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Chapter                                                                                         6Measuring National Output...
Measuring National Output                                     and National Income                                         ...
MEASURING NATIONAL OUTPUT                                AND NATIONAL INCOME                                           nat...
GROSS DOMESTIC PRODUCT                                                  gross domestic product (GDP) The                  ...
GROSS DOMESTIC PRODUCT                                 FINAL GOODS AND SERVICES                                           ...
To arrive at GDP, the Bureau of Economic                                    Analysis (BEA) counts:                        ...
To arrive at GDP, the Bureau of Economic                                    Analysis (BEA) counts:                        ...
e m c nI l a no t a N dna                                GROSS DOMESTIC PRODUCT                                Tires taken...
GROSS DOMESTIC PRODUCT                                  TABLE 6.1 Value Added in the Production of a Gallon of Gasoline   ...
GROSS DOMESTIC PRODUCT                                   EXCLUSION OF USED GOODS AND PAPER                                ...
GROSS DOMESTIC PRODUCT                                   EXCLUSION OF OUTPUT PRODUCED                                   AB...
Which of the following is counted in GDP?                                a. The output produced by U.S. citizens abroad.  ...
Which of the following is counted in GDP?                                a. The output produced by U.S. citizens abroad.  ...
CALCULATING GDP                                           expenditure approach A method of                                ...
CALCULATING GDP                                 THE EXPENDITURE APPROACH                                           There a...
CALCULATING GDP                                 TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure                   ...
For the year 2004, the percentages of C, I, G, and                                    (EX – IM) in U.S. aggregate expendit...
For the year 2004, the percentages of C, I, G, and                                    (EX – IM) in U.S. aggregate expendit...
CALCULATING GDP                                  Personal Consumption Expenditures ( C)                                   ...
CALCULATING GDP                                           durable goods Goods that last a                                 ...
The largest component of Personal Consumption                                   Expenditures (C) is:                      ...
The largest component of Personal Consumption                                   Expenditures (C) is:                      ...
CALCULATING GDP                                  Gross Private Domestic Investment ( I)                                   ...
CALCULATING GDP                                           residential investment Expenditures                             ...
CALCULATING GDP                                  Gross Investment versus Net Investment                                   ...
CALCULATING GDP                                  Government Consumption and Gross                                  Investm...
CALCULATING GDP                                  Net Exports (EX - IM)                                           net expor...
Which of the following statements about exports                                   and imports is correct?                 ...
Which of the following statements about exports                                   and imports is correct?                 ...
CALCULATING GDP                                   THE INCOME APPROACH                                                     ...
CALCULATING GDP                                           compensation of employees                                       ...
CALCULATING GDP                                           corporate profits The income of                                 ...
Which of the following statements is/are correct                                   about the components of GDP using the  ...
Which of the following statements is/are correct                                   about the components of GDP using the  ...
CALCULATING GDP                                                   net business transfer payments Net                      ...
CALCULATING GDP                                                    net national product (NNP) Gross                       ...
The difference between gross national product                                   (GNP) and net national product (NNP) is:  ...
The difference between gross national product                                   (GNP) and net national product (NNP) is:  ...
CALCULATING GDP                                           statistical discrepancy Data                                    ...
CALCULATING GDP                                           personal saving The amount of                                   ...
Fill in the blanks. Saving rates tend to ________                                      during recessionary periods and ___...
Fill in the blanks. Saving rates tend to ________                                      during recessionary periods and ___...
NOMINAL VERSUS REAL GDP                                           current dollars The current prices                      ...
NOMINAL VERSUS REAL GDP                                   CALCULATING REAL GDP                                TABLE 6.6 A ...
NOMINAL VERSUS REAL GDP                                           base year The year chosen for the                       ...
The difference between nominal GDP and real                                   GDP comes from:                             ...
The difference between nominal GDP and real                                   GDP comes from:                             ...
NOMINAL VERSUS REAL GDP                                 CALCULATING THE GDP DEFLATOR                                   The...
