Chapter 5 Measuring a Nations Production and Income

Chapter 5 Measuring a Nation’s Production and Income

Note pg. 97! ® Circular Flow Model with Production and Income!

GDP = C+I+G+X-M WHICH MAKES THE MAJORITY OF GDP? ®Consumption ®Investment ®Govt. spending ®Exports ®Imports

There are 2 Types of GDP ® REAL GDP: measure that adjusts for changes in price. ® NOMINAL GDP: The value of GDP in current dollars

REAL GDP ® If 10 computers are produced in the economy for $1, 000 ($10, 000) ® THAT becomes the base year or the “chained” year that we compare to.

Real GDP ® If in year 2, there are $12, 000 dollars in sales of computers – then REAL GDP in year 2 is greater than REAL GDP for year one by a factor of 1. 2.

Real GDP ® Construct a measure using the SAME prices for both years and taking price changes into account. Eliminates inflation / deflation. ® Constant prices ®

Nominal GDP ® Using current prices for GDP. ® GDP will grow for one of only TWO reasons. Production of goods has increased. ® Prices for the goods have increased. ®

IMPORTANT! ® Face value of money or income doesn’t matter to people. ® What matters to people is the “real” value of the money or the PURCHASING POWER.

GDP Definitions for the advanced person! ® CONSUMPTION: Purchases by consumers ® Doesn’t matter if imports or domestic. ®

Consumption: What kind of goods do we buy? ® Durable ® Last for a long time (well, hopefully!) ® ® Nondurable ® Goods that don’t last. ® ® Cars, appliances, etc. Food Services ® People do the delivery of service. ® Medical, dental, travel agents, hair cuts

Investment: Private Investment Expenditures ®Purchases by firms!

Three Forms of Private Investment Expenditures ® Spending on new plants / equipment during the year. ® Newly produced housing is investment spending. ® Companies that increase their inventories.

Definitions of Investment: ® Gross Investment: Actual investment purchases. ® Total of new investment expenditures.

Definitions of Investment: ® Depreciation: The wear and tear of capital as it is used in production. ® (Note: Apply this notion to Econ teachers at your own peril!) ® Net Investment: Simple equation ® Gross Investment – depreciation = net investment

Investing has two meanings to Economists. ® Investment in the GDP means purchases of NEW final goods and services. ® Counted in the GDP!

Investing has two meanings to Economists ® You might talk about Investment like buying stock. Buying EXISTING financial assets. ® NOT counted in the GDP. ®

Government Purchases ® Purchases of newly produced goods and services by all levels of government. ® Copy machine paper, copy machines, weapons, cars, chairs, etc.

Government Spending: ® TRANSFER PAYMENTS: ® Payments to individuals from governments that do not correspond to the production of goods and services. ® ® Social Security, Military Benefits Medicare Interest on the debt ETC

Government Spending ® Transfer Payments are NOT included in GDP. ® They have a BIG impact on incomes of individuals and their consumption and savings behavior!

Transfer Payments = Mandatory Spending for Government ® Big impact on the growing deficit / debt!

US Federal Budget Deficit Projection: Congressional Budget Office

Net Exports ® Equation! ® Exports – Imports = NET EXPORTS ® Exports > Imports = Trade Surplus ® Exports < Imports = Trade Deficit

The US Trade Deficit: Consequences? ® We give up more dollars than we bring in when we export. ® American money in the hands of foreigners.

Look at it this way: ® College Students need money: Sell your assets (property) ® Sell your future prospects. ® ® Plans for a $$$ career, you will be able to pay back later with interest.

US Trade Deficit ® THAT is the same for the US! ® We can sell our assets. ® ® Real Estate, Stocks, Corporate Bonds We can sell our debt with the expectations that we will continue to be a growing economy. ® US Savings Bonds to fund the debt

Who Gets the Income? MORE definitions! ® National Income: The income that flows into the private sector. ® GNP: GDP plus net income earned from abroad. ® NNP: Net National Product: GNP – depreciation ® Indirect Taxing: Sales and Excise Taxes

MORE Definitions ® Value ® Added: Sum of all income ® ® Wages, interest, profits, rent, etc. generated by an organization. SEE PAGE 106 for example!

And Finally! ® Personal ® Income: Income (including transfer payments) received by households. ® Personal Disposable Income: ® Personal income after taxes.

INTERESTING STATISTIC! Families don’t have the same buying power ® Average family income has dropped 2. 3% between 2001 – 2004. ® Federal Reserve Survey of Consumer Finances

So, Why don’t we notice that we have less purchasing power? ®CHEAP imports!

Two Sides to GDP ® Who buys the output that is produced? ® Who gets the income that is created by production?

Who buys the output that is produced? ® 67% of GDP is from consumer spending!

Who is getting the income from production? ® 70% of national income is paid in wages and benefits.

GDP Deflator ® An index that measures how the prices of goods included in GDP change over time. ® SEE PAGE 108 for an explanation!

GDP is NOT a perfect measurement! ® ® ® Does not count transactions in “underground economies” Leisure time is not counted. Some growth might be from women in the workforce ® ® ® More need for services since women are working. Makes GDP look bigger? Does not count externalities like pollution