Chapter 15Gross Domestic Product   • Key Concepts   • Summary   • Practice Quiz   • Internet Exercises       ©2000 South-W...
In this chapter, you will  learn to solve these   economic puzzles:Can one newscaster report  Why doesn’t economic  that i...
Who was Simon Kuznets?Published a report in 1934 titled National Income, 1929 -32, which explained the first national acco...
What is GrossDomestic Product?GDP is the most widely reported measure of a nation’s economic performance                  4
What does   GDP measure?The market value of all final goods and services produced in a nation during a period of time, usu...
What is Gross National   Product (GNP)?GNP measures the market value of all final goods and services produced by a nation’...
What is an advantage  of using GDP?GDP measures value using dollars, rather than a list of the number of goods and service...
Does GDP measuresecondhand transactions?No, Current GDP does not include the sale of a used car or the sale of a home cons...
What areIntermediate Goods?Goods and services used as inputs for production of final goods                    9
Does GDP count  Intermediate Goods?No, to avoid double counting, GDP only measures final goods and services               ...
What are Final Goods?  Finished goods and   services produced   for the ultimate user                    11
Does GDP measure    nonproductivefinancial transactions?No, GDP does not count purely private or public financial transact...
What is a   Transfer Payment?A government payment to individuals, not in exchange for goods or services currently produced...
Does GDP measure the   whole economy?Yes, GDP consists of many puzzle pieces to fit together, including markets for produc...
What is aCircular Flow Model?A model that show us how all the pieces of the puzzle fit together                    15
Product             markets              Basic             CircularBusinesses    Flow      Households              Model  ...
What is a Flow?A rate of change in a quantity during a given time period                  17
What is a Stock?A quantity measured at one point in time                  18
What additional sectorsdoes a complex Circular Flow Model contain?   • Financial markets   • Government   • Foreign market...
What Leakages arepresent in the more Complex Model?• Household saving• Household taxes paid• Income spent on imports      ...
What Injections arepresent in the more Complex Model?• Business spending• Government spending• Foreign spending           ...
What point is theEconomy tending toward? Where the dollar value of  leakages equals the  dollar value of injections       ...
What are the twoapproaches we use to  measure GDP?    Expenditure      Income               23
What is theExpenditure Approach?The national income accounting method that measures GDP by adding all the spending for fin...
What are the foursectors of GDP? • Consumption • Investment • Government • Foreign (X - M)                25
GDP = C + I + G + (X - M)                   26
GDP using the Expenditure Approach               1998     National Income   Percentage of        Accounts           GDP  C...
What is theIncome Approach? The method that  measures GDP by  adding all incomes                 28
What are the Income components of GDP?GDP = Compensation of employees + rents + profits + net interest + nonincome adjustm...
What areNonincome Adjustments?  • Capital consumption    allowances  • Indirect business taxes                      30
GDP using the Income Approach              1998    National Income     Percentage       Accounts          of GDPEmployee c...
What is Compensation  of Employees?  Income earned from   wages, salaries, and   certain supplements   paid to labor      ...
What is Rental Income of Persons?Rent and royalties received by property owners who permit others to use their assets     ...
What are Profits? Proprietors income Corporate profits                 34
What is Net Interest?  Interest earned from   loans to businesses                   35
What is Depreciation? An allowance for the  capital worn out  producing GDP                  36
What are Indirect   Business Taxes?Taxes levied as a percentage of the prices of goods sold and therefore become a part of...
What areShortcomings of GDP?• Nonmarket transactions• Distribution, kind, &  quality of products• Neglect of leisure time•...
What other national   accounts measureeconomic performance?• Net National Product• National Income• Personal Income• Dispo...
What is NetDomestic Product? NDP is GDP minus  depreciation of the  capital worn out in  producing output                 ...
What is  National Income?NI is the total earned by resource owners, including wages, rents, interest, and profits         ...
What is  Personal Income?PI is the total income received by households that is available for consumption, saving, and paym...
What is Disposable  Personal Income?DI is the amount of income that households have to spend or save after payment of pers...
What is Nominal GDP?The value of all final goods based on the prices existing during the time period of production        ...
