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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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Chapter Outline
2Measuring National Output
and National Income
Gross Domestic Product
Final Goods and Services
Exclusion of Used Goods and Paper
Transactions
Exclusion of Output Produced
Abroad by Domestically Owned
Factors of Production
Calculating GDP
The Expenditure Approach
The Income Approach
Nominal versus Real GDP
Calculating Real GDP
Calculating the GDP Deflator
The Problems of Fixed Weights
Limitations of the GDP Concept
GDP and Social Welfare
The Underground Economy
Gross National Income Per Capita
Looking Ahead
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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MEASURING NATIONAL OUTPUT
AND NATIONAL INCOME
national income and product
accounts Data collected and published
by the government describing the
various components of national income
and output in the economy.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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GROSS DOMESTIC PRODUCT
gross domestic product (GDP) The
total market value of all final goods and
services produced within a given period
by factors of production located within a
country.
GDP is the total market value of a country’s output. It is the market value of all final goods
and services produced within a given period of time by factors of production located within
a country.
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GROSS DOMESTIC PRODUCT
final goods and services Goods
and services produced for final use.
FINAL GOODS AND SERVICES
intermediate goods Goods that are
produced by one firm for use in further
processing by another firm.
value added 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.
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GROSS DOMESTIC PRODUCT
Tires taken from that pile and mounted on the wheels of the new car
before it is sold are considered intermediate goods to the auto producer.
Tires from that pile to replace tires on your old car are considered final
goods. If, in calculating GDP, we included the value of the tires (an
intermediate good) on new cars and the value of new cars (including the
tires), we would be double counting.
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GROSS DOMESTIC PRODUCT
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.
TABLE 6.1 Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED
(1) Oil drilling $ 1.00 $1.00
(2) Refining 1.30 0.30
(3) Shipping 1.60 0.30
(4) Retail sale 2.00 0.40
Total value added $2.00
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GROSS DOMESTIC PRODUCT
GDP ignores all transactions in which money or goods change hands but in which no new
goods and services are produced.
EXCLUSION OF USED GOODS AND PAPER
TRANSACTIONS
GDP is concerned only with new, or current, production.
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GROSS DOMESTIC PRODUCT
GDP is the value of output produced by factors of production located within a country.
EXCLUSION OF OUTPUT PRODUCED
ABROAD BY DOMESTICALLY OWNED
FACTORS OF PRODUCTION
gross national product (GNP) The
total market value of all final goods and
services produced within a given period
by factors of production owned by a
country’s citizens, regardless of where
the output is produced.
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CALCULATING GDP
expenditure approach A method of
computing GDP that measures the
amount spent on all final goods during a
given period.
income approach A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods.
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CALCULATING GDP
THE EXPENDITURE APPROACH
There are four main categories of expenditure:
Expenditure Categories:
■ Personal consumption expenditures (C):
household spending on consumer goods
■ Gross private domestic investment (I):
spending by firms and households on new
capital, i.e., plant, equipment, inventory, and
new residential structures
■ Government consumption and gross
investment (G)
■ Net exports (EX - IM): net spending by the
rest of the world, or exports (EX) minus
imports (IM)
GDP = C + I + G + (EX - IM)
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CALCULATING GDP
TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure
Approach
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
Personal consumption expenditures (C) 8,214.3 70.0
Durable goods 987.8 8.4
Nondurable goods 2,368.3 20.2
Services 4,858.2 41.4
Gross private domestic investment (l) 1,928.1 16.4
Nonresidential 1,198.8 10.2
Residential 673.8 5.7
Change in business inventories 55.4 0.5
Government consumption and gross
investment (G)
2,215.9 18.9
Federal 827.6 7.1
State and local 1,388.3 11.8
Net exports (EX – IM) −624.0 − 5.3
Exports (EX) 1,173.8 10.0
Imports (IM) 1,797.8 15.3
Gross domestic product (GDP) 11,734.3 100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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CALCULATING GDP
personal consumption
expenditures (C) A major
component of GDP: expenditures by
consumers on goods and services.
Personal Consumption Expenditures (C)
There are three main categories of consumer
expenditures: durable goods, nondurable goods,
and services.
