This document discusses national income accounting and measuring economic output through Gross Domestic Product (GDP). It provides background on how GDP was developed by Simon Kuznets in the 1930s as a way to measure the overall health and performance of the economy. The document defines GDP as the total market value of all final goods and services produced within a country in a given year. It also outlines the different approaches to calculating GDP, including the expenditure approach which adds consumption, investment, government spending, and net exports.

1. 7 - 1
MeasuringMeasuring
DomesticDomestic
Output,Output,
and Nationaland National
IncomeIncome

2. 7 - 2
Assessing the Economy’sAssessing the Economy’s
PerformancePerformance
National Income Accounting:National Income Accounting:
•Health of the EconomyHealth of the Economy
•Comparisons Over TimeComparisons Over Time
•Formulation of Public PolicyFormulation of Public Policy

3. 7 - 3
√√ The idea was created byThe idea was created by Simon KuznetsSimon Kuznets (1901-1985)(1901-1985)
beginning in 1930 shortly after the beginning of thebeginning in 1930 shortly after the beginning of the
Great Depression.Great Depression. He received the Nobel Prize inHe received the Nobel Prize in
Economics in 1971 for his effort.Economics in 1971 for his effort.
√√ TheThe tools of collectiontools of collection of the data were developed byof the data were developed by
the team led by Dr. Kuznets.the team led by Dr. Kuznets.
√√ TheThe Bureau of Economic AnalysisBureau of Economic Analysis (part of the(part of the
Commerce Department) compiles the numbersCommerce Department) compiles the numbers
(http://www.bea.gov/).(http://www.bea.gov/).
National Income accounting:National Income accounting:
measuring overall performancemeasuring overall performance
of the economyof the economy

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GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT
Market ValueMarket Value of theof the totaltotal
goods and servicesgoods and services
producedproduced within thewithin the
boundaries of the USboundaries of the US
whetherwhether by Americans orby Americans or
foreignersforeigners in one year.in one year.
Defining…Defining…

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•• uses monetary measureuses monetary measure
√√ attach a “price tag” to productsattach a “price tag” to products
producedproduced
√√ use market value ofuse market value of FINALFINAL goodsgoods
and servicesand services
•• avoid multiple counting-avoid multiple counting-
√√ ignore transactions involvingignore transactions involving
intermediateintermediate goods.goods.
GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT

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• Excludes Non-productive Transactions
• Financial Transactions
•Public Transfer Payments
•Private Transfer Payments
•Security Transactions
• Secondhand Sales
GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT

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+
+
+
+
+
+
+
GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT
ConsumptionConsumption
by Householdsby Households
InvestmentInvestment
by Businessesby Businesses
GovernmentGovernment
PurchasesPurchases
ExpendituresExpenditures
by Foreignersby Foreigners
Expenditures ApproachExpenditures Approach Income ApproachIncome Approach
WagesWages
RentsRents
InterestInterest
ProfitsProfits
StatisticalStatistical
AdjustmentsAdjustments
= =
G
D
P

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GDP = C + G + IGDP = C + G + Igg + X+ Xnn
Consumption SpendingConsumption Spending
Government SpendingGovernment Spending
Investment SpendingInvestment Spending
Net Export SpendingNet Export Spending

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C for Consumption SpendingC for Consumption Spending
Largest portion of GDP — about 65%Largest portion of GDP — about 65%
√√ Durables consumptionDurables consumption
(more than 3 yrs use)(more than 3 yrs use)
√√ Non durable consumptionNon durable consumption
(less than 3 yrs use)(less than 3 yrs use)
√√ ServicesServices

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G for Government SpendingG for Government Spending
Federal SpendingFederal Spending
State and Local SpendingState and Local Spending

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IIgg for Investment Spendingfor Investment Spending
4. change in business4. change in business
inventoriesinventories
2. new commercial construction2. new commercial construction
3. tools and machines3. tools and machines
1. new residential construction1. new residential construction

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Net InvestmentNet Investment
Gross InvestmentGross Investment
DepreciationDepreciation——
==
Stock ofStock of
CapitalCapital
ConsumptionConsumption
andand
GovernmentGovernment
SpendingSpending
Stock ofStock of
CapitalCapital
DepreciationDepreciation
NetNet
InvestmentInvestment
January 1January 1 Year’s GDPYear’s GDP December 31December 31
IncreasedIncreased
GrossGross
InvestmentInvestment

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XXnn for Net Export Spendingfor Net Export Spending
√√ ImportsImports (goods and services from(goods and services from
other countries purchased by Americanother countries purchased by American
citizens)citizens)
√√ ExportsExports (goods and services from(goods and services from
America purchased by citizens of otherAmerica purchased by citizens of other
countries.countries.
XXnn = Exports-Imports= Exports-Imports

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0 1 2 3 4 5 6 7 8 9 100 1 2 3 4 5 6 7 8 9 10
United StatesUnited States
JapanJapan
GermanyGermany
UnitedUnited
KingdomKingdom
FranceFrance
ChinaChina
ItalyItaly
CanadaCanada
MexicoMexico
SpainSpain
BrazilBrazil
IndiaIndia
Korea, Rep.Korea, Rep.
NetherlandsNetherlands
AustraliaAustralia
GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE
Comparative GDPs in Trillions, 2001
Source: World Bank