What is Real GDP?The value of all final goods produced during a given time period based on the prices existing in a select...
nominal GDP x 100Real GDP =              GDP price index                        46
What is the  Chain Price Index?A measure that compares changes in the prices of all final goods during a given period to t...
Key Concepts           48
Key Concepts•   Who was Simon Kuznets?•   What is Gross Domestic Product?•   What does GDP measure?•   What is an advantag...
Key Concepts cont.•   What are the four sectors of GDP?•   What is the Income Approach?•   What are the Income components ...
Summary Key Concepts cont.•   What is Personal Income?•   What is Disposable Personal Income?•   What is Nominal GDP?•   W...
Summary          52
GDP is the most widely used measureof a nation’s economic performance. GDPis the market value of all final goodsproduced i...
GNP is the market value of finalgoods and services produced by U.S.residents, no matter where they arelocated. To reflect ...
The circular flow model is adiagram representing the flow ofproducts and resources betweenbusinesses and households inexch...
Product             markets              Basic             CircularBusinesses    Flow      Households              Model  ...
The expenditure approach sumsthe four major spending componentsof GDP: consumption, investment,government, and net exports...
The income approach sums themajor income components of GDP,consisting of compensation ofemployees, rents, profits net inte...
Net domestic product (NDP) isGDP minus depreciation                         59
National income (NI) is totalincome earned by households and iscalculated as NDP minus indirectbusiness taxes.            ...
Personal income (PI) is the totalincome received by households andis calculated as NI minus corporatetaxes and Social Secu...
Disposable personal income(DI) is personal income minuspersonal taxes. DI is the amount ofincome a household has available...
Nominal GDP measures allfinal goods and services produced ina given time period of production.                            63
Real GDP measures all finalgoods and services produced in agiven time period, valued at theprices existing in a base year....
The GDP chain price index is abroad price index used to convertnominal GDP to real GDP. The GDPchain price index measures ...
Chapter 15 Quiz   ©2000 South-Western College Publishing                                            66
1. The dollar value of all final goods and services  produced within the borders of a nation is the   a. GNP deflator.   b...
2. Based on the circular flow model, money  flows from businesses to households in   a. factor markets.   b. product marke...
3. The circular flow model does not include  which of the following?   a. The quantity of shoes in inventory on     Januar...
4. The expenditure approach measures  GDP by adding all the expenditures for  final goods made by   a. households.   b. bu...
5. GDP is a less-than-perfect measure of the  nation’s economic pulse because it   a. excludes nonmarket transactions.   b...
6. Subtracting an allowance for  depreciation of fixed capital from gross  domestic product yields   a. real GDP.   b. nom...
7. Adding all incomes earned by households  from the sale of resources yields   a. intermediate goods.   b. indirect busin...
8. Personal income equals disposable   income plus    a. personal savings.    b. transfer payments.    c. dividend payment...
9. Disposal personal income   a. is the income people spend for     personal items such as homes and cars.   b. includes t...
10. Which of the following statements is true?   a. Leakages in an economy equal savings plus taxes plus     imports.   b....
11. Gross domestic product data that reflect  actual prices as they exist in a given year  are expressed in terms of   a. ...
12. The GDP chain price index is  a. widely reported in the news.  b. broadly based.  c. adjusted for government spending....
13. Which of the following statements is true?  a. The inclusion of intermediate goods and     services in GDP calculation...
Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises           ...
