chapter 8 chapter 8: measuring the economy’s performance econ 151 – principles of macroeconomics...
TRANSCRIPT
Chapter 8Chapter 8:Measuring
the Economy’s Performance
ECON 151 – PRINCIPLES OF MACROECONOMICS
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1
The Simple Circular Flow
Two observations
1. In every economic exchange, the seller receives exactly the same amount that the buyer spends.
2. Goods and services flow in one direction and money payments flow in the other.
8-2
The Simple Circular Flow (cont'd) Profits explained
Question Why is profit a cost of production?
Answer Profits are the return entrepreneurs receive
for the risk they incur when organizing productive activities.
8-3
The Simple Circular Flow (cont'd) Final Goods and Services
Goods and services that are at their final stage of production and will not be transformed into yet other goods or services
8-4
The Simple Circular Flow (cont'd)
Question Why must total income
be identical to the dollar value of total output?
Answer Every transaction
simultaneously involves an expenditure and a receipt.
8-9
National Income Accounting
National Income AccountingA measurement system used to estimate
national income and its components
Total IncomeThe yearly amount earned by the nation’s
resources (factors of production)
8-10
National Income Accounting Gross Domestic Product (GDP)
The total market value of all final goods and services produced by factors of production located within a nation’s borders
GDP measures the dollar value of final output.
GDP measures the dollar value of final goods and services produced per year by factors of production located within a nation’s borders.
8-11
National Income Accounting (cont'd) Stress on final output
What is a final good? Wheat?
Steel?
Oil?
Bread?
Automobile?
Gasoline?
8-12
National Income Accounting (cont'd) Intermediate Goods
Goods used up entirely in the production of final goods
Value AddedThe dollar value of an industry’s sales minus the
value of intermediate goods (for example, raw materials and parts) used in production
8-13
National Income Accounting Numerous transactions occur that have nothing to do with final goods
and services being produced. Exclusion of financial transactions
Securities Stocks and bonds
Government transfer payments Social Security
Unemployment compensation
Private transfer payments Individual gifts
Corporate gifts
8-15
National Income Accounting
Transfer of secondhand goods excludedWhy not count the sale of a used computer, guitar,
or snowboard as part of GDP?
Other excluded transactionsHousehold production
Legal and illegal underground transactions
8-16
National Income Accounting
GDP’s limitations
Excludes non-market production
It is not necessarily a good measure of the well-being of a nation.
GDP is not a measure of a nation’s overall welfare.
GDP is a measure of the value of production in terms of market prices, and an indicator of economic activity.
8-17
Two Main Methods of Measuring GDP Expenditure Approach
Computing GDP by adding up the dollar value at current market prices of all final goods and services
8-18
Two Main Methods of Measuring GDP (cont'd) Income Approach
Measuring GDP by adding up all components of national income, including wages, interest, rent, and profits
8-20
