Assessing the Economys Performance National income accounting measures economy s overall performance Bureau of Economic Analysis compiles National Income and Product Accounts Assess health of economy ID: 759543
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Slide1
Chapter 7
Measuring Domestic Output and National Income
Slide2Assessing the Economy’s Performance
National income accounting measures economy’s overall performanceBureau of Economic Analysis compiles National Income and Product AccountsAssess health of economyTrack long-run courseFormulate policy
LO1
Slide3Gross Domestic Product
Measure of aggregate outputMonetary measureAvoid multiple countingMarket value final goodsIgnore intermediate goodsCount value added
LO1
Slide4Monetary Measure
LO1
Slide5Gross Domestic Product Continued
(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 wholesaler
270
Firm E, retail clothier
350
Total Sales Value
$1140
Value Added (total income)
(3)
Value
Added
]--------$120 (= $120 - $ 0)
]-------- 60 (= 180 - 120)
]-------- 40 (= 220 - 180)
]-------- 50 (= 270 - 220)
]-------- 80 (= 350 - 270)
$350
LO1
Slide6Gross Domestic Product Concluded
Exclude financial transactionsPublic transfer paymentsPrivate transfer paymentsStock market transactionsExclude second hand salesSell used car to a friend
LO1
Slide7Two Approaches to GDP
Income approachCount income derived from productionWages, rental income, interest income, profitExpenditure approachCount sum of money spent buying the final goodsWho buys the goods?
LO1
Slide8Two Approaches to GDP Cont’d
G
D
P
=
=
+
Consumption by
Households
Investment byBusinesses
GovernmentPurchases
ExpendituresBy Foreigners
+
+
+
+
+
Wages
Rents
Interest
Profits
StatisticalAdjustments
+
Expenditures or Output Approach
Income or Allocations Approach
LO1
Slide9Expenditures Approach
Personal consumption expenditures (C)Durable goodsNondurable goodsConsumer expenditures for servicesDomestic plus foreign goods produced
LO2
Slide10Expenditures Approach Continued
Gross private domestic investment (Ig)Machinery, equipment, and toolsAll constructionPositive and negative changes in inventoriesCreation of new capital assetsNoninvestment transactions excluded
LO2
Slide11Expenditures Approach: Investment
January 1
Year’
s GDP
December 31
Consumption,governmentexpenditures, and net exports
Depreciation
NetInvestment
Gross
Investment
Stock ofCapital
Stock
ofCapital
Gross Investment
Depreciation
Net Investment
-
=
LO2
Slide12Expenditures Approach Concluded
Government purchases (G)Expenditures for goods and servicesExpenditures for publicly owned capitalExcludes transfer paymentsNet exports (Xn)Add exported goodsSubtract imported goodsXn= exports (X) - imports (M)GDP = C + Ig + G + Xn
LO2
Slide13Accounting Statement for the U.S. Economy, 2015
LO2
Slide14Comparative GDP
LO2
Slide15The Income Approach
Compensation of employeesRentsInterestProprietor’s incomeCorporate profitsCorporate income taxesDividendsUndistributed corporate profitsTaxes on production and imports
LO3
Slide16The Income Approach Continued
From national income to GDPSubtract net foreign factor incomeStatistical discrepancyConsumption of fixed capitalOther national accountsNet domestic product (NDP)National income (NI)Personal income (PI)Disposable income (DI)
LO3, LO4
Slide17U.S. Income Relationships 2015
LO4
Slide18Circular Flow Revisited
LO4
Slide19Nominal GDP vs. Real GDP
GDP is a dollar measure of productionUsing dollar values creates problemsNominal GDPBased on prices that prevailed when output was producedReal GDPReflect changes in the price levelUse base year price
LO5
Slide20GDP Price Index
Use price index to determine real GDP
Price
IndexIn GivenYear
=
×
100
Price of Market Basket
in Specific Year
Price of Same Basketin Base Year
Real
GDP
=
Nominal GDP
Price Index (in hundredths)
LO5
Slide21GDP Price Index Continued
Calculating Real GDP (Base Year = Year 1)
Year(1)Units of Output(2)Price of PizzaPer Unit(3)Price Index(Year 1 = 100)(4) Unadjusted, or Nominal, GDP(1) × (2)(5)Adjusted, or Real, GDP15$10100$ 50$502720200 140703825250 2008041030---------51128---------
LO5
Slide22Real World Considerations
Slide23Shortcomings of GDP
Nonmarket activitiesLeisureImproved product qualityThe underground economyGDP and the environmentComposition and distribution of outputNoneconomic sources of well-being
LO6
Slide24Underground Economy
LO6
Slide25Gross Output
Sum ofResource ExtractionProductionDistribution Final Output (GDP)Larger than GDPBetter reflection of productive side of economy
LO6
Slide26Sources of BEA Data
Consumption
Census Bureau’s Retail Trade Survey
Census Bureau’s Survey of Manufacturers
Census Bureau’s Service Survey
Industry trade sources
Slide27Sources of BEA Data Continued
Investment
All consumption data sources
Census Bureau’s Housing Starts Survey and Housing Sales Survey
Retail Trade Survey
Wholesale Trade Survey
Survey of Manufacturing
Slide28Sources of BEA Data Concluded
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