END      81
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01 gdp

  1. 1. Chapter 15Gross Domestic Product • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles:Can one newscaster report Why doesn’t economic that isinclude increases in the economy grew, How the calculation ofgrowth another reports for while output affected by national spending yearwelfare, for that the the same environmental damage? Social Security, andeconomy declined, and both unemployment programs? reports be correct? 2
  3. 3. Who was Simon Kuznets?Published a report in 1934 titled National Income, 1929 -32, which explained the first national accounting system 3
  4. 4. What is GrossDomestic Product?GDP is the most widely reported measure of a nation’s economic performance 4
  5. 5. What does GDP measure?The market value of all final goods and services produced in a nation during a period of time, usually a year 5
  6. 6. What is Gross National Product (GNP)?GNP measures the market value of all final goods and services produced by a nation’s residents, no matter where they are located 6
  7. 7. What is an advantage of using GDP?GDP measures value using dollars, rather than a list of the number of goods and services 7
  8. 8. Does GDP measuresecondhand transactions?No, Current GDP does not include the sale of a used car or the sale of a home constructed some years ago 8
  9. 9. What areIntermediate Goods?Goods and services used as inputs for production of final goods 9
  10. 10. Does GDP count Intermediate Goods?No, to avoid double counting, GDP only measures final goods and services 10
  11. 11. What are Final Goods? Finished goods and services produced for the ultimate user 11
  12. 12. Does GDP measure nonproductivefinancial transactions?No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments 12
  13. 13. What is a Transfer Payment?A government payment to individuals, not in exchange for goods or services currently produced 13
  14. 14. Does GDP measure the whole economy?Yes, GDP consists of many puzzle pieces to fit together, including markets for products, resources, consumers, workers, and businesses 14
  15. 15. What is aCircular Flow Model?A model that show us how all the pieces of the puzzle fit together 15
  16. 16. Product markets Basic CircularBusinesses Flow Households Model Factor markets 16
  17. 17. What is a Flow?A rate of change in a quantity during a given time period 17
  18. 18. What is a Stock?A quantity measured at one point in time 18
  19. 19. What additional sectorsdoes a complex Circular Flow Model contain? • Financial markets • Government • Foreign markets 19
  20. 20. What Leakages arepresent in the more Complex Model?• Household saving• Household taxes paid• Income spent on imports 20
  21. 21. What Injections arepresent in the more Complex Model?• Business spending• Government spending• Foreign spending 21
  22. 22. What point is theEconomy tending toward? Where the dollar value of leakages equals the dollar value of injections 22
  23. 23. What are the twoapproaches we use to measure GDP? Expenditure Income 23
  24. 24. What is theExpenditure Approach?The national income accounting method that measures GDP by adding all the spending for final goods and services 24
  25. 25. What are the foursectors of GDP? • Consumption • Investment • Government • Foreign (X - M) 25
  26. 26. GDP = C + I + G + (X - M) 26
  27. 27. GDP using the Expenditure Approach 1998 National Income Percentage of Accounts GDP Consumption 68% Investment 15% Government 19% Exports - Imports -2% 27
  28. 28. What is theIncome Approach? The method that measures GDP by adding all incomes 28
  29. 29. What are the Income components of GDP?GDP = Compensation of employees + rents + profits + net interest + nonincome adjustments 29
  30. 30. What areNonincome Adjustments? • Capital consumption allowances • Indirect business taxes 30
  31. 31. GDP using the Income Approach 1998 National Income Percentage Accounts of GDPEmployee compensation 59%Rental income of persons 2%Profits 16%Net interest 5%Depreciation 11%Indirect business taxes 7% 31
  32. 32. What is Compensation of Employees? Income earned from wages, salaries, and certain supplements paid to labor 32
  33. 33. What is Rental Income of Persons?Rent and royalties received by property owners who permit others to use their assets 33
  34. 34. What are Profits? Proprietors income Corporate profits 34
  35. 35. What is Net Interest? Interest earned from loans to businesses 35
  36. 36. What is Depreciation? An allowance for the capital worn out producing GDP 36
  37. 37. What are Indirect Business Taxes?Taxes levied as a percentage of the prices of goods sold and therefore become a part of the revenue received by firms 37
  38. 38. What areShortcomings of GDP?• Nonmarket transactions• Distribution, kind, & quality of products• Neglect of leisure time• Underground economy• Economic bads 38