NOMINAL VERSUS REAL GDP                                 THE PROBLEMS OF FIXED WEIGHTS                                   Th...
LIMITATIONS OF THE GDP CONCEPT                                 GDP AND SOCIAL WELFARE                                   So...
LIMITATIONS OF THE GDP CONCEPT                                 THE UNDERGROUND ECONOMY                                    ...
Legalizing all forms of illegal activities would:                                a. Reduce both the underground economy an...
Legalizing all forms of illegal activities would:                                a. Reduce both the underground economy an...
LIMITATIONS OF THE GDP CONCEPT                                 GROSS NATIONAL INCOME PER CAPITA                           ...
LIMITATIONS OF THE GDP CONCEPT                                  TABLE 6.7 Per Capita Gross National Income for Selected   ...
REVIEW TERMS AND CONCEPTS                                base year                                         net business tr...
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  1. 1. Chapter 6Measuring National Outputand National Income Prepared by: Fernando & Yvonn Quijano © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  2. 2. Measuring National Output and National Income 6 Chapter Outline 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 e m c nI l a no t a N dna Calculating GDP The Expenditure Approach The Income Approach Nominal versus Real GDP Calculating Real GDP i Calculating the GDP Deflator The Problems of Fixed Weights Limitations of the GDP Concept GDP and Social Welfare The Underground Economy o Gross National Income Per CapitaP A HC Looking Ahead © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of
  3. 3. 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. e m c nI l a no t a N dna o iP A HC © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of
  4. 4. 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. e m c nI l a no t a N dna o i GDP is the total market value of a country’s output. It is the market value of all final goodsP A HC and services produced within a given period of time by factors of production located within a country. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of
  5. 5. GROSS DOMESTIC PRODUCT FINAL GOODS AND SERVICES final goods and services Goods and services produced for final use. intermediate goods Goods that are produced by one firm for use in further processing by another firm. e m c nI l a no t a N dna value added The difference between the value of goods as they leave a stage i of production and the cost of the goods as they entered that stage. oP A HC © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of
  6. 6. To arrive at GDP, the Bureau of Economic Analysis (BEA) counts: a. The value of total sales, including sales to suppliers and sales to consumers. b. The value of final sales. c. The value of intermediate goods and final goods. d. Value added plus the value of sales at the retail level. e m c nI l a no t a N dna e. Any of the above. o iP A HC © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 6 of
  7. 7. To arrive at GDP, the Bureau of Economic Analysis (BEA) counts: a. The value of total sales, including sales to suppliers and sales to consumers. b. The value of final sales. c. The value of intermediate goods and final goods. d. Value added plus the value of sales at the retail level. e m c nI l a no t a N dna e. Any of the above. o iP A HC © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 7 of
  8. 8. e m c nI l a no t a N dna 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 i 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. oP A HC © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 8 of
  9. 9. GROSS DOMESTIC PRODUCT 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 e m c nI l a no t a N dna Total value added $2.00 o i In calculating GDP, we can either sum up the value added at each stage of production orP A HC 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. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 9 of
  10. 10. GROSS DOMESTIC PRODUCT EXCLUSION OF USED GOODS AND PAPER TRANSACTIONS GDP is concerned only with new, or current, production. GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced. e m c nI l a no t a N dna o iP A HC 10 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  11. 11. GROSS DOMESTIC PRODUCT EXCLUSION OF OUTPUT PRODUCED ABROAD BY DOMESTICALLY OWNED FACTORS OF PRODUCTION GDP is the value of output produced by factors of production located within a country. gross national product (GNP) The total market value of all final goods and e m c nI l a no t a N dna services produced within a given period by factors of production owned by a country’s citizens, regardless of where i the output is produced. oP A HC 11 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  12. 12. Which of the following is counted in GDP? a. The output produced by U.S. citizens abroad. b. The profits earned abroad by U.S. companies. c. The output produced by foreigners working in U.S. companies abroad. d. The profits earned in the Unites States by foreign-owned companies. e m c nI l a no t a N dna o iP A HC 12 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  13. 