Principles of Economics
Global Edition
Chapter 21
Measuring
National Output
and National
Income
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Chapter Outline and Learning Objectives
21.1 Gross Domestic Product
• Describe GDP fundamentals and differentiate between GDP and
GNP.
21.2 Calculating GDP
• Explain two methods for calculating GDP.
21.3 Nominal versus Real GDP
• Discuss the difference between real GDP and nominal GDP.
20.3 Limitations of the GDP Concept
• Discuss the limitations of using GDP to measure well-being
• Looking Ahead
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Measuring National Output and National
Income
• National income and product accounts: Data collected
and published by the government describing the various
components of national income and output in the economy.
• Data are complied (collected) by the Bureau of Economic
Analysis (BEA) of the U.S. Department of Commerce.
• While there are literally thousands of variables in the
national income and product accounts, in this chapter we
discuss only those that are most important.
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Gross Domestic Product
• Gross domestic product (GDP): The total market
value of all final goods and services produced within a
given period by factors of production located within a
country.
• GDP is the total market value of a country’s output. It is
the market value of all final goods and services
produced within a given period of time by factors of
production located within a country.
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Final Goods and Services (1 of 2)
• Final goods and services: Goods and services
produced for final use.
• Intermediate goods: Goods that are produced by
one firm for use in further processing or for resale by
another firm.
• Value added: The difference between the value of
goods as they leave a stage of production and the
cost of the goods as they entered that stage.
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Final Goods and Services (2 of 2)
• In calculating GDP, we can sum up the value
added at each stage of production or we can take
the value of final sales.
• We do not use the value of total sales in an
economy to measure how much output has been
produced.
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Table 21.1: Value Added in the Production
of a Gallon of Gasoline (Hypothetical
Numbers)
Stage of Value of Sales Value Added
Production
(1) Oil drilling $3.00 $3.00
(2) Refining 3.30 0.30
(3) Shipping 3.60 0.30
(4) Retail sale 4.00 0.40
Total value added Blank $4.00
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Exclusion of Used Goods and Paper
Transactions
• GDP is concerned only with new, or current,
production. Old output is not counted in current GDP
because it was already counted when it was
produced.
• GDP does not count transactions in which money or
goods change hands but in which no new goods and
services are produced.
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Exclusion of Output Produced Abroad by
Domestically Owned Factors of Production
• GDP is the value of output produced by factors of
production located within a country.
• Gross national product (GNP): The total market
value of all final goods and services produced within
a given period by factors of production owned by a
country’s citizens, regardless of where the output is
produced.
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Calculating GDP
• Expenditure approach: A method of computing GDP
that measures the total amount spent on all final
goods and services during a given period.
• Income approach: A method of computing GDP that
measures the income—wages, rents, interest, and
profits—received by all factors of production in
producing final goods and services.
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The Expenditure Approach (1 of 7)
• There are four main categories of expenditure:
– Personal consumption expenditures (C): household spending on
consumer goods
– Gross private domestic investment (Ia): spending by firms and
households on new capital—that is, plant, equipment, inventory,
and new residential structures
– Government consumption and gross investment (G)
– Net exports (EX − IM): net spending by the rest of the world, or
exports (EX) minus imports (IM)
GDP = C + I a + G + ( EX – IM )
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Economics In Practice (1 of 4)
Are Christie’s Brokerage Services Counted in GDP?
In 2017, the auction art sales at Christie’s broke its
own worldwide sales record of €5.8 billion. The most
significant art piece sold that year was Leonardo da
Vinci’s masterpiece, Salvator Mundi or Savior of the
World, which was sold by Russian collector Dmitry
Rybolovlev to Louvre Abu Dhabi for over $450
million at Christie’s New York auction house.
Since the painting was commissioned in the early
sixteenth century by the French monarch, Louis XII,
it was counted as part of France’s GDP in the year
CRITICAL THINKING
when it was painted, i.e., 1,500. The sale does not
affect the GDP of either Abu Dhabi or Russia. Would a contemporary painting
However, since Christie’s services were rendered on completed in 2017, and sold by
U.S. soil by the British auction house via its New Christie’s in the same year, be
York branch, it would have been recorded as a recorded in GDP of 2017? What
service brokerage fee in the GDP of the United about the paintings painted in
States in 2017. Once the brokerage income fee is 2015?
remitted to the United Kingdom, it is recorded under
its national income or gross national product (GNP).