  39. 39. What other national accounts measureeconomic performance?• Net National Product• National Income• Personal Income• Disposable Personal Income• Nominal and Real GDP• GDP Chain Price Index 39
  40. 40. What is NetDomestic Product? NDP is GDP minus depreciation of the capital worn out in producing output 40
  41. 41. What is National Income?NI is the total earned by resource owners, including wages, rents, interest, and profits 41
  42. 42. What is Personal Income?PI is the total income received by households that is available for consumption, saving, and payment of personal taxes 42
  43. 43. What is Disposable Personal Income?DI is the amount of income that households have to spend or save after payment of personal taxes 43
  44. 44. What is Nominal GDP?The value of all final goods based on the prices existing during the time period of production 44
  45. 45. What is Real GDP?The value of all final goods produced during a given time period based on the prices existing in a selected base year 45
  46. 46. nominal GDP x 100Real GDP = GDP price index 46
  47. 47. What is the Chain Price Index?A measure that compares changes in the prices of all final goods during a given period to the prices of those goods in a base year 47
  48. 48. Key Concepts 48
  49. 49. Key Concepts• Who was Simon Kuznets?• What is Gross Domestic Product?• What does GDP measure?• What is an advantage of using GDP?• Does GDP measure the whole economy?• What are the two approaches we use to measur• What is the Expenditure Approach? 49
  50. 50. Key Concepts cont.• What are the four sectors of GDP?• What is the Income Approach?• What are the Income components of GDP?• What are Nonincome Adjustments?• What are Shortcomings of GDP?• What is Net Domestic Product?• What is National Income? 50
  51. 51. Summary Key Concepts cont.• What is Personal Income?• What is Disposable Personal Income?• What is Nominal GDP?• What is Real GDP?• What is the Chain Price Index? 51
  52. 52. Summary 52
  53. 53. GDP is the most widely used measureof a nation’s economic performance. GDPis the market value of all final goodsproduced in the U.S. during a period oftime regardless of who owns the factors ofproduction. Secondhand and financialtransactions are not counted in GDP. Toavoid double counting, GDP also does notinclude intermediate goods. GDP iscalculated by either the expenditureapproach or the income approach. 53
  54. 54. GNP is the market value of finalgoods and services produced by U.S.residents, no matter where they arelocated. To reflect the increasingintegration of the U.S. into the globaleconomy, the Department ofCommerce changed its emphasis toGDP in 1991. 54
  55. 55. The circular flow model is adiagram representing the flow ofproducts and resources betweenbusinesses and households inexchange for money payments.Flows must be distinguished fromstocks. Flows are measured in unitsper time period, for example, dollarsper year. Stocks are quantities thatexist at a given point in timemeasured in dollars. 55
  56. 56. Product markets Basic CircularBusinesses Flow Households Model Factor markets 56
  57. 57. The expenditure approach sumsthe four major spending componentsof GDP: consumption, investment,government, and net exports.Algebraically, GDP = C + I + G +(X-M), where X equals foreignspending for domestic exports andM equals domestic spending forforeign products. 57
  58. 58. The income approach sums themajor income components of GDP,consisting of compensation ofemployees, rents, profits net interestand nonincome expenses fordepreciation and indirect businesstaxes. Indirect business taxes arelevied as a percentage of productprices and include sales taxes,excise taxes, and customs duties. 58
  59. 59. Net domestic product (NDP) isGDP minus depreciation 59
  60. 60. National income (NI) is totalincome earned by households and iscalculated as NDP minus indirectbusiness taxes. 60
  61. 61. Personal income (PI) is the totalincome received by households andis calculated as NI minus corporatetaxes and Social Security taxes plustransfer payments, net interest, anddividends. 61
  62. 62. Disposable personal income(DI) is personal income minuspersonal taxes. DI is the amount ofincome a household has available toconsume or save. 62
  63. 63. Nominal GDP measures allfinal goods and services produced ina given time period of production. 63
  64. 64. Real GDP measures all finalgoods and services produced in agiven time period, valued at theprices existing in a base year. 64
  65. 65. The GDP chain price index is abroad price index used to convertnominal GDP to real GDP. The GDPchain price index measures changesin the prices of consumer goods,business investment, governmentspending, exports, and imports. RealGDP is computed by dividingnominal GDP for year X by year X’sGDP chain price index and thenmultiplying the result by 100. 65
  66. 66. Chapter 15 Quiz ©2000 South-Western College Publishing 66
