Chapter 6 National Income Accounting Economics 7 th

Chapter 6 National Income Accounting Economics, 7 th Edition Boyes/Melvin

Measuring Economic Activity • After being blind-sided by the Great Depression, policymakers decided that they needed measures of economic activity. • Simon Kuznets collected and organized the national income accounts of the United States in the late 1930 s. • Kuznets later received the Nobel Prize for his efforts. Copyright © Houghton Mifflin Company. All rights reserved. 6|2

National Income Accounting • Economists use National Income Accounting to evaluate the economic condition of a country and to compare conditions across time and countries. Copyright © Houghton Mifflin Company. All rights reserved. 6|3

GDP – “Output” • Gross Domestic Product (GDP) is the market value of final goods and services produced within a country during a specific time period, usually a year. • Valued at Market Value • Only Final Goods and Services Count: Sales at intermediate stages of production are not counted as their value is embodied within the final-user good. Their inclusion would result in double counting. • Excludes financial transactions and income transfers since these do not reflect production. • Must be produced within the geographic boundaries of the country. • Net additions to inventory are current period output so are also included. Copyright © Houghton Mifflin Company. All rights reserved. 6|4

The Circular Flow Copyright © Houghton Mifflin Company. All rights reserved. 6|5

Value Added • It is possible to compute GDP by computing the value added at each stage of production. • Value added is the difference between the value of output and the value of the intermediate goods used in the production of that output. Copyright © Houghton Mifflin Company. All rights reserved. 6|6

Value Added Steel and cement have value, but not as much value as a bridge. Copyright © Houghton Mifflin Company. All rights reserved. 6|7

GDP as Value-Added Copyright © Houghton Mifflin Company. All rights reserved. 6|8

GDP as Output Produced • Inventory is a firm’s stock of unsold goods. • GDP includes all output sold plus all goods produced but not sold. Copyright © Houghton Mifflin Company. All rights reserved. 6|9

Inventory affects GDP in Japan's economic growth slowed recently as companies such as Toshiba Corp. ate into inventory to satisfy demand. Japan's largest chipmaker could only supply 90 % of customer demand during the second quarter of ’ 06. Expectations were that the level might fall to as low as 70% in the remaining half of ‘ 06. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 10

Two Ways of Measuring GDP Expenditures on Final Goods Income received for = GDP = producing Final Goods Copyright © Houghton Mifflin Company. All rights reserved. 6 | 11

GDP as Expenditures • GDP is the sum of the amount each sector (households, investors, governments, and foreigners) spends on final user goods and services. • There are four components of GDP: • personal consumption expenditures (C), • gross private domestic investment (I), • government purchases (G) of goods and services, and, • net exports (X) ( exports - imports ) • GDP = C + I + G + X Copyright © Houghton Mifflin Company. All rights reserved. 6 | 12

GDP as Expenditures Who Produces It? Copyright © Houghton Mifflin Company. All rights reserved. 6 | 13

U. S. Gross Domestic Product as Expenditures Copyright © Houghton Mifflin Company. All rights reserved. 6 | 14

GDP as Income The total value of output also can be computed by adding up the income of all sectors: • Wages including benefits • Interest--net interest paid by businesses to households plus net interest received from foreigners. • Rent--income earned from selling the use of real estate. • Profits--the sum of corporate profits plus proprietors’ income. • Capital Consumption Allowance--the estimated value of capital goods used up or worn out in production (depreciation) plus the value of accidental damage to capital goods • Indirect business taxes--taxes collected by businesses and turned over to governments. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 15

U. S. Gross Domestic Product as Income Received Copyright © Houghton Mifflin Company. All rights reserved. 6 | 16

National Income Accounts Copyright © Houghton Mifflin Company. All rights reserved. 6 | 17

GDP vs. GNP • Gross Domestic Product (GDP) is the total value of final goods and services produced during a given period within the geographic boundaries of a country regardless of by whom. The goods and services are produced domestically. • Gross National Product (GNP) is the total value of final goods and services produced during a given period by the citizens of a country no matter where they live. The goods and services are produced by the “nationals” of the country. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 18

Net National Product • Net National Product (NNP) is GDP that is net of depreciation. • NNP includes net investment instead of gross investment. – Gross investment is total investment, which includes investment expenditures that simply replace worn out capital goods. Such replacement investment does not add to the total capital stock. – Net investment excludes replacement investment. That is, it is gross investment minus CCA. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 19

National Income • National Income (NI) is NNP less business taxes. • NI is a measure of the income payments that actually go to resources. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 20

Personal Income and Personal Disposable Income • Personal Income (PI) is national income plus income currently received but not earned, minus income currently earned but not received. • Disposable Personal Income is PI minus personal taxes. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 21

Real and Nominal GDP • Nominal GDP is a measure of national output based on the current prices of goods and services. • Real GDP is a measure of the quantity of final goods and services produced, obtained by eliminating the influence of price changes from nominal GDP statistics. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 22

Prices and Quantities in a Hypothetical Economy Copyright © Houghton Mifflin Company. All rights reserved. 6 | 23

Real GDP Growth in Some Industrial Countries Copyright © Houghton Mifflin Company. All rights reserved. 6 | 24

Three Key Price Indexes • Consumer Price Index (CPI) – measures the impact of price changes on the cost of the typical bundle of goods and services purchased by households. • Producer Price Index (PPI) – A measure of the average prices received by producers for raw materials, intermediate, and final goods. The PPI used to be called the Wholesale Price Index (WPI). • GDP Deflator (GDP Price Index or GDPPI) – Is a broader price index than the CPI. It is designed to measure the change in the average price of all the goods and services included in GDP. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 25

Price Indexes • The value of a price index in any particular year indicates how prices have changed relative to a base year. • The base year is the year against which all other years are compared. • The index is 100 the percent change in prices from the base year. • This type of index suffers from substitution bias as some buyers will change the mix of goods that they buy in response to price changes. • Chain-type indexes of real GDP were created to correct for this bias. Such an index uses the mean of the growth rates using beginning and ending year prices. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 26

The GDP, PPI, and CPI Copyright © Houghton Mifflin Company. All rights reserved. 6 | 27