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Table 21.2: Components of U.S. GDP,
2017: The Expenditure Approach
Blank Billions of Billions of Percentage of Percentage
Dollars ($) Dollars ($) GDP (%) of GDP (%)
Personal consumption expenditures (C) 13,395.5 Blank 69.1 Blank
Durable goods Blank 1,473.8 Blank 7.6
Nondurable goods Blank 2,851.5 Blank 14.6
Services Blank 9,100.2 Blank 46.9
Gross private domestic investment (Ia) 3,212.8 Blank 16.6 Blank
Non-residential Blank 2,449.6 Blank 12.6
Residential Blank 747.6 Blank 3.9
Change in business inventories Blank 15.7 Blank 0.1
Government consumption and gross investment (G) 3,353.8 Blank 17.3 Blank
Federal Blank 1,260.7 Blank 6.5
State and local Blank 2,093.2 Blank 10.8
Net exports(EX − IM) -571.6 Blank -2.9 Blank
Exports (EX) Blank 2,334.0 Blank 12.1
Imports (IM) Blank 2,915.6 Blank 15.0
Gross domestic product 19,390.6 Blank 100.0 Blank
Source: U.S. Bureau of Economic Analysis, March 28, 2018. MyLab Economics Real-time data
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The Expenditure Approach (2 of 7)
Personal Consumption Expenditures (C)
• Personal consumption expenditures (C): Expenditures
by consumers on goods and services.
• Durable goods: Goods that last a relatively long time,
such as cars and household appliances.
• Non-durable goods: Goods that are used up fairly
quickly, such as food and clothing.
• Services: The things we buy that do not involve the
production of physical things, such as legal and medical
services and education.
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The Expenditure Approach (3 of 7)
Gross Private Domestic Investment (I a)
• Gross private domestic investment (I a): Total
investment in capital—that is, the purchase of new
housing, plants, equipment, and inventory by the private
(or non-government) sector.
• Non-residential investment: Expenditures by firms for
machines, tools, plants, and so on.
• Residential investment: Expenditures by households
and firms on new houses and apartment buildings.
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The Expenditure Approach (4 of 7)
Gross Private Domestic Investment (I a)
• Change in business inventories: The amount by
which firms’ inventories change during a period.
Inventories are the goods that firms produce now
but intend to sell later.
GDP = Final sales + Change in business inventories
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The Expenditure Approach (5 of 7)
Gross Private Domestic Investment (I a)
• Depreciation: The amount by which an asset’s value
falls in a given period.
• Gross investment: The total value of all newly
produced capital goods (plant, equipment, housing,
and inventory) produced in a given period.
• Net investment: Gross investment minus
depreciation.
capitalend of period = capitalbeginning of period + net investment
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Economics In Practice (2 of 4)
Estimating Depreciation in the National Income and Product
Accounts
For some products, the calculation of
physical depreciation is relatively simple.
But for goods in the high tech area,
depreciation occurs when the goods
become obsolete.
A paper by four Federal Reserve Board
economists indicates that computers lose
roughly half their value with each additional
year of use.
Most of this depreciation comes from the CRITICAL THINKING
inability of older computer models to match
the functionality of the newer models. If a computer is initially worth $1,000
and loses half of its value per year,
what is its value after three years of
depreciation? How much depreciation
takes place in the third year?
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The Expenditure Approach (6 of 7)
Government Consumption and Gross Investment (G)
• Government consumption and gross investment
(G): Expenditures by federal, state, and local
governments for final goods and services.
• Defense, Welfare, Education, Health Care, Social
Security, etc.
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The Expenditure Approach (7 of 7)
Net Exports (EX−IM)
• Net exports (EX−IM): The difference between exports
(sales to foreigners of U.S.-produced goods and
services) and imports (U.S. purchases of goods and
services from abroad). The figure can be positive or
negative.
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The Income Approach (1 of 4)
• National income: The total income earned by the
factors of production owned by a country’s citizens.
• Compensation of employees: Includes wages,
salaries, and various supplements—employer
contributions to social insurance and pension funds,
for example—paid to households by firms and by the
government.
• Proprietors’ income: The income of unincorporated
businesses.
• Rental income: The income received by property
owners in the form of rent.