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CALCULATING GDP
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 we buy that do
not involve the production of physical
things,
such as legal and medical services and
education.
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CALCULATING GDP
gross private domestic investment
(I) Total investment in capital—that is,
the purchase of new housing, plants,
equipment, and inventory by the private
(or nongovernment) sector.
Gross Private Domestic Investment (I)
nonresidential investment
Expenditures by firms for machines,
tools, plants, and so on.
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CALCULATING GDP
residential investment Expenditures
by households and firms on new houses
and apartment buildings.
change in business inventories
The amount by which firms’ inventories
change during a period. Inventories are
the goods that firms produce now but
intend to sell later.
Change in Business Inventories
GDP = final sales + change in business inventories
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CALCULATING GDP
depreciation The amount by which an
asset’s value falls in a given period.
Gross Investment versus Net Investment
gross investment The total value of
all newly produced capital goods (plant,
equipment, housing, and inventory)
produced in a given period.
net investment Gross investment
minus depreciation.
capitalend of period = capitalbeginning of period + net investment
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CALCULATING GDP
government consumption and
gross
investment (G) Expenditures by
federal, state, and local governments for
final goods and services.
Government Consumption and Gross
Investment (G)
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CALCULATING GDP
net exports (EX - IM) 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.
Net Exports (EX - IM)
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CALCULATING GDP
national income The total income
earned by the factors of production
owned by a country’s citizens.
THE INCOME APPROACH
TABLE 6.3 National Income, 2004
BILLIONS OF
DOLLARS
PERCENTAGE
OF NATIONAL INCOME
National Income 10,275.9 100.0
Compensation of employees 6,687.6 65.1
Proprietors’ income 889.6 8.7
Corporate profits 134.2 1.3
Net interest 1,161.5 11.3
Rental income 505.5 4.9
Indirect taxes minus subsidies 809.3
Net business transfer payments
Surplus of government enterprises
Source: See Table 6.2.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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CALCULATING GDP
compensation of employees
Includes wages, salaries, and various
supplements—employer contributions to
social insurance and pension funds, for
example—paid to households by firms
and by the government.
proprietors’ income The income of
unincorporated businesses.
rental income The income received
by property owners in the form of rent.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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CALCULATING GDP
corporate profits The income of
corporate businesses.
net interest The interest paid by
business.
indirect taxes minus subsidies
Taxes such as sales taxes, customs
duties, and license fees, less subsidies
that the government pays for which it
receives no goods or services in return.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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CALCULATING GDP
net business transfer payments
Net transfer payments by businesses to
others.
surplus of government enterprises
Income of government enterprises.
TABLE 6.4 GDP, GNP, NNP and National Income, 2004
DOLLARS
(BILLIONS)
GDP 11,734.3
Plus: Receipts of factor income from the rest of the world + 415.4
Less: Payments of factor income to the rest of the world − 361.7
Equals: GNP 11,788.0
Less: Depreciation − 1,435.3
Equals: Net national product (NNP) 10,352.8
Less: Statistical discrepancy − 76.9
Equals: National income 10,275.9
Source: See Table 6.2.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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CALCULATING GDP
net national product (NNP) Gross
national product minus depreciation; a
nation’s total product minus what is
required to maintain the value of its
capital stock.
TABLE 6.5 National Income, Personal Income, Disposable
Personal Income, and Personal Saving, 2004
DOLLARS
(BILLIONS)
National income 10,275.9
Less: Amount of national income not going to households − 562.6
Equals: Personal income 9,713.3
Less: Personal income taxes − 1,049.1
Equals: Disposable personal income 8,664.2
Personal consumption expenditures − 8,214.3
Personal interest payments −186.7
Transfer payments made by households −111.5
Equals: Personal saving 151.8
Personal saving as a percentage of disposable personal income: 1.8%
Source: See Table 6.2.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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CALCULATING GDP
statistical discrepancy Data
measurement error.
personal income The total income of
households before paying personal
income taxes.
disposable personal income or
after-tax income Personal income
minus personal income taxes. The
amount that households have to spend
or save.