13. Which of the following is counted in GDP? a. The output produced by U.S. citizens abroad. b. The profits earned abroad by U.S. companies. c. The output produced by foreigners working in U.S. companies abroad. d. The profits earned in the Unites States by foreign-owned companies. e m c nI l a no t a N dna o iP A HC 13 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  14. 14. 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 e m c nI l a no t a N dna income—wages, rents, interest, and profits—received by all factors of i production in producing final goods. oP A HC 14 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  15. 15. 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 e m c nI l a no t a N dna ■ Government consumption and gross investment (G) ■ Net exports (EX - IM): net spending by the i rest of the world, or exports (EX) minus imports (IM) oP A HC GDP = C + I + G + (EX - IM) 15 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  16. 16. CALCULATING GDP TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure Approach BILLIONS OF PERCENTAGE DOLLARS 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 2,215.9 18.9 e m c nI l a no t a N dna investment (G) Federal 827.6 7.1 State and local 1,388.3 11.8 Net exports (EX – IM) −624.0 − 5.3 i 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. oP A HC 16 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  17. 17. For the year 2004, the percentages of C, I, G, and (EX – IM) in U.S. aggregate expenditure were roughly as follows: a. 70%, 16%, 19%, and –5%. b. 40%, 18%, 25%, and 17%. c. 24%, 35%, 45%, and –4% d. 35%, 27%, 41%, and –3%. e m c nI l a no t a N dna o iP A HC 17 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  18. 18. For the year 2004, the percentages of C, I, G, and (EX – IM) in U.S. aggregate expenditure were roughly as follows: a. 70%, 16%, 19%, and –5%. b. 40%, 18%, 25%, and 17%. c. 24%, 35%, 45%, and –4% d. 35%, 27%, 41%, and –3%. e m c nI l a no t a N dna o iP A HC 18 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  19. 19. CALCULATING GDP Personal Consumption Expenditures ( C) personal consumption expenditures (C) A major component of GDP: expenditures by consumers on goods and services. e m c nI l a no t a N dna There are three main categories of consumer expenditures: durable goods, nondurable goods, and services. o iP A HC 19 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  20. 20. 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. e m c nI l a no t a N dna services The things we buy that do not involve the production of physical things, i such as legal and medical services and education. oP A HC 20 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  21. 21. The largest component of Personal Consumption Expenditures (C) is: a. Durable goods. b. Nondurable goods. c. Services. d. Residential Investment. e. Imports. e m c nI l a no t a N dna o iP A HC 21 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  22. 22. The largest component of Personal Consumption Expenditures (C) is: a. Durable goods. b. Nondurable goods. c. Services. d. Residential Investment. e. Imports. e m c nI l a no t a N dna o iP A HC 22 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  23. 23. CALCULATING GDP Gross Private Domestic Investment ( I) 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. e m c nI l a no t a N dna nonresidential investment Expenditures by firms for machines, i tools, plants, and so on. oP A HC 23 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  24. 24. CALCULATING GDP residential investment Expenditures by households and firms on new houses and apartment buildings. Change in Business Inventories change in business inventories The amount by which firms’ inventories e m c nI l a no t a N dna change during a period. Inventories are the goods that firms produce now but i intend to sell later. GDP = final sales + change in business inventories oP A HC 24 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  25. 25. CALCULATING GDP Gross Investment versus Net Investment depreciation The amount by which an asset’s value falls in a given period. gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) e m c nI l a no t a N dna produced in a given period. net investment Gross investment i minus depreciation. capitalend of period = capitalbeginning of period + net investment oP A HC 25 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  26. 26. CALCULATING GDP Government Consumption and Gross Investment (G) government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services. e m c nI l a no t a N dna o iP A HC 26 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  27. 27. CALCULATING GDP Net Exports (EX - IM) 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 e m c nI l a no t a N dna be positive or negative. o iP A HC 27 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  28. 28. Which of the following statements about exports and imports is correct? a. Exports must be subtracted out of GDP to obtain the correct figure. b. Imports must be subtracted out of GDP to obtain the correct figure. c. The difference between exports and imports is negative when the country is a net exporter. e m c nI l a no t a N dna d. Before 1976, the United States was generally a net importer. Only after 1976, exports began to exceed imports. o iP A HC 28 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  29. 