From the Expenditure From the Expenditure angle, what is the angle, what is the largestlargest component of GDP?component of GDP?

Consumption

From the Expenditure From the Expenditure angle, what is the angle, what is the smallestsmallest component of GDP?component of GDP?

Expenditure Approach to 1996 GDP ($ Billions)Expenditure Approach to 1996 GDP ($ Billions)

C = Personal Consumption Expenditure 5 5,207.6

Durable Goods 634.5

Nondurable Goods 1,534.7Services 3,038.4

I = Gross Private Domestic Investment 1,116.5

Nonresidential 781.4Residential 309.2Change in Business Inventory 25.9

G = Government Purchases 1,406.7Federal 520.0Defense 352.8Nondefense 167.3State and Local 886.7

X-M = Net Exports of Goods & Services -94.8Exports 870.9Imports (965.7)

GDP = Gross Domestic Product 7,636.0

From the Expenditure From the Expenditure angle, what is the angle, what is the smallestsmallest component of GDP?component of GDP?

Net Exports

From the Income angle, From the Income angle, what is the what is the largest & largest & smallestsmallest component of component of GDP?GDP?

1996 National Income ($ Billions)1996 National Income ($ Billions)

Compensation of Employees 4,426.9

Wages and Salaries 3,633.6 Supplements 793.3Rental Income 146.3

Corporate Profit 735.9Net Interest 425.1Proprietor’s Income 520.3

Farm 37.2 Nonfarm 483.1

National Income 6,254.5

From the Income angle, From the Income angle, what is the what is the largest & largest & smallestsmallest component of component of GDP?GDP?

Largest: Compensation of Employees.

Smallest: Rental Income.

Bringing GDP & National Income into accord:Bringing GDP & National Income into accord:

GDP = GNP

GNP - Depreciation = NNP

Net National Product

NNP - Indirect Business Taxes = National Income

+ Net Factor Payments from Abroad

Receipt of Factor Incomes from the rest of the world – Payment of Factor Incomes to the rest of the world

Reconciliation between GNP and NI:Reconciliation between GNP and NI:

Gross Domestic Product (GDP) 7,636.0

Minus Factor Payments to the rest of the world -232.6Plus Factor Payments from the rest of the world 234.3

Equals Gross National Product (GNP) 7,637.7

Minus Capital Depriciation 830.1

Equals Net National Product (NNP) 6,807.6Minus Indirect Business Taxes 553.1

Equals National Income (NI) 6,254.5

In a closed economy:

GDP – depreciation = NDP

NDP – indirect business taxes = NI

Net Domestic Product

• Sales taxes• Excise taxes• Customs duty• Property taxes• License Fees

National Income (NI) is what people earn.

Personal Income (PI) is what people receive.

PI = NI + income received but not earned

– income earned but not received

Disposable Personal Income

= PI – Direct Taxes

How Comprehensive is GDP?How Comprehensive is GDP?

Value of Housework

The Underground Economy

Leisure

Quality of Goods and Services

Costs of Environmental Damage

Use the following data to compute GDP, GNP, NNP, NI, PI and Use the following data to compute GDP, GNP, NNP, NI, PI and Personal Disposable Income.Personal Disposable Income.Personal Consumption Expenditures $800

Interest 80

Corporate Profit 120Government Purchases 300Depreciation 80

Rent 40Gross Private Domestic Investment 100Compensation of Employees 750

Exports 100Imports 60Indirect Business Taxes 70Proprietor’s Income 110Income Tax 100Income Earned but not Received 120Income Received but not Earned 140Factor Income from abroad 60Factor Incoem to the world 50

Suppose next year, the following changes in Suppose next year, the following changes in economic activity occur in the country. What economic activity occur in the country. What effect would these changes have on GDP? effect would these changes have on GDP?

Durable Goods +30

Business Inventory +10

Imports +20Income Tax +10