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CALCULATING GDP
personal saving The amount of
disposable income that is left after total
personal spending in a given period.
personal saving rate 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.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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NOMINAL VERSUS REAL GDP
current dollars The current prices
that one pays for goods and services.
nominal GDP Gross domestic product
measured in current dollars.
weight The importance attached to an
item within a group of items.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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NOMINAL VERSUS REAL GDP
TABLE 6.6 A Three-Good Economy
(1) (2) (3) (4) (5) (6) (7) (8)
GDP IN GDP IN GDP IN GDP IN
YEAR 1 YEAR 2 YEAR 1 YEAR 2
IN IN IN IN
PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2
YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES
Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P2 x Q1 P2 X Q2
Good A 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40
Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00
Good C 10 12 .70 .90 7.00 8.40 9.00 10.80
Total $12.10 $15.10 $18.40 $19.20
Nominal GDP
in year 1
Nominal GDP
in year 2
CALCULATING REAL GDP
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NOMINAL VERSUS REAL GDP
base year The year chosen for the
weights in a fixed-weight procedure.
fixed-weight procedure A procedure
that uses weights from a given base
year.
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NOMINAL VERSUS REAL GDP
CALCULATING THE GDP DEFLATOR
The GDP deflator is one measure of the overall price level.
The GDP deflator is computed by the Bureau of Economic
Analysis (BEA).
Overall price increases can be sensitive to the choice of
the base year. For this reason, using fixed-price weights
to compute real GDP has some problems.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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NOMINAL VERSUS REAL GDP
THE PROBLEMS OF FIXED WEIGHTS
The use of fixed-price weights to estimate real GDP leads
to problems because it ignores:
• Structural changes in the economy.
• Supply shifts, which cause large decreases in
price and large increases in quantity supplied.
• The substitution effect of price increases.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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LIMITATIONS OF THE GDP CONCEPT
GDP AND SOCIAL WELFARE
Society is better off when crime decreases; however, a
decrease in crime is not reflected in GDP.
An increase in leisure is an increase in social welfare, but
not counted in GDP.
Nonmarket and household activities are not counted in
GDP even though they amount to real production.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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LIMITATIONS OF THE GDP CONCEPT
THE UNDERGROUND ECONOMY
underground economy The part of
the economy in which transactions take
place and in which income is generated
that is unreported and therefore not
counted in GDP.
Whenever sellers looking for a
profit come into contact with
buyers willing to pay, markets
will arise, often “underground.”
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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LIMITATIONS OF THE GDP CONCEPT
GROSS NATIONAL INCOME PER CAPITA
gross national income (GNI) GNP
converted into dollars using an average
of currency exchange rates over several
years adjusted for rates of inflation.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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LIMITATIONS OF THE GDP CONCEPT
TABLE 6.7 Per Capita Gross National Income for Selected
Countries, 2004
COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS
Norway 52,030 Portugal 14,350
Switzerland 48,230 South Korea 13,980
United States 41,400 Czech Republic 9,150
Denmark 40,650 Mexico 6,770
Japan 37,180 Argentina 3,720
Sweden 35,270 Turkey 3,750
Ireland 34,280 South Africa 3,630
United Kingdom 33,940 Brazil 3,090
Finland 32,790 Romania 2,920
Austria 32,300 Jordan 2,140
Netherlands 31,700 Colombia 2,000
Belgium 31,030 Philippines 1,170
Germany 30,120 China 1,290
France 30,090 Indonesia 1,140
Canada 28,390 India 620
Australia 26,900 Pakistan 600
Italy 26,120 Nepal 260
Spain 21,210 Rwanda 220
Greece 16,610 Ethiopia 110
Source: World Bank, 2005.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
base year
change in business inventories
compensation of employees
corporate profits
current dollars
depreciation
disposable personal income, or after-tax
income
durable goods
expenditure approach
final goods and services
fixed-weight procedure
government consumption and gross
investment (G)
gross domestic product (GDP)
gross investment
gross national income (GNI)
gross national product (GNP)
gross private domestic investment (I)
income approach
indirect taxes minus subsidies
intermediate goods
national income
national income and product accounts
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net business transfer payments
net exports (EX - IM)
net interest
net investment
net national product (NNP)
nominal GDP
nondurable goods
nonresidential investment
personal consumption expenditures (C)
personal income
personal saving
personal saving rate
proprietors’ income
rental income
residential investment
services
statistical discrepancy
surplus of government enterprises
underground economy
value added
weight
Expenditure approach to GDP: GDP = C + I + G + (EX - IM)
GDP = final sales - change in business inventories
net investment = capital end of period - capital beginning of
period
REVIEW TERMS AND CONCEPTS

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Macro gnp

  • 1. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 1 of 36 Chapter Outline 2Measuring National Output and National Income Gross Domestic Product Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output Produced Abroad by Domestically Owned Factors of Production Calculating GDP The Expenditure Approach The Income Approach Nominal versus Real GDP Calculating Real GDP Calculating the GDP Deflator The Problems of Fixed Weights Limitations of the GDP Concept GDP and Social Welfare The Underground Economy Gross National Income Per Capita Looking Ahead
  • 2. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 36 MEASURING NATIONAL OUTPUT AND NATIONAL INCOME national income and product accounts Data collected and published by the government describing the various components of national income and output in the economy.
