07Measuring Domestic Output and

National Income

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

• National Income Accounting measures economy’s overall performance

• Bureau of Economic Analysis compiles National Income and Product Accounts•Assess health of economy•Track long run course•Formulate policy

Assessing the Economy’s Performance

LO1 7-2

Gross Domestic Product

• Measure of aggregate output• Monetary measure• Avoid multiple counting

•Market value final goods• Ignore intermediate goods•Count value added

LO1 7-3

GDP is the market value of new, final goods and services produced year within the nation’s borders in a given time period.

Gross Domestic Product (GDP)

GDP is our basicmeasure of economic

activity

Final versus Intermediate Goods

A final good or service is produced for a final user and not as a component of a final good.

Examples: Cars, pizzas, luggage

An intermediate good or service is used as a component of a final good or service

Examples: Radiator hoses, flour, plastics.

Gross Domestic Product

(1)Stage of Production

(2)Sales ValueOf MaterialsOr Product

$ 0

Firm A, sheep ranch 120

Firm B, wool producer 180

Firm C, coat manufacturer 220

Firm D, clothing manufacturer 270

Firm E, retail clothier 350

Total Sales Value $1140

Value Added (total income)

(3)ValueAdded

]--------$120 (= $120 - $ 0)

]-------- 60 (= 180 - 120)

]-------- 40 (= 220 - 180)

]-------- 50 (= 270- 220)

]-------- 80 (= 350 – 270)

$350

LO1 7-6

To count the new coat in GDP, we count the final transaction only. Otherwise, we would be counting value added twice.

Gross Domestic Product

• Exclude financial transactions•Public transfer payments•Private transfer payments•Stock (and bond) market

transactions• Exclude second hand sales

•Sell used car to a friend

LO1 7-8

Two Approaches to GDP

• Income approach•Count income derived from

production•Wages, rental income, interest

income, profit• Expenditure approach

•Count sum of money spent buying the final goods

•Who buys the goods?LO2 7-9

GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

+

+

+++

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

Two Approaches to GDPExpenditures or

Output ApproachIncome or

Allocations Approach

LO2 7-10

Expenditures Approach

• Personal consumption expenditures (C)•Durable consumer goods•Nondurable consumer goods•Consumer expenditures for

services•Domestic plus foreign goods

produced

LO2 7-11

Category

Spending in 2009

(billions)

Percent of Total

Durables $1,034.4 10

Nondurables 2,223.3 22

Services 6,835.0 68

Source: Bureau of Economic Analysis

Consumer Spending by Type, 2009 (in billions)

Total spending byU.S. households

in 2009 was a $10.1trillion

Expenditures Approach

• Gross private domestic investment (Ig)

•Machinery, equipment, and tools•All construction•Changes in inventories

• Creation of new capital assets• Noninvestment transactions excluded

LO2 7-13

Expenditures Approach

January 1 Year’s GDP December 31

Consumption& Government

Spending

Depreciation

NetInvestment

GrossInvestment

Stock ofCapital

Increase

Stock ofCapital

Gross InvestmentDepreciationNet Investment

-=

LO2 7-14

Expenditures Approach

• Government purchases (G)• Expenditures for goods and services• Expenditures for publicly owned capital• Excludes transfer payments

• Net exports (Xn)• Add exported goods• Subtract imported goods

• Xn = exports – imports

• GDP = C + Ig + G + XnLO2 7-15

Compensation

Rents

Interest

Proprietor’s Income

Corporate Profits

Taxes on Production and

Imports

National Income

Net Foreign Factor Income (-)

Statistical Discrepancy (+)

Consumption of Fixed

Capital (+)

Gross Domestic Product

$ 7792

268

788

1041

1309

1090

$12,288

105

209

1864

$ 14,256

Personal Consumption (C)

Gross Private Domestic

Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Gross Domestic Product

In Billions ReceiptsExpenditures Approach

AllocationsIncome Approach

$10,089

1628

2931

-392

$ 14,256

U.S. Economy 2009

LO2 7-16

Comparative GDP

LO2 7-17

The Income Approach

• Compensation of employees• Rents• Interest• Proprietor’s income• Corporate profits

•Corporate income taxes•Dividends•Undistributed corporate profits

• Taxes on production and importsLO2 7-18

The Income Approach• From national income to GDP

•Subtract net foreign factor income•Statistical discrepancy•Consumption of fixed capital

• Other national accounts•Net domestic product (NDP)•National income (NI)•Personal income (PI)•Disposable income (DI)

LO2 7-19

U.S. Income Relationships 2009

Gross Domestic Product (GDP)Less: Consumption of Fixed CapitalEquals: Net Domestic Product (NDP)Less: Statistical DiscrepancyPlus: Net Foreign Factor IncomeEquals: National Income (NI)Less: Taxes on Production and ImportsLess: Social Security ContributionsLess: Corporate Income TaxesLess: Undistributed Corporate ProfitsPlus: Transfer PaymentsEquals: Personal Income (PI)Less: Personal TaxesEquals: Disposable Income (DI)

$ 14,2561864

$ 12,392209105

$ 12,2881090

967315418

2528$ 12,026

1102$ 10,924

LO2 7-20

Circular Flow Revisited

LO2 7-21

Nominal vs. Real GDP

• GDP is a dollar measure of production

• Using dollar values creates problems• Nominal GDP

•Use prevailing price• Real GDP

•Reflect changes in price•Use base year price

LO3 7-22

GDP Price Index

• Use price index to determine real GDP

PriceIndexIn GivenYear

= x100Price of Market Basket

In Specific Year

Price of Same BasketIn Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

LO3 7-23

GDP Price Index

• Calculating Real GDP (Base Year = Yr 1)

Year

(1)Units of Output

(2)Price of

PizzaPer Unit

(3)Price Index

(Year 1 = 100)

(4) Unadjusted, or Nominal,

GDP(1) X (2)

(5)Adjusted,

or 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 --- --- ---

LO3 7-24

0

5000

10000

15000

20000

25000

30000

35000

60 65 70 75 80 85 90 95

Nominal Chained 1996 dollars

GDP per Person in the United States

www.economagic.com

The residential construction industry is in a major slump.

2005 = 100

Net Exports (NX) of the U.S. (Monthly)

-300

-200

-100

0

100

200

300

90 92 94 96 98 00 02 04 06 08 10

Quarter-to-Quarter Change of Real GDP (in billions)

Year/Quarter

Recesssions are shaded

Source: www.bea.gov

Shortcomings of GDP

• Nonmarket activities• Leisure• Improved product quality• The underground economy• GDP and the environment• Composition and distribution of the

output• Noneconomic sources of well-being

LO4 7-30

Underground Economy

LO4 7-31

Sources of BEA Data

• Consumption•Census Bureau’s Retail Trade

Survey•Census Bureau’s Survey of

Manufacturers•Census Bureau’s Service Survey• Industry Trade Sources

LO4 7-32

Sources of BEA Data

• Investment• All consumption data sources• Census Bureau’s Housing Starts Survey and Housing

Sales Survey• Retail Trade Survey• Wholesale Trade Survey• Survey of Manufacturing

LO4 7-33

Sources of BEA Data

• Government Purchases•Office of Personnel Management•Construction Surveys•Census Bureau’s Survey of

Government Finance• Net Exports

•U.S. Customs Service•BEA Surveys and Analysis

LO4 7-34