  67. 67. 1. The dollar value of all final goods and services produced within the borders of a nation is the a. GNP deflator. b. gross national product. c. net national product. d. gross domestic product.D. GDP is the most widely reported measure of a nation’s economic performance. GDP excludes production abroad by U.S. firms. 67
  68. 68. 2. Based on the circular flow model, money flows from businesses to households in a. factor markets. b. product markets. c. neither factor nor product markets. d. both factor and product markets. A. Money flows from household to businesses in product markets. The reverse is true for factor markets. 68
  69. 69. 3. The circular flow model does not include which of the following? a. The quantity of shoes in inventory on January 1. b. The total wages paid per month. c. The percentage of profits paid out as dividends each year. d. The total profits earned per year in the U.S. economy.A. The quantity of shoes in inventory is a stock at one point in time rather than a flow over a period of time. 69
  70. 70. 4. The expenditure approach measures GDP by adding all the expenditures for final goods made by a. households. b. businesses. c. government. d. foreigners. e. all of the above.E. One method national income accountants use to calculate CDP is to add all spending for the four sectors of the economy during a period of time. 70
  71. 71. 5. GDP is a less-than-perfect measure of the nation’s economic pulse because it a. excludes nonmarket transactions. b. does not measure the quality of goods and services. c. does not report illegal transactions. d. all of the above.D. GDP only measures legal market transactions and adjustments for quality changes are very difficult or impossible. 71
  72. 72. 6. Subtracting an allowance for depreciation of fixed capital from gross domestic product yields a. real GDP. b. nominal GDP. c. national income. d. net domestic product.D. Real GDP and nominal GDP include an estimate of depreciation. National income is equal to net national product less indirect business taxes (e.g. sales taxes, federal excise taxes). 72
  73. 73. 7. Adding all incomes earned by households from the sale of resources yields a. intermediate goods. b. indirect business taxes. c. national income. d. personal income.C. Intermediate goods and indirect business taxes have nothing to do with adding incomes. Personal income is the total income received by households. For example, PI includes transfer payments and NI does not. 73
  74. 74. 8. Personal income equals disposable income plus a. personal savings. b. transfer payments. c. dividend payments. d. personal taxes.D. Disposable income is the amount of income that households actually have to spend or save after payment of personal taxes. 74
  75. 75. 9. Disposal personal income a. is the income people spend for personal items such as homes and cars. b. includes transfer payments. c. excludes transfer payments. d. includes personal taxes. B. DPI equals PI minus personal taxes. Since PI includes transfer payments, DPI also includes transfer payments. 75
  76. 76. 10. Which of the following statements is true? a. Leakages in an economy equal savings plus taxes plus imports. b. National income is total income earned by households, whereas personal income is total income received by households. c. Disposable personal income equals personal income minus personal taxes. d. The expenditures approach and the income approach yield the same GDP figure. e. all of the above are true. E. When money leaves the system, a leakage occurs. Personal income is both earned and unearned income. Disposable income is income left over after taxes. Expenditures will always equal income. 76
  77. 77. 11. Gross domestic product data that reflect actual prices as they exist in a given year are expressed in terms of a. fixed dollars. b. current dollars. c. constant dollars. d. real dollars. B. Nominal GDP is also referred to as current dollar or money GDP and is not adjusted for inflation. 77
  78. 78. 12. The GDP chain price index is a. widely reported in the news. b. broadly based. c. adjusted for government spending. d. a measure of changes in consumer prices.B. The GDP chain price index not only measures price changes of consumer goods, but also price changes of business investment, government consumption expenditures, exports and imports. 78
  79. 79. 13. Which of the following statements is true? a. The inclusion of intermediate goods and services in GDP calculations would underestimate our nation’s production level. b. The expenditures approach sums the compensation of employees, rents, profits, net interest, and non-income expenses for depreciation and indirect business taxes. c. Real GDP has been adjusted for inflation or deflation. d. Real GDP equals nominal GDP multiplied by the GDP deflator. C. The word real in front of any term means that the value has been adjusted. 79
  80. 80. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 80
  81. 81. END 81
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