  • 3. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 36 GROSS DOMESTIC PRODUCT gross domestic product (GDP) The total market value of all final goods and services produced within a given period by factors of production located within a country. GDP is the total market value of a country’s output. It is the market value of all final goods and services produced within a given period of time by factors of production located within a country.
  • 4. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of 36 GROSS DOMESTIC PRODUCT final goods and services Goods and services produced for final use. FINAL GOODS AND SERVICES intermediate goods Goods that are produced by one firm for use in further processing by another firm. value added 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.
  • 5. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 36 GROSS DOMESTIC PRODUCT Tires taken from that pile and mounted on the wheels of the new car before it is sold are considered intermediate goods to the auto producer. Tires from that pile to replace tires on your old car are considered final goods. If, in calculating GDP, we included the value of the tires (an intermediate good) on new cars and the value of new cars (including the tires), we would be double counting.
  • 6. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 6 of 36 GROSS DOMESTIC PRODUCT 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. TABLE 6.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED (1) Oil drilling $ 1.00 $1.00 (2) Refining 1.30 0.30 (3) Shipping 1.60 0.30 (4) Retail sale 2.00 0.40 Total value added $2.00
  • 7. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 7 of 36 GROSS DOMESTIC PRODUCT GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced. EXCLUSION OF USED GOODS AND PAPER TRANSACTIONS GDP is concerned only with new, or current, production.
  • 8. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 8 of 36 GROSS DOMESTIC PRODUCT GDP is the value of output produced by factors of production located within a country. EXCLUSION OF OUTPUT PRODUCED ABROAD BY DOMESTICALLY OWNED FACTORS OF PRODUCTION gross national product (GNP) The total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced.
  • 9. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 9 of 36 CALCULATING GDP expenditure approach A method of computing GDP that measures the amount spent on all final goods during a given period. income approach A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods.
  • 10. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 10 of 36 CALCULATING GDP THE EXPENDITURE APPROACH There are four main categories of expenditure: Expenditure Categories: ■ Personal consumption expenditures (C): household spending on consumer goods ■ Gross private domestic investment (I): spending by firms and households on new capital, i.e., plant, equipment, inventory, and new residential structures ■ Government consumption and gross investment (G) ■ Net exports (EX - IM): net spending by the rest of the world, or exports (EX) minus imports (IM) GDP = C + I + G + (EX - IM)
  • 11. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 11 of 36 CALCULATING GDP TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure Approach BILLIONS OF DOLLARS PERCENTAGE OF GDP Personal consumption expenditures (C) 8,214.3 70.0 Durable goods 987.8 8.4 Nondurable goods 2,368.3 20.2 Services 4,858.2 41.4 Gross private domestic investment (l) 1,928.1 16.4 Nonresidential 1,198.8 10.2 Residential 673.8 5.7 Change in business inventories 55.4 0.5 Government consumption and gross investment (G) 2,215.9 18.9 Federal 827.6 7.1 State and local 1,388.3 11.8 Net exports (EX – IM) −624.0 − 5.3 Exports (EX) 1,173.8 10.0 Imports (IM) 1,797.8 15.3 Gross domestic product (GDP) 11,734.3 100.0 Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.
