Chapter 7Measuring Domestic Output and National Income

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Assessing the Economy’s Performance

• National Income Accounting measures economy’s overall performance

• Bureau of Economic Analysis compiles National Income and Product Accounts• Assess health of economy• Track long run course• Formulate policy

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Gross Domestic Product

• Measure of aggregate output• Monetary measure• Avoid multiple counting• Market value final goods• Ignore intermediate goods• Count value added

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Gross Domestic Product

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(1)Stage of Production

(2)Sales Value

Of MaterialsOr Product

$ 0

Firm A, sheep ranch 120

Firm B, wool producer 180

Firm C, coat manufacturer 220

Firm D, clothing manufacturer 270

Firm E, retail clothier 350

Total Sales Value $1140

Value Added (total income)

(3)ValueAdded

]--------$120 (= $120 - $ 0)

]-------- 60 (= 180 - 120)

]-------- 40 (= 220 - 180)

]-------- 50 (= 270- 220)

]-------- 80 (= 350 – 270)

$350

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Gross Domestic Product

• Exclude financial transactions• Public transfer payments• Private transfer payments• Stock market transactions

• Exclude second hand sales• Sell used car to a friend

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Two Approaches to GDP

• Income approach• Count income derived from production• Wages, rental income, interest income,

profit• Expenditure approach• Count sum of money spent buying the final

goods• Who buys the goods?

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GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

++

+++

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

Two Approaches to GDPExpenditures or Output

ApproachIncome or

Allocations Approach

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Expenditures Approach

• Personal consumption expenditures (C)• Durable goods• Nondurable goods• Consumer expenditures for services• Domestic plus foreign goods produced

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Expenditures Approach

• Gross private domestic investment (Ig)• Machinery, equipment, and tools• All construction• Positive and negative changes in inventories

• Creation of new capital assets• Noninvestment transactions excluded

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Expenditures Approach

January 1 Year’s GDP December 31

Consumption,government

expenditures, and net exports

Depreciation

NetInvestment

GrossInvestment

Stock ofCapital

Stock

ofCapital

Gross InvestmentDepreciationNet Investment

-=

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Expenditures Approach• Government purchases (G)• Expenditures for goods and services• Expenditures for publicly owned capital• Excludes transfer payments

• Net exports (Xn)• Add exported goods• Subtract imported goods• Xn= exports (X) – imports (M)

• GDP = C + Ig + G + Xn

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Accounting Statement for the U.S. Economy, 2012 (in

Billions)

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Comparative GDP

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The Income Approach

• Compensation of employees• Rents• Interest• Proprietor’s income• Corporate profits• Corporate income taxes• Dividends• Undistributed corporate profits

• Taxes on production and imports

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The Income Approach• From national income to GDP• Subtract net foreign factor income• Statistical discrepancy• Consumption of fixed capital

• Other national accounts• Net domestic product (NDP)• National income (NI)• Personal income (PI)• Disposable income (DI)

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U.S. Income Relationships 2012

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Circular Flow Revisited

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Nominal GDP vs. Real GDP

• GDP is a dollar measure of production• Using dollar values creates problems• Nominal GDP• Based on prices that prevailed when output

was produced• Real GDP• Reflect changes in the price level• Use base year price

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GDP Price Index

• Use price index to determine real GDP

PriceIndexIn GivenYear

= x 100Price of Market Basket

In Specific YearPrice of Same Basket

In Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

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GDP Price Index

Year

(1)Units of Output

(2)Price of

PizzaPer Unit

(3)Price Index

(Year 1 = 100)

(4) Unadjusted, or Nominal,

GDP(1) X (2)

(5)Adjusted,

or Real, GDP

1 5 $10 100 $ 50 $50

2 7 20 200 140 703 8 25 250 200 80

4 10 30 --- --- ---

5 11 28 --- --- ---

• Calculating Real GDP (Base Year = Year 1)

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Shortcomings of GDP

• Nonmarket activities• Leisure• Improved product quality• The underground economy• GDP and the environment• Composition and distribution of the output• Noneconomic sources of well-being

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Underground Economy

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Sources of BEA Data

• Consumption• Census Bureau’s Retail Trade Survey• Census Bureau’s Survey of Manufacturers• Census Bureau’s Service Survey• Industry Trade Sources

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Sources of BEA Data

• Investment• All consumption data sources• Census Bureau’s Housing Starts Survey and

Housing Sales Survey• Retail Trade Survey• Wholesale Trade Survey• Survey of Manufacturing

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Sources of BEA Data

• Government Purchases• Office of Personnel Management• Construction Surveys• Census Bureau’s Survey of Government

Finance• Net Exports• U.S. Customs Service• BEA Surveys and Analysis

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