Module 7
Measuring
Domestic Output
and National
Income
Chapter Objectives
• Define and measure GDP
• GDP and income relationships
• The GDP price index
• Nominal GDP vs. real GDP
• Limitations of the GDP measure
24-2
National Income Accounting
• Measures the economy’s overall
performance.
• Operates in much the same way for the
economy as a whole.
• Enables economists and policymakers to:
The system tracks a
– Assess the health of the economy country's total income
– Track the long-run course of the economy over a year, including
business production,
– Formulate policies government spending,
investments, and trade
with other countries.
24-3
Gross Domestic Product
ERM THIS IS UNDER NATIONAL INCOME ACCOUNTING!!
• Measure of aggregate output
–its annual total output of goods and
services
• Monetary measure
–Without such a measure we would have no
way of comparing the relative values of the
vast number of goods and services
produced in different years.
24-4
Gross Domestic Product
• Avoid multiple counting
• Includes only:
–Market value final goods
–Ignore intermediate goods
–Count value added
24-5
Gross Domestic Product
Value Added in a Five-Stage Production
Process
24-6
Gross Domestic Product
• Exclude financial transactions
–Public transfer payments
• Social security payments, welfare payments, and
veterans’ payments
–Private transfer payments
• money that parents give children or the cash gifts
–Stock (and bond) market transactions
• buying and selling of stocks (and bonds)
24-7
Gross Domestic Product
• Second hand sales
–Sell used car to a friend
24-8
Two Approaches to GDP
• Income approach
–Count income derived from
production
–Wages, rental income, interest
income, profit
• Expenditure approach Expenses
–Count sum of money spent buying
the final goods
–Who buys the goods?
24-9
Two Approaches to GDP
Consumption by Wages
+
Households
+
Investment by Rents
Businesses G +
+ = D= Interest
Government
Purchases P +
Profits
+
Expenditures
+
Statistical <— Income
By Foreigners Adjustments approach ;-;
24-10
Expenditure Approach
• Personal consumption
expenditures (C) things that u dont buy often and lasts long
ex: appliances, furniture
–Durable consumer goods
–Nondurable consumer goods
things that u buy often cuz they dont
–Consumer expenditures for last that long
ex: food
services
–Domestic plus foreign produced
24-11
Expenditure Approach
• Gross private domestic
investment (I)
–Machinery, equipment, and tools
–All construction
–Changes in inventories
• Creation of new capital asset
• Noninvestment transactions
24-12
Expenditure Approach
basically in simpler terms: Gross Investment
Gross Investment -
Depreciation = Net
- Depreciation
Investment = Net Investment
Net
Investment
Gross
Investment
Depreciation
Increase
Consumption
Stock of & Government Stock of
Capital Spending Capital
January 1 Year’s GDP December 31
24-13
Expenditure Approach
• Government purchases (G)
– Expenditures for goods and services
Expenses – Expenditures for social capital
– Excludes transfer payments
• Net exports (Xn) <3
Exported Goods - Imported
– Add exported goods Goods = Xn
– Subtract imported goods
– NX = exports - imports
• GDP = C+Ig+G+Xn 24-14
U.S. Economy 2007
in Billions
Receipts Allocations
Expenditures Approach Income Approach
Personal Consumption (C) $ 9734 Compensation $ 7874
Gross Private Domestic Rents 65
Investment (Ig) 2125 Interest 603
Government Purchases (G) 2690 Proprietor’s Income 1043
Net Exports (Xn) -708 Corporate Profits 1627
Taxes on Production and
Imports 1009
National Income $12,221
Net Foreign Factor Income (-) 96
Statistical Discrepancy (+) 29
Consumption of Fixed
Capital (+) 1687
Gross Domestic Product $ 13,841 Gross Domestic Product $ 13,841
24-15
Comparative GDP
Selected Nations GDPs, 2007
GDP in Trillions of Dollars
0 1 2 3 4 5 6 7 8 9 10 12 13
United States
Japan
Germany
China
United Kingdom
France
Italy
Canada
Spain
Brazil
Russia
India
South Korea
Mexico
Australia
Source: World Bank
24-16
Components of National Income
• Compensation of employees
– Paid as wages and salaries by business and
government to their employees.
• Rents
– Consist of the income received by the households
and businesses that supply property resources.
• Interest
– consists of the money paid by private businesses
to the suppliers of loans used to purchase capital.