  • 12. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 12 of 36 CALCULATING GDP personal consumption expenditures (C) A major component of GDP: expenditures by consumers on goods and services. Personal Consumption Expenditures (C) There are three main categories of consumer expenditures: durable goods, nondurable goods, and services.
  • 13. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 13 of 36 CALCULATING GDP 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 we buy that do not involve the production of physical things, such as legal and medical services and education.
  • 14. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 14 of 36 CALCULATING GDP gross private domestic investment (I) Total investment in capital—that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sector. Gross Private Domestic Investment (I) nonresidential investment Expenditures by firms for machines, tools, plants, and so on.
  • 15. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 15 of 36 CALCULATING GDP residential investment Expenditures by households and firms on new houses and apartment buildings. change in business inventories The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later. Change in Business Inventories GDP = final sales + change in business inventories
  • 16. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 16 of 36 CALCULATING GDP depreciation The amount by which an asset’s value falls in a given period. Gross Investment versus Net Investment gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. net investment Gross investment minus depreciation. capitalend of period = capitalbeginning of period + net investment
  • 17. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 17 of 36 CALCULATING GDP government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services. Government Consumption and Gross Investment (G)
  • 18. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 18 of 36 CALCULATING GDP net exports (EX - IM) 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. Net Exports (EX - IM)
  • 19. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 19 of 36 CALCULATING GDP national income The total income earned by the factors of production owned by a country’s citizens. THE INCOME APPROACH TABLE 6.3 National Income, 2004 BILLIONS OF DOLLARS PERCENTAGE OF NATIONAL INCOME National Income 10,275.9 100.0 Compensation of employees 6,687.6 65.1 Proprietors’ income 889.6 8.7 Corporate profits 134.2 1.3 Net interest 1,161.5 11.3 Rental income 505.5 4.9 Indirect taxes minus subsidies 809.3 Net business transfer payments Surplus of government enterprises Source: See Table 6.2.
  • 20. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 20 of 36 CALCULATING GDP compensation of employees Includes wages, salaries, and various supplements—employer contributions to social insurance and pension funds, for example—paid to households by firms and by the government. proprietors’ income The income of unincorporated businesses. rental income The income received by property owners in the form of rent.
  • 21. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 21 of 36 CALCULATING GDP corporate profits The income of corporate businesses. net interest The interest paid by business. indirect taxes minus subsidies Taxes such as sales taxes, customs duties, and license fees, less subsidies that the government pays for which it receives no goods or services in return.
  • 22. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 22 of 36 CALCULATING GDP net business transfer payments Net transfer payments by businesses to others. surplus of government enterprises Income of government enterprises. TABLE 6.4 GDP, GNP, NNP and National Income, 2004 DOLLARS (BILLIONS) GDP 11,734.3 Plus: Receipts of factor income from the rest of the world + 415.4 Less: Payments of factor income to the rest of the world − 361.7 Equals: GNP 11,788.0 Less: Depreciation − 1,435.3 Equals: Net national product (NNP) 10,352.8 Less: Statistical discrepancy − 76.9 Equals: National income 10,275.9 Source: See Table 6.2.
  • 23. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 23 of 36 CALCULATING GDP net national product (NNP) Gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock. TABLE 6.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2004 DOLLARS (BILLIONS) National income 10,275.9 Less: Amount of national income not going to households − 562.6 Equals: Personal income 9,713.3 Less: Personal income taxes − 1,049.1 Equals: Disposable personal income 8,664.2 Personal consumption expenditures − 8,214.3 Personal interest payments −186.7 Transfer payments made by households −111.5 Equals: Personal saving 151.8 Personal saving as a percentage of disposable personal income: 1.8% Source: See Table 6.2.
  • 24. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 24 of 36 CALCULATING GDP statistical discrepancy Data measurement error. personal income The total income of households before paying personal income taxes. disposable personal income or after-tax income Personal income minus personal income taxes. The amount that households have to spend or save.
  • 25. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 25 of 36 CALCULATING GDP personal saving The amount of disposable income that is left after total personal spending in a given period. personal saving rate 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.
  • 26. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 26 of 36 NOMINAL VERSUS REAL GDP current dollars The current prices that one pays for goods and services. nominal GDP Gross domestic product measured in current dollars. weight The importance attached to an item within a group of items.