29. Which of the following statements about exports and imports is correct? a. Exports must be subtracted out of GDP to obtain the correct figure. b. Imports must be subtracted out of GDP to obtain the correct figure. c. The difference between exports and imports is negative when the country is a net exporter. e m c nI l a no t a N dna d. Before 1976, the United States was generally a net importer. Only after 1976, exports began to exceed imports. o iP A HC 29 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  30. 30. CALCULATING GDP THE INCOME APPROACH national income The total income earned by the factors of production owned by a country’s citizens. TABLE 6.3 National Income, 2004 PERCENTAGE BILLIONS OF OF NATIONAL DOLLARS e m c nI l a no t a N dna INCOME National Income 10,275.9 100.0 Compensation of employees 6,687.6 65.1 Proprietors’ income 889.6 8.7 i 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 7.9 Net business transfer payments 91.1 0.9 oP A HC Surplus of government enterprises −3.0 −0.0 Source: See Table 6.2. 30 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  31. 31. 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. e m c nI l a no t a N dna proprietors’ income The income of unincorporated businesses. i rental income The income received by property owners in the form of rent. oP A HC 31 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  32. 32. 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 e m c nI l a no t a N dna duties, and license fees, less subsidies that the government pays for which it i receives no goods or services in return. oP A HC 32 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  33. 33. Which of the following statements is/are correct about the components of GDP using the income approach? a. Compensation of employees is the largest item in national income. b. Proprietor’s income refers to the profits earned by corporations. c. Net interest refers to interest paid by households, business firms, and the government. e m c nI l a no t a N dna d. Rental income is a major component of national income. o iP A HC 33 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  34. 34. Which of the following statements is/are correct about the components of GDP using the income approach? a. Compensation of employees is the largest item in national income. b. Proprietor’s income refers to the profits earned by corporations. c. Net interest refers to interest paid by households, business firms, and the government. e m c nI l a no t a N dna d. Rental income is a major component of national income. o iP A HC 34 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  35. 35. 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 e m c nI l a no t a N dna DOLLARS (BILLIONS) GDP 11,734.3 Plus: Receipts of factor income from the rest of the world + 415.4 i 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 o Less: Statistical discrepancy − 76.9P A HC Equals: National income 10,275.9 Source: See Table 6.2. 35 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  36. 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) e m c nI l a no t a N dna 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 i 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 o Equals: Personal saving 151.8P A HC Personal saving as a percentage of disposable personal income: 1.8% Source: See Table 6.2. 36 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  37. 37. The difference between gross national product (GNP) and net national product (NNP) is: a. Net exports. b. The surplus of government enterprises. c. Net interest. d. Depreciation. e m c nI l a no t a N dna o iP A HC 37 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  38. 38. The difference between gross national product (GNP) and net national product (NNP) is: a. Net exports. b. The surplus of government enterprises. c. Net interest. d. Depreciation. e m c nI l a no t a N dna o iP A HC 38 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  39. 39. CALCULATING GDP statistical discrepancy Data measurement error. personal income The total income of households before paying personal income taxes. e m c nI l a no t a N dna disposable personal income or after-tax income Personal income minus personal income i taxes. The amount that households have to spend or save. oP A HC 39 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  40. 40. 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, e m c nI l a no t a N dna households are spending a large amount relative to their incomes; if it is high, households are spending cautiously. o iP A HC 40 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  41. 41. Fill in the blanks. Saving rates tend to ________ during recessionary periods and ________ during boom times. a. rise; rise b. rise; fall c. fall; fall d. fall; rise e m c nI l a no t a N dna o iP A HC 41 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  42. 42. Fill in the blanks. Saving rates tend to ________ during recessionary periods and ________ during boom times. a. rise; rise b. rise; fall c. fall; fall d. fall; rise e m c nI l a no t a N dna o iP A HC 42 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  43. 43. 