Importance of Macroeconomic Measurement Gross Domestic Product Expenditures

Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach 7 CHAPTER Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 -1 Next Slide Measuring Domestic Output, National Income, and the Price Level Copyright Mc. Graw-Hill/Irwin, 2002

Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 -2 Next Slide The Importance of Macroeconomic Measurement National Income Accoun • Health of the Economy • Comparisons Over Time • Formulation of Public Policy What Are These Accounting Measures? Copyright Mc. Graw-Hill/Irwin, 2002

GROSS DOMESTIC PRODUCT Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 -3 Next Slide The total market value of all final goods and services produced in a given year • A Monetary Measure • Avoid Multiple Counting • Final Goods • Intermediate Goods • Value Added Copyright Mc. Graw-Hill/Irwin, 2002

GROSS DOMESTIC PRODUCT Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 -4 Next Slide • Excludes Nonproduction Transactions • Financial Transactions • Public Transfer Payments • Private Transfer Payments • Stock Market Transactions • Secondhand Sales • Two Approaches • Expenditures Approach • Income Approach more… Copyright Mc. Graw-Hill/Irwin, 2002

EXPENDITURES APPROACH Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Personal Consumption Expenditure ( C ) • Durable Consumer Goods • Nondurable Consumer Goods • Consumer Expenditures for Services Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide Next Slide End Show 7 -5 Copyright Mc. Graw-Hill/Irwin, 2002

EXPENDITURES APPROACH Importance of Macroeconomic Measurement Personal Consumption Expenditure ( C ) Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 -6 Next Slide Gross Private Domestic Investment ( Ig ) • Machinery, Equipment, and Tools • All Construction • Changes in Inventories • Noninvestment Transactions • Gross vs. Net Investment • Net Private Domestic Investment Copyright Mc. Graw-Hill/Irwin, 2002

EXPENDITURES APPROACH Importance of Macroeconomic Measurement Personal Consumption Expenditure ( C ) Gross Domestic Product Expenditures Approach Income Approach Gross Private Domestic Investment ( Ig ) Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 -7 Next Slide Government Purchases ( G ) • Expenditures for Goods & Services • Expenditures for Social Capital • Does NOT include Government Transfer Payments Copyright Mc. Graw-Hill/Irwin, 2002

EXPENDITURES APPROACH Importance of Macroeconomic Measurement Personal Consumption Expenditure ( C ) Gross Domestic Product Expenditures Approach Income Approach Gross Private Domestic Investment ( Ig ) Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Government Purchases ( G ) Key Terms Previous Slide End Show 7 -8 Next Slide Net Exports ( Xn) Net Exports (Xn) = Exports (X) – Imports (M) Copyright Mc. Graw-Hill/Irwin, 2002

EXPENDITURES APPROACH Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Putting it all together: Income Approach Other National Accounts Nominal GDP vs. Real GDP = C + Ig + G + Xn Shortcomings of GDP Key Terms Previous Slide Next: The Income Approach End Show 7 -9 Copyright Mc. Graw-Hill/Irwin, 2002

THE INCOME APPROACH Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 10 Next Slide • • • Compensation of Employees Rents Interest Proprietors’ Income Corporate Profits • Corporate Income Taxes • Dividends • Undistributed Corporate Profits Copyright Mc. Graw-Hill/Irwin, 2002

THE INCOME APPROACH Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP • From National Income to GDP • Indirect Business Taxes • Consumption of Fixed Capital (Depreciation) • Net Foreign Factor Income Shortcomings of GDP Key Terms Previous Slide End Show 7 - 11 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

OTHER NATIONAL ACCOUNTS Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 12 Next Slide U. S. GDP, NI, PI, & DI, 2000 Gross Domestic Product (GDP) $9966 Consumption of fixed capital 1257 Net Domestic Product (NDP) $8709 Net foreign factor income earned in the U. S. - 9 Indirect business taxes 682 National Income (NI) $8018 Social security contributions 706 Corporate income taxes -286 Undistributed corporate profits -274 Transfer payments +1530 Copyright Mc. Graw-Hill/Irwin, 2002

Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts NOMINAL GDP vs. REAL GDP • Nominal Values • Deflate GDP when prices rise • Inflate GDP when Prices fall • Nominal GDP • Calculating Real GDP (4) Nominal GDP vs. Real GDP (2) (1) Price (3) or Nominal, (5) Units of Pizza Price Index GDP, Adjusted, or Year Output Per Unit Year 1 = 100 (1)x(2) Real, GDP 1 5 $10 100 $ 50 $50 2 7 20 200 140 70 3 8 25 250 200 80 4 10 30 - - - 5 11 28 - - - Shortcomings of GDP Key Terms Previous Slide End Show 7 - 13 Next Slide Unadjusted, Copyright Mc. Graw-Hill/Irwin, 2002

NOMINAL GDP vs. REAL GDP Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach • Adjustment Process • GDP Price Index = Price Index in a given year Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 14 Price of market basket in specific year Real GDP Price of same market basket in base year = Nominal GDP Price Index (in hundredths) An Alternative Method Next Slide Price Index (in hundredths) Copyright Mc. Graw-Hill/Irwin, 2002 = Nominal GDP Real GDP x 100

NOMINAL GDP vs. REAL GDP Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach • Consumer Price Index CPI = Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 15 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 Price of 1993 -1995 market basket in any given year Price of the same market basket in 1982 -1984 x 100

SHORTCOMINGS OF GDP Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 16 Next Slide • Nonmarket Transactions • Leisure • Improved Product Quality • The Underground Economy • GDP and the Environment • Composition and Distribution of Output • Per Capita Output • Noneconomic Sources of Well. Being Copyright Mc. Graw-Hill/Irwin, 2002

GLOBAL PERSPECTIVE Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 17 Next Slide The Underground Economy as a Percent of GDP 0 5 10 15 20 25 30 Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland Copyright Mc. Graw-Hill/Irwin, 2002 Source: The Journal of Economic Literature, 2000

Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Chapter Conclusions Key Terms Previous Slide End Show 7 - 18 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

national income accounting gross domestic product intermediate goods final goods multiple counting value added expenditures approach income approach personal consumption expenditures (C) gross private domestic investment (Ig) net private domestic investment Copyright Mc. Graw-Hill/Irwin, 2002 government purchases (G) net exports (Xn) national income indirect business taxes consumption of fixed capital net domestic product (NDP) personal income (PI) disposable income (DI) nominal GDP price index real GDP consumer price index (CPI) per capita output BACK END

Importance of Macroeconomic Measurement Gross Domestic Product Expenditures Approach Income Approach Other National Accounts Nominal GDP vs. Real GDP Shortcomings of GDP Key Terms Previous Slide End Show 7 - 20 Next. . . Introduction to Economic Growth And Instability Next Slide Chapter 8 Copyright Mc. Graw-Hill/Irwin, 2002