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• Compensation of EmployeesCompensation of Employees
• RentsRents
• InterestInterest
• Proprietors’ IncomesProprietors’ Incomes
• Corporate ProfitsCorporate Profits
•Corporate Income TaxesCorporate Income Taxes
•DividendsDividends
•Undistributed Corporate ProfitsUndistributed Corporate Profits
THE INCOME APPROACHTHE INCOME APPROACH
National Income
National Income

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From National Income, subtract:From National Income, subtract:
•Indirect Business Taxes
•Consumption of Fixed Capital
(Depreciation)
•Net Foreign Factor Income
THE INCOME APPROACHTHE INCOME APPROACH
From National Income to GDPFrom National Income to GDP

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Net Domestic ProductNet Domestic Product
By subtracting DEPRECIATIONBy subtracting DEPRECIATION
or Consumption of Fixed Capitalor Consumption of Fixed Capital
from the GDP, a figure for the truefrom the GDP, a figure for the true
amount of new goods and servicesamount of new goods and services
can be determined.can be determined.

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Personal IncomePersonal Income
Subtracting losses to income (SocialSubtracting losses to income (Social
Security contribution, corporateSecurity contribution, corporate
profits and retained earnings) andprofits and retained earnings) and
adding a source of income (transferadding a source of income (transfer
payments) to the National Income, apayments) to the National Income, a
figure is determined that shows thefigure is determined that shows the
personal income available to thepersonal income available to the
nation.nation.

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Disposable IncomeDisposable Income
By subtracting from Personal Income,By subtracting from Personal Income,
the dollars lost to taxes, we have thethe dollars lost to taxes, we have the
Disposable Income.Disposable Income.
This is the “bottom” line of nationalThis is the “bottom” line of national
income accounting.income accounting.
This figure of Disposable IncomeThis figure of Disposable Income
gives us the funds available forgives us the funds available for
spending and/or saving.spending and/or saving.

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Gross Domestic ProductGross Domestic Product $10,446$10,446 (GDP)(GDP)
Consumption of fixed capitalConsumption of fixed capital -1,393-1,393
Net Domestic ProductNet Domestic Product $9,053$9,053 (NDP)(NDP)
Net foreign factor income earnedNet foreign factor income earned
in the U.S.in the U.S. - 10- 10
Indirect business taxesIndirect business taxes -695-695
National IncomeNational Income $8,348$8,348 (NI)(NI)
Social security contributionsSocial security contributions -748-748
Corporate income taxesCorporate income taxes -213-213
Undistributed corporate profitsUndistributed corporate profits -141-141
Transfer paymentsTransfer payments +1,683+1,683
Personal IncomePersonal Income $8,929$8,929 (PI)(PI)
Personal TaxesPersonal Taxes -1,113-1,113
Disposable IncomeDisposable Income $7,816$7,816 (DI)(DI)
U.S. GDP, NDP, NI, PI, & DI, 2002U.S. GDP, NDP, NI, PI, & DI, 2002

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NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP
Nominal GDPNominal GDP
…… reflects the current price levelreflects the current price level
of goods and services and ignoresof goods and services and ignores
the effect of inflation on thethe effect of inflation on the
growth of GDP.growth of GDP.
…… this measure is called Currentthis measure is called Current
Dollar GDP.Dollar GDP.

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Real GDPReal GDP
…… measures the value of goods and servicesmeasures the value of goods and services
adjusted for change in the price level. It willadjusted for change in the price level. It will
reflect the real change in output.reflect the real change in output.
…… This measure is called the Constant DollarThis measure is called the Constant Dollar
GDP.GDP.
…… indicates what the GDP would be if theindicates what the GDP would be if the
purchasing power of the dollar has not changedpurchasing power of the dollar has not changed
from what it was in a base year. Thefrom what it was in a base year. The
government currently uses 2000 as its base yeargovernment currently uses 2000 as its base year
for Real GDP measurement.for Real GDP measurement.
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

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Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when prices fall
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP
11
22
33
44
55
55
77
88
1010
1111
$ 10$ 10
2020
2525
3030
2828
100100
200200
250250
--
--
$ 50$ 50
140140
200200
--
--
$ 50$ 50
7070
8080
--
--
(2)(2)
PricePrice
PizzaPizza
Per UnitPer Unit
(1)(1)
Units ofUnits of
OutputOutput
YearYear
(3)(3)
Price IndexPrice Index
Year 1 =Year 1 =
100100
(4)(4)
Unadjusted,Unadjusted,
or Nominal,or Nominal,
GDP,GDP,
(1)x(2)(1)x(2)
(5)(5)
Adjusted,Adjusted,
Or Real,Or Real,
GDPGDP
Calculating Real GDP

24. 7 - 24
GDP Price IndexGDP Price Index
Price IndexPrice Index
in a givenin a given
yearyear
==
Price of market basketPrice of market basket
in specific yearin specific year
Price of same marketPrice of same market
basket in base yearbasket in base year
x 100x 100
Real GDPReal GDP ==
Nominal GDPNominal GDP
Price IndexPrice Index
(in hundredths)(in hundredths)
Price Index
(in hundredths)
=
Nominal GDP
Real GDP
An Alternative MethodAn Alternative Method
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

25. 7 - 25
GDP Index NumbersGDP Index Numbers
YearYear GDP IndexGDP Index
20002000 100.00100.00
20012001 102.402102.402
20022002 104.097104.097
20032003 106.003106.003
2004 Q2004 Q33 108.551108.551