  • 27. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 27 of 36 NOMINAL VERSUS REAL GDP TABLE 6.6 A Three-Good Economy (1) (2) (3) (4) (5) (6) (7) (8) GDP IN GDP IN GDP IN GDP IN YEAR 1 YEAR 2 YEAR 1 YEAR 2 IN IN IN IN PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2 YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P2 x Q1 P2 X Q2 Good A 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40 Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00 Good C 10 12 .70 .90 7.00 8.40 9.00 10.80 Total $12.10 $15.10 $18.40 $19.20 Nominal GDP in year 1 Nominal GDP in year 2 CALCULATING REAL GDP
  • 28. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 28 of 36 NOMINAL VERSUS REAL GDP base year The year chosen for the weights in a fixed-weight procedure. fixed-weight procedure A procedure that uses weights from a given base year.
  • 29. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 29 of 36 NOMINAL VERSUS REAL GDP CALCULATING THE GDP DEFLATOR The GDP deflator is one measure of the overall price level. The GDP deflator is computed by the Bureau of Economic Analysis (BEA). Overall price increases can be sensitive to the choice of the base year. For this reason, using fixed-price weights to compute real GDP has some problems.
  • 30. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 30 of 36 NOMINAL VERSUS REAL GDP THE PROBLEMS OF FIXED WEIGHTS The use of fixed-price weights to estimate real GDP leads to problems because it ignores: • Structural changes in the economy. • Supply shifts, which cause large decreases in price and large increases in quantity supplied. • The substitution effect of price increases.
  • 31. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 31 of 36 LIMITATIONS OF THE GDP CONCEPT GDP AND SOCIAL WELFARE Society is better off when crime decreases; however, a decrease in crime is not reflected in GDP. An increase in leisure is an increase in social welfare, but not counted in GDP. Nonmarket and household activities are not counted in GDP even though they amount to real production.
  • 32. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 32 of 36 LIMITATIONS OF THE GDP CONCEPT THE UNDERGROUND ECONOMY underground economy The part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP. Whenever sellers looking for a profit come into contact with buyers willing to pay, markets will arise, often “underground.”
  • 33. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 33 of 36 LIMITATIONS OF THE GDP CONCEPT GROSS NATIONAL INCOME PER CAPITA gross national income (GNI) GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.
  • 34. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 34 of 36 LIMITATIONS OF THE GDP CONCEPT TABLE 6.7 Per Capita Gross National Income for Selected Countries, 2004 COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS Norway 52,030 Portugal 14,350 Switzerland 48,230 South Korea 13,980 United States 41,400 Czech Republic 9,150 Denmark 40,650 Mexico 6,770 Japan 37,180 Argentina 3,720 Sweden 35,270 Turkey 3,750 Ireland 34,280 South Africa 3,630 United Kingdom 33,940 Brazil 3,090 Finland 32,790 Romania 2,920 Austria 32,300 Jordan 2,140 Netherlands 31,700 Colombia 2,000 Belgium 31,030 Philippines 1,170 Germany 30,120 China 1,290 France 30,090 Indonesia 1,140 Canada 28,390 India 620 Australia 26,900 Pakistan 600 Italy 26,120 Nepal 260 Spain 21,210 Rwanda 220 Greece 16,610 Ethiopia 110 Source: World Bank, 2005.
  • 35. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair base year change in business inventories compensation of employees corporate profits current dollars depreciation disposable personal income, or after-tax income durable goods expenditure approach final goods and services fixed-weight procedure government consumption and gross investment (G) gross domestic product (GDP) gross investment gross national income (GNI) gross national product (GNP) gross private domestic investment (I) income approach indirect taxes minus subsidies intermediate goods national income national income and product accounts 35 of 36 net business transfer payments net exports (EX - IM) net interest net investment net national product (NNP) nominal GDP nondurable goods nonresidential investment personal consumption expenditures (C) personal income personal saving personal saving rate proprietors’ income rental income residential investment services statistical discrepancy surplus of government enterprises underground economy value added weight Expenditure approach to GDP: GDP = C + I + G + (EX - IM) GDP = final sales - change in business inventories net investment = capital end of period - capital beginning of period REVIEW TERMS AND CONCEPTS