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. e m c nI l a no t a N dna weight The importance attached to an item within a group of items. o iP A HC 43 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  44. 44. NOMINAL VERSUS REAL GDP CALCULATING 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 Y EAR 1 Y EAR 2 Y EAR 1 Y EAR 2 IN IN IN IN PRODUCTION PRICE PER UNIT Y EAR 1 Y EAR 1 Y EAR 2 Y EAR 2 Y EAR 1 Y EAR 2 Y EAR 1 Y EAR 2 PRICES PRICES PRICES PRICES Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P2 x Q1 P2 X Q2 e m c nI l a no t a N dna 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 i Nominal GDP Nominal GDP in year 1 in year 2 oP A HC 44 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  45. 45. 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. e m c nI l a no t a N dna o iP A HC 45 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  46. 46. The difference between nominal GDP and real GDP comes from: a. Changes in the level of income. b. Changes in purchasing power of the dollar caused by changes in the exchanger rate. c. Changes in prices. d. Differences in the value of GDP depending on whether the income approach or the expenditure approach is chosen to compute e m c nI l a no t a N dna GDP. o iP A HC 46 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  47. 47. The difference between nominal GDP and real GDP comes from: a. Changes in the level of income. b. Changes in purchasing power of the dollar caused by changes in the exchanger rate. c. Changes in prices. d. Differences in the value of GDP depending on whether the income approach or the expenditure approach is chosen to compute e m c nI l a no t a N dna GDP. o iP A HC 47 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  48. 48. 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 e m c nI l a no t a N dna to compute real GDP has some problems. o iP A HC 48 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  49. 49. 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 e m c nI l a no t a N dna price and large increases in quantity supplied. • The substitution effect of price increases. o iP A HC 49 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  50. 50. 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. e m c nI l a no t a N dna Nonmarket and household activities are not counted in GDP even though they amount to real production. o iP A HC 50 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  51. 51. 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. e m c nI l a no t a N dna Whenever sellers looking for a i profit come into contact with buyers willing to pay, markets will arise, often “underground.” oP A HC 51 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  52. 52. Legalizing all forms of illegal activities would: a. Reduce both the underground economy and GDP. b. Increase both the underground economy and GDP. c. Increase the underground economy but reduce the value of GDP. d. Reduce the underground economy and increase the value of GDP. e m c nI l a no t a N dna o iP A HC 52 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  53. 53. Legalizing all forms of illegal activities would: a. Reduce both the underground economy and GDP. b. Increase both the underground economy and GDP. c. Increase the underground economy but reduce the value of GDP. d. Reduce the underground economy and increase the value of GDP. e m c nI l a no t a N dna o iP A HC 53 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  54. 54. 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. e m c nI l a no t a N dna o iP A HC 54 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  55. 55. 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 e m c nI l a no t a N dna 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 i Canada 28,390 India 620 Australia 26,900 Pakistan 600 Italy 26,120 Nepal 260 Spain 21,210 Rwanda 220 o Greece 16,610 Ethiopia 110P A HC Source: World Bank, 2005. 55 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
  56. 56. REVIEW TERMS AND CONCEPTS base year net business transfer payments change in business inventories net exports (EX - IM) compensation of employees net interest corporate profits net investment current dollars net national product (NNP) depreciation nominal GDP disposable personal income, or after-tax nondurable goods income nonresidential investment durable goods personal consumption expenditures (C) expenditure approach personal income final goods and services personal saving fixed-weight procedure personal saving rate government consumption and gross proprietors’ income e m c nI l a no t a N dna investment (G) rental income gross domestic product (GDP) residential investment gross investment services gross national income (GNI) statistical discrepancy gross national product (GNP) surplus of government enterprises i gross private domestic investment (I) underground economy income approach value added indirect taxes minus subsidies weight intermediate goods Expenditure approach to GDP: GDP = C + I + G + (EX - IM) o national income GDP = final sales - change in business inventoriesP A HC national income and product accounts net investment = capital end of period - capital beginning of period 56 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

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