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The Income Approach (2 of 4)
• Corporate profits: The income of corporations.
• Net interest: The interest paid by business.
• Indirect taxes minus subsidies: Taxes such as sales
taxes, customs duties, and license fees less subsidies
that the government pays for which it receives no
goods or services in return.
• Net business transfer payments: Net transfer
payments by businesses to others.
• Surplus of government enterprises: Income of
government enterprises.
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Table 21.3: National Income, 2017
Blank Billions Billions Percentage Percentage
of of of National of National
Dollars Dollars Income (%) Income (%)
($) ($)
National income 16,607.7 Blank 100.0 Blank
Compensation of employees Blank 10,307.2 Blank 62.1
Proprietor’s income Blank 1,386.0 Blank 8.3
Rental income Blank 743.9 Blank 4.5
Corporate profits Blank 2,164.6 Blank 13.0
Net interest Blank 586.4 Blank 3.5
Indirect taxes minus subsidies Blank 1,268.8 Blank 7.6
Net business transfer payments Blank 161.8 Blank 1.0
Surplus of government enterprises Blank −11.0 Blank −0.1
Source: U.S. Bureau of Economic Analysis, March 28, 2018.
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The Income Approach (3 of 4)
• Net national product (NNP): Gross national product
minus depreciation; a nation’s total product minus
what is required to maintain the value of its capital
stock.
• Statistical discrepancy: Data measurement error.
• Personal income: The total income of households.
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Table 21.4: GDP, GNP, NNP, and National
Income, 2017
Blank Billions of Dollars
($)
GDP 19,390.6
Plus: Receipts of factor income from the rest of the
world +934.7
Less: Payments of factor income to the rest of the
world −717.9
Equals: GNP 19,607.4
Less: Depreciation −3,034.7
Equals: Net national product (NNP) 16,572.7
Less: Statistical discrepancy −(−35.0)
Equals: National income 16,607.7
Source: U.S. Bureau of Economic Analysis, March 28, 2018.
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The Income Approach (4 of 4)
• Disposable personal income or after-tax income:
Personal income minus personal income taxes. The
amount that households have to spend or save.
• Personal saving: The amount of disposable income
that is left after total personal spending in a given
period.
• Personal saving rate: The percentage of disposable
personal income that is saved. If the personal saving
rate is low, households are spending a large amount
relative to their incomes; if it is high, households are
spending cautiously.
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Table 21.5: National Income, Personal Income,
Disposable Personal Income, and Personal
Saving, 2017
Blank Billions of Dollars ($)
National income 16,607.7
Less: Amount of national income not going to households −180.4
Equals: Personal income 16,427.3
Less: Personal income taxes −2,048.3
Equals: Disposable personal income 14,379.0
Less: Personal consumption expenditures −13,395.5
Personal interest payments −300.5
Transfer payments made by households −197.0
Equals: Personal saving 485.9
Personal saving as a percentage of disposable personal 3.4%
income:
Source: U.S. Bureau of Economic Analysis, March 28, 2018.
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Economics In Practice (3 of 4)
GDP: One of the Great Inventions of the 20th Century
The United States and the rest of the world
rely on GDP to tell where we are in the
business cycle and to estimate long-run
growth.
It is the centerpiece of an elaborate
(detailed) and indispensable (essential)
system of social accounting, the national
income, and product accounts.
This is surely the single most innovative
achievement of the Commerce Department
in the 20th century.
CRITICAL THINKING
The articles emphasize the importance of being able to measure an economy’s output
to improve government policy. Looking at recent news, can you identify one economic
policy debate or action that referenced GDP?
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Nominal versus Real GDP
• Current dollars: The current prices that we pay for
goods and services.
• Nominal GDP: Gross domestic product measured in
current dollars.
• Weight: The importance attached to an item within a
group of items.
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Calculating Real GDP
• Fixed-weight procedure: A procedure that uses
weights from a given base year.
• Base year: The year chosen for the weights in a
fixed-weight procedure.
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Table 21.6: Three-Good Economy
Blank (1) (2) (3) (4) (5) (6) (7) (8)
Production Production Price per Price per GDP in GDP in GDP in GDP in
Year 1 Year 2 Unit Unit Year 1 in Year 1 in Year 2 in Year 2 in
Q1 Q2 Year 1 Year 2 Year 1 Year 1 Year 2 Year 2
P1 P2 Prices Prices Prices Prices
P1 × Q1 P1 × Q2 P2 × Q 1 P2 × Q 2
Good A 6 11 $0.50 $0.40 $3.00 $5.50 $2.40 $4.40
Good B 7 4 0.30 1.00 2.10 1.20 7.00 4.00
Good C 10 12 0.70 0.90 7.00 8.40 9.00 10.80
Total Blank Blank Blank Blank $12.10 $15.10 $18.40 $19.20
Nominal Nominal
GDP in GDP in
Year 1 Year 2
Q: Quantity P: Price
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Calculating the GDP Deflator
• Policy makers need not only good measures of how
real output is changing but also good measures of
how the overall price level is changing.
• The GDP deflator is one measure of the overall price
level.
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The Problems of Fixed Weights
• Many structural changes took place in the U.S.
economy between the 1950s and 1987.
• The use of fixed-price weights does not account for
the responses in the economy to supply shifts.
• The fixed-weight procedure ignores the substitution
away from goods whose prices are increasing and
toward goods whose prices are decreasing or whose
prices are increasing less rapidly.
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Limitations of the GDP Concept (1 of 2)
GDP and Social Welfare
• If crime levels went down, society would be better off,
but a decrease in crime is not an increase in output
and is not reflected in GDP.
• An increase in leisure is also an increase in social
welfare, sometimes associated with a decrease in
GDP.
• Most non-market and domestic activities, such as
housework and childcare, are not counted in GDP.
• GDP also has nothing to say about the distribution of
output among individuals in a society.
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Economics In Practice (4 of 4)
An Alternative to GDP: The Human Development Index
GDP and GNI indicate economic
welfare but do not measure the nation’s
overall well-being. As a result of
discussions about the multiple
dimensions of economic development,
a new indicator-the Human
Development Index was created by the
United Nations in 1990 to compare
well-being across nations.
However, it neglects important aspects
of a county’s well-being such as human
rights or political participation.
CRITICAL THINKING
HDI components are as follows: life
expectancy at birth, expected years of What are the other aspects of a nation’s
schooling, mean years of schooling, well-being you think are missing from
GNI per capita, GDP per capita. both HDI and GDP (or GNI) measures?
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Limitations of the GDP Concept (2 of 2)
The Informal Economy
• Informal economy: The part of the economy in which
transactions take place and in which income is
generated that is unreported and therefore not counted
in GDP.
Gross National Income per Capita
• Gross national income (GNI): GNP converted into
dollars using an average of currency exchange rates
over several years adjusted for rates of inflation.
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Figure 21.1: Per Capita Gross National Income for
Selected Countries, 2016
Source: Data from GNI per capita, PPP (current international $), The World Bank Group,
Retrieved from [Link]
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Looking Ahead
• This chapter has introduced many key variables in
which macroeconomists are interested, including
GDP and its components.
• In the next chapter, we will discuss the data on
employment, unemployment, and the labor force.
• In Chapter 25, we will discuss the data on money and
interest rates.
• In Chapter 34, we will discuss in more detail the data
on the relationship between the United States and the
rest of the world.
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Review Terms and Concepts (1 of 2)
• base year
• change in business inventories
• gross investment
• compensation of employees
• gross national income (GNI)
• corporate profits
• gross national product (GNP)
• current dollars
• gross private domestic investment (Ia)
• depreciation
• income approach
• disposable personal income, or after-
• indirect taxes minus subsidies
tax income
• informal economy
• durable goods
• intermediate goods
• expenditure approach
• national income
• final goods and services
• national income and product
• fixed-weight procedure
accounts
• government consumption and gross
• net business transfer payments
investment (G)
• gross domestic product (GDP)
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Review Terms and Concepts (2 of 2)
• rental income
• net exports (EX − IM)
• residential investment
• net interest
• services
• net investment
• statistical discrepancy
• net national product (NNP)
• surplus of government enterprises
• nominal GDP
• value added
• nondurable goods
• weight
• nonresidential investment
• Equations:
• personal consumption
expenditures (C) Expenditure approach to GDP:
• personal income GDP = C + I a + G + ( EX – IM )
• personal saving
GDP = Final sales + Change in business inventories
• personal saving rate
capitalend of period = capitalbeginning of period + net investment
• proprietors’ income
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