Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.
Value Added 1.00 $ Total value added .20 1.00 Retail sale (4) .15 .80 Shipping (3) .15 .65 Refining (2) .50 $ .50 $ Oil drilling (1) VALUE ADDED VALUE OF SALES STAGE OF PRODUCTION Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers)
GDP is the value of output produced by factors of production located within a country . Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP).
Personal consumption expenditures (C) are expenditures by consumers on the following:
Durable goods : Goods that last a relatively long time, such as cars and household appliances.
Nondurable goods : Goods that are used up fairly quickly, such as food and clothing.
Services : The things that we buy that do not involve the production of physical things, such as legal and medical services and education.
Components of GDP, 1999: The Expenditure Approach Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis. 13.4 1,244.2 Imports ( IM ) 10.6 990.2 Exports ( EX ) 2.7 254.0 Net exports (EX – IM) 11.5 1,065.8 State and local 6.1 568.6 Federal 17.6 1,634.4 Government consumption and gross investment (G) 0.5 43.3 Change in business inventories 4.3 403.8 Residential 12.9 1,203.1 Nonresidential 17.7 1,650.1 Gross private domestic investment (l) 39.4 3,661.9 Services 19.8 1,845.5 Nondurable goods 8.2 761.3 Durable goods 67.4 6,268.7 Personal consumption expenditures (C) 100.0 9,299.2 Total gross domestic product PERCENTAGE OF GDP BILLIONS OF DOLLARS Components of GDP, 1999: The Expenditure Approach
Total investment by the private sector is called gross private domestic investment . It includes the purchase of new housing, plants, equipment, and inventory by the private (or non-government) sector.
Net exports (EX – IM) is the difference between exports (sales to foreigners of U.S.-produced goods and services) and imports (U.S. purchases of goods and services from abroad). The figure can be positive or negative.
National income is the total income earned by the factors of production owned by a country’s citizens.
The income approach to GDP breaks down GDP into four components:
GDP = national income + depreciation + ( indirect taxes – subsidies ) + net factor payments to the rest of the world + other
The Income Approach 7.4 689.7 Indirect taxes minus subsidies 0.1 11.0 Net factor payments to the rest of the world 9.2 856.0 Corporate profits 5.5 507.1 Net interest 1.5 143.4 Rental income Source: See Table 17.2. 0.3 32.2 Other 12.5 1,161.0 Depreciation 7.1 663.5 Proprietors’ income 57.0 5,299.8 Compensation of employees 80.3 7,469.7 National income 100.0 9,299.2 Gross domestic product PERCENTAGE OF GDP BILLIONS OF DOLLARS Components of GDP, 1999: The Income Approach
From GDP to Disposable Income Source: See Table 17.2. 6,637.7 Equals: disposable personal income 1,152.0 Less: personal taxes 7,789.6 Equals: personal income +1,011.0 Plus: transfer payments to persons + 456.6 Plus: personal interest income received from the government and consumers 662.1 Less: social insurance payments 485.7 Less: corporate profits minus dividends 7,469.7 Equals: national income 675.5 Less: indirect taxes minus subsidies plus other 8,127.1 Equals: net national product (NNP) 1,161.0 Less: depreciation 9,288.2 Equals: GNP 316.9 Less: payments of factor income to the rest of the world + 305.9 Plus: receipts of factor income from the rest of the world 9,299.2 GDP DOLLARS (BILLIONS) GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 1999
Personal income is the total income of households. Equals (national income) minus (corporate profits minus dividends) minus (social insurance payments) plus (interest income received from the government and households).
Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes.
Disposable Personal Income and Personal Saving 194.8 Interest paid by consumers to business 6,268.7 Personal consumption expenditures Source: See Table 17.2. 2.2% Personal savings as a percentage of disposable personal income: 147.6 Equals: personal saving 26.6 Personal transfer payments to foreigners Less: 6,637.7 Disposable personal income DOLLARS (BILLIONS) Disposable Personal Income and Personal Saving, 1999
Disposable Personal Income and Personal Saving
The personal saving rate is the percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.
A weight is the importance attached to an item within a group of items.
A base year is the year chosen for the weights in a fixed-weight procedure.
A fixed-weight procedure uses weights from a given base year.
Calculating Real GDP GDP IN GDP IN GDP IN GDP IN YEAR 2 YEAR 1 YEAR 2 YEAR 1 Nominal GDP in year 2 Nominal GDP in year 1 $19.20 $18.40 $15.10 $12.10 Total 10.80 9.00 8.40 7.00 .90 .70 12 10 Good C 4.00 7.00 1.20 2.10 1.00 .30 4 7 Good B $4.40 $2.40 $5.50 $3.00 $ .40 $.50 11 6 Good A P 2 X Q 2 P 2 x Q 1 P 1 x Q 2 P 1 x Q 1 P 2 P 1 Q 2 Q 1 PRICES PRICES PRICES PRICES YEAR 2 YEAR 1 YEAR 2 YEAR 1 YEAR 2 YEAR 2 YEAR 1 YEAR 1 PRICE PER UNIT PRODUCTION IN IN IN IN (8) (7) (6) (5) (4) (3) (2) (1) A Three-Good Economy
The GDP price index is one measure of the overall price level.
The old procedure used by the Bureau of Economic Analysis (BEA) to estimate changes in the overall price level used the quantities produced in a chosen year (the base year) as weights. But overall price increases are sensitive to the choice of the base year. The new procedure, known as the chained price index, avoids the problems associated with the use of fixed weights.
Per capita GDP or GNP measures a country’s GDP or GNP divided by its population.
Per capita GDP is a better measure of well-being for the average person that its total GDP or GNP.
Per Capita GDP/GNP Source: The World Bank Atlas, 2000. 11,650 Greece 100 Ethiopia 14,080 Spain 210 Nepal 15,940 Israel 230 Rwanda 18,340 Ireland 430 India 20,020 Canada 480 Pakistan 20,250 Italy 680 Indonesia 20,300 Australia 750 China 21,400 United Kingdom 1,050 Philippines 24,110 Finland 1,390 Romania 24,760 Netherlands 1,520 Jordan 24,940 France 2,600 Colombia 25,380 Belgium 2,880 South Africa 25,620 Sweden 3,160 Turkey 25,850 Germany 3,970 Mexico 26,850 Austria 4,570 Brazil 29,340 United States 5,040 Czech Republic 32,380 Japan 7,970 South Korea 33,260 Denmark 8,970 Argentina 34,330 Norway 10,690 Portugal 40,080 Switzerland U.S. DOLLARS COUNTRY U.S. DOLLARS COUNTRY Per Capita GNP for Selected Countries, 1998