                       of $6 billion   of $531 bil. $2,105 Trillion
                        Declining                      Expanding
                                        Depreciation
                        productive                     productive
Depreciation             capacity          2005
                                       $1,574 Trillion  capacity
    1933
 $7.6 billion
                            Ig
[in current dollars]

                       $1.6 billion
Ig($1.6) - D($7.6) = (Disinv. of $6) Ig($2,105) - D($1,574) = (In of $531)
(Disinvest. of $6) + D($7.6)=($1.6) In($531) + D($1,574) = (Ig of $2,105)
Ig($1.6)–Disinv.($6)=(Depr. of $7.6) Ig($2,105)-In($531)=(Depr. of $1,574)
 Expanding/Static/Declining Productive Capacity




                 Expanding Productive Capacity

Maintaining
our production
possibilities
                 Static Productive Capacity




                 Declining Productive Capacity
            SHORTCOMINGS OF GDP
Non-market Transactions don’t count
Earthquakes, divorces, etc. increase GDP
Leisure isn’t factored in
Improved Product Quality
The Underground Economy
GDP’s impact on the Environment
Per Capita Output
Countries with low GDP per capita have more infants with
low birth weight, higher rates of infant mortality, higher rates
of maternal mortality, higher rates of child malnutrition, and
less common access to safe drinking water. Also, fewer go
to school and they have fewer teachers. They have fewer
TVs and telephones, fewer paved roads. They also win fewer
Olympic medals.
                           NIA NS 1-10
1. GDP is the monetary value of all final domestic goods/services
    produced (by/within) a nation in one year.
2. If N.F.F.I. is positive, which means U.S. profits are greater in the
   ROW than foreign profits in the U.S., then (GDP/GNP) is larger.
3. Double or multiple counting can be avoided by counting only
   (intermediate/final) goods.
4. (Final/Intermediate) goods and services refer to products
   purchased by the ultimate users.
5. Transfer payments [when you take tax money from those who
   are working & give it to those who are not working] (do/do not)
  count in GDP because they (do/do not) reflect current production.
6. (The purchase of 100 shares of Playboy stock/
   The purchase of a drill press) is not considered real investment.
7. If depreciation exceeds gross private domestic investment,
   it can be concluded that In is (positive/negative) & we have
   declining productive capacity.
8. Depreciation can be determined by (adding/subtracting) In from Ig.
9. The largest component of GDP (spending) is (C/Ig/G/Xn)
   and the smallest is (C/Ig/G/Xn).
10. NDP is (GDP-indirect business taxes/GDP-Depreciation).
                    GDP NS 11 and 14-15
11. Real GDP and nominal GDP differ because real GDP has
    been adjusted for changes in (depreciation/prices).




14. Which economy has expanding productive capacity(positive Ig)?
    (A/B/C). Which has declining productive capacity[negative Ig?
    (A/B/C). Which has static productive capacity? (A/B/C).
If this is Pat then this is “The End”.

				
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