Lecture Three Measuring National Output and National Income

Lecture Three Measuring National Output and National Income

GDP 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

Expenditure Approach The expenditure approach is a method of computing GDP that measures the amount spent on all final goods during a given time period.

Expenditure Approach GDP = C + I + G + (EX - IM)

Consumption - C Durable goods: goods that last a relatively long time Nondurable goods: goods which are perishable Services: Services goods which do not involve the production of physical things

Investment - I Nonresidential: Nonresidential expenditures by firms on machines, factories, tools, etc. Residential: Residential expenditures by households on new houses and apartment buildings Business inventories: inventories goods that firms produce now with the intent to sell later

Government Purchases - G Expenditures by federal, state and local governments on final goods Does not include transfer payments (social security, unemployment benefits, etc. )

Net Exports - (EX-IM) Exports: sales to foreigners of U. S. produced goods Imports: purchases by U. S. citizens of foreign produced goods Net Exports = Exports - Imports

Income Approach A method of computing GDP that measures the incomes - wages, rents, interest, and profits - received by all factors of production in producing final goods.

National Income Compensation of employees: wages, salaries, etc. , paid to households Proprietors’ income: income of unincorporated businesses Corporate profits: income of corporations Net interest: interest paid by businesses Rental income: income received by property owners

Depreciation is the decline in value of capital assets as they wear out or become obsolete.

Indirect Taxes and Subsidies Indirect Taxes: Taxes sales taxes, custom duties, license fees, etc. Subsidies: Subsidies payments made by the government for which it receives goods or services

Net Factor Payments to Rest of World Payments of factor income to the rest of the world minus the receipt of factor income from the rest of the world

Gross National Product Add to GDP any income earned abroad by US firms or residents Subtract any income earned in the US by foreign firms or residents.

Net National Product - NNP = GDP - depreciation

National Income - NI NI = NNP - indirect taxes + subsidies

Personal Income - PI PI = NI - (corporate profits - dividends) - social insurance payments

Disposable Personal Income DPI = PI - personal income taxes

Nominal GDP is GDP measured in current dollars Current dollars: dollars the current prices that one pays for goods and services

Real GDP is measured in constant year prices Real GDP is adjusted for inflation Constant year: year an arbitrary base year from which prices are derived

Real GDP adjusted for inflation. Base year will be year 1.

GDP Deflator A measure of the prices of all goods and services produced = (Nominal GDP/Real GDP) * 100

Rate of Inflation Rate of change in price level Inflation (year 2) = GDP deflator (year 2) - GDP deflator (year 1)

Limitations of the GDP Concept Social Welfare Underground Economy Per Capita GDP

Review Terms & Concepts Base year Durable goods Business inventories Expenditure approach Compensation of Final goods & services employees Corporate profits Current dollars Depreciation Disposable personal income Fixed-weight procedure Government consumption & investment Gross Domestic Product (GDP) Gross investment

Review Terms & Concepts (cont. ) Gross National Net factor payments Product (GNP) Gross private investment Income approach Indirect taxes Intermediate goods National income Net exports Net interest Net investment Net National Product (NNP) Nominal GDP Nondurable goods Nonresidential investment

Review Terms & Concepts (cont. ) Per capita GDP Rental income Personal consumption Residential investment expenditures Personal income Personal saving rate Proprietors’ income Services Subsidies Underground economy Value added Weight