24-17
Components of National Income
• Proprietor’s income
– consists of the net income of sole proprietorships,
partnerships, and other unincorporated businesses;
• Corporate profits
– Are the earnings of corporations.
24-18
Components of National Income
• Three categories of corporate profits
– Corporate income taxes
• These taxes are levied on corporations’ profits.
– Dividends
• Part of after-tax profits that corporations choose to pay
out, or distribute, to their stockholders.
– Undistributed corporate profits
• Any after-tax profits that are not distributed to
shareholders are saved, or retained, by corporations to
be invested later
24-19
Components of National Income
• Taxes on production and imports
• Includes general sales taxes, excise taxes,
business property taxes, license fees, and
customs duties.
24-20
From National Income to GDP
similar to exports and
–Net Foreign Factor Income imports ;p
• Difference of income gain from supplying
resources abroad and the income that foreigners
gain by supplying resources to our country.
–Statistical Discrepancy
–Consumption of Fixed Capital.
24-21
Income Approach
• From national income to GDP
– Net foreign factor income
– Statistical discrepancy
– Consumption of fixed capital
• Other national accounts
– Net domestic product (NDP)
– National income (NI)
– Personal income (PI)
– Disposable income (DI)
– DI = C + S 24-22
U.S. Income Relationships 2007
Gross Domestic Product (GDP) $ 13,841
Less: Consumption of Fixed Capital 1687
Equals: Net Domestic Product (NDP) $ 12,154
Less: Statistical Discrepancy 29
Plus: Net Foreign Factor Income 96
Equals: National Income (NI) $ 12,221
Less: Taxes on Production and Imports 1009
Less: Social Security Contributions 979
Less: Corporate Income Taxes 467
Less: Undistributed Corporate Profits 344
Plus: Transfer Payments 2237
Equals: Personal Income (PI) $ 11,659
Less: Personal Taxes 1482
Equals: Disposable Income (DI) $ 10,177
24-23
Net Domestic Product
– To determine that, we must subtract from GDP the capital
that was consumed in producing the GDP and that had to be
replaced.
– That is, we need to subtract consumption of fixed capital
(depreciation) from GDP.
– NDP = GDP – consumption of fixed capital ( depreciation)
– It measures the total annual output that the entire
economy— households, businesses, government, and
foreigners—can consume without impairing its capacity to
produce in ensuing years.
24-24
National Income
– Includes all income earned through the use of the country’s-
owned resources, whether they are located at home or
abroad.
24-25
Personal Income
– Includes all income received, whether earned or unearned.
24-26
Disposable Income
– Personal income less personal taxes.
– The amount of income that households have left over after
paying their personal taxes.
– Personal taxes include personal income taxes, personal
property taxes, and inheritance taxes.
– DI = C + S
24-27
Nominal vs. Real GDP
• GDP is a dollar measure of
production
• Using dollar values creates
problems
• Nominal GDP
–Use prevailing price
• Real GDP
–Reflect changes in price
–Use base year price 24-28
GDP Price Index
• Use price index to determine real
GDP
Price Price of Market Basket
Index In Specific Year
In Given = Price of Same Basket
x 100
Year In Base Year
Real Nominal GDP
GDP =
Price Index (in hundredths)
24-29
Shortcomings of GDP
• Nonmarket activities
– Certain productive activities do not take place in any
market—the services of homemakers, for example,
and the labor of carpenters who repair their own
homes.
• Leisure
• Improved product quality
– Fails to capture the full value of improvements in
product quality.
24-30
Shortcomings of GDP
• The underground economy
• GDP and the environment
– The social costs of the negative by-products reduce
our economic well-being.
• Composition and distribution of the output
– GDP does not tell us whether the currently produced
mix of goods and services is enriching or potentially
detrimental to society.
• Noneconomic sources of well-being
24-31
Underground Economy
As a percentage of GDP, Selected
Nations, 2007
Percentage of GDP
0 5 10 15 20 25 30
Mexico
South Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States Source: Open Assessment, E-Journal
24-32
SUMMARY OF
TERMS :
Key Terms
• national income • government
accounting purchases
• gross domestic product • net exports
• intermediate goods • taxes on production
• final goods and imports
• multiple counting • national income
• value added • consumption of fixed
• expenditures approach capital
• income approach • net domestic product
• personal consumption • personal income
expenditures • disposable income
• gross and net private • nominal GDP
domestic investment • real GDP
• price index
24-33