Chapter 11 Gross Domestic Product Lecture Slides Survey

Chapter 11 Gross Domestic Product Lecture Slides Survey of Economics Irvin B. Tucker © 2016 south-Western, a part of Cengage Learning 1

What is national income accounting? • The system used to measure the aggregate income and expenditures for a nation 2 © 2016 south-Western, a part of Cengage Learning

What is gross domestic product? • GDP is the market value of all final goods and services produced in a nation during a period of time, usually a year 3 © 2016 south-Western, a part of Cengage Learning

What are final goods? • Finished goods and services produced for the ultimate user 4 © 2016 south-Western, a part of Cengage Learning

What are intermediate goods? • Goods and services used as inputs for production of final goods 5 © 2016 south-Western, a part of Cengage Learning

Does GDP count intermediate goods? • No, to avoid double counting, GDP only measures final goods and services 6 © 2016 south-Western, a part of Cengage Learning

What is an advantage of using GDP? • GDP measures value using dollars, rather than a list of the number of goods and services © 2016 south-Western, a part of Cengage Learning 7

Does GDP measure secondhand transactions? • No, current GDP does not include the sale of a used car or the sale of a home constructed some years ago. To include these items would be double counting because they were counted in GDP when they were new. 8 © 2016 south-Western, a part of Cengage Learning

What is a transfer payment? • A government payment to individuals, not in exchange for goods or services currently produced. Such nonproductive transactions are not counted in GDP. 9 © 2016 south-Western, a part of Cengage Learning

Does GDP measure nonproductive financial transactions? • No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments 10 © 2016 south-Western, a part of Cengage Learning

What is a circular flow model? • A model that show us how all the pieces of the GDP puzzle fit together © 2016 south-Western, a part of Cengage Learning 11

Product markets Exhibit 11 -1 Businesses Basic Circular Flow Model Households Factor markets 12 12 © 2016 south-Western, a part of Cengage Learning

What is the expenditure approach? • The national income accounting method that measures GDP by adding all the spending for final goods and services 13 © 2016 south-Western, a part of Cengage Learning

What are the four sectors of GDP? • Consumption • Investment • Government • Foreign (X - M) 14 © 2016 south-Western, a part of Cengage Learning

GDP = C + I + G + (X - M) 15 © 2016 south-Western, a part of Cengage Learning

Exhibit 11 -2 Gross Domestic Product Using the Expenditure Approach, 2013 Amount National Income Account (trillions of dollars) Personal consumption expenditures ( C ) Durable goods Nondurable goods Services Gross private domestic Investment ( I ) Fixed investment Change in business inventories Government consumption expenditures and gross investment ( G ) Federal State and local Net exports of goods and services (X-M ) Exports ( X ) Imports ( M ) Gross domestic product ( GDP ) © 2016 south-Western, a part of Cengage Learning $11. 5 Percent of GDP 69% $1. 3 2. 6 7. 6 2. 7 16 3. 1 18 - 0. 5 -3 2. 6 0. 1 1. 2 1. 9 2. 3 2. 8 $16. 86 100% 16

Exhibit 11 -3 An International Comparison of GDPs, 2013 $16. 8 GDP (Trillions of dollars) $9. 2 $4. 9 $3. 6 $2. 5 United States China Japan Germany United Russia Kingdom Country © 2016 south-Western, a part of Cengage Learning $2. 1 $1. 8 India $1, 8 Canada $1. 3 Mexico 17

What are shortcomings of GDP? • Nonmarket transactions • Distribution, kind, and quality of products • Neglect of leisure time • Underground economy • Economic bads 18 © 2016 south-Western, a part of Cengage Learning

What is a conclusion from the shortcomings of GDP ? • GDP is a quantitative, rather than qualitative, measure of the output of goods and services 19 © 2016 south-Western, a part of Cengage Learning

What other national accounts measure economic performance? • National Income • Personal Income • Disposable Personal Income • Nominal and Real GDP • GDP Chain Price Index 20 © 2016 south-Western, a part of Cengage Learning

What is national income? • NI is the total earned by resource owners, including wages, rents, interest, and profits 21 © 2016 south-Western, a part of Cengage Learning

Exhibit 11 -4 National Income Calculated from Gross Domestic Product, 2013 National Income Account Gross domestic product (GDP) Depreciation National income Amount (trillions of dollars) $16. 8 -2. 3 $14. 5 22 © 2016 south-Western, a part of Cengage Learning

What is personal income? • PI is the total income received by households that is available for consumption, saving, and payment of personal taxes 23 © 2016 south-Western, a part of Cengage Learning

Exhibit 11 -5 Four Measures of the Macro Economy © 2016 south-Western, a part of Cengage Learning 24

Exhibit 11 -6 Personal Income Calculated from National Income, 2013 National Income Account Amount (trillions of dollars) National income (NI ) Corporate profits Transfer payments and other income Personal income ( PI ) $14. 5 -2. 1 2. 8 $14. 1 25 © 2016 south-Western, a part of Cengage Learning

What is disposable personal income? • DI is the amount of income that households have to spend or save after payment of personal taxes © 2016 south-Western, a part of Cengage Learning 26

Exhibit 11 -7 Disposable Personal Income Calculated from Personal Income, 2013 National Income Account Personal income ( PI ) Personal taxes Disposable personal income ( DI ) Amount (trillions of dollars) $14. 1 -1. 6 $12. 5 27 © 2016 south-Western, a part of Cengage Learning

What is nominal GDP? • The value of all final goods based on the prices existing during the time period of production 28 © 2016 south-Western, a part of Cengage Learning

What is real GDP? • The value of all final goods produced during a given time period based on the prices existing in a selected base year 29 © 2016 south-Western, a part of Cengage Learning

What is the chain price index? • A measure that compares changes in the prices of all final goods during a given period to the prices of those goods in a base year 30 © 2016 south-Western, a part of Cengage Learning

Real GDP = nominal GDP X 100 GDP chain price index 31 © 2016 south-Western, a part of Cengage Learning

Exhibit 11 -8 Nominal GDP, Real GDP, and the GDP Chain Price Index (1) Nominal GDP Year 1970 (billions of dollars) (2) Real GDP (billions of 2009 dollars) (3) GDP Chain Price Index (2009 = 100) 1, 076 4, 718 22. 8 1980 2, 862 6, 443 44. 4 1990 2000 5, 980 10, 290 8, 945 12, 565 66, 8 81. 9 2009 14, 418 100. 0 2013 16, 880 15, 761 107. 0 32 © 2016 south-Western, a part of Cengage Learning

Exhibit 11 -8 Nominal GDP, Real GDP, and the GDP Chain Price Index 18, 000 16, 000 14, 000 Real GDP 12, 000 and Nominal 10, 000 GDP (billions of 8, 000 dollars per year) 6, 000 Real GDP Nominal GDP 4, 000 2, 000 Base year 1970 © 2016 south-Western, a part of Cengage Learning 1980 1990 Year 2000 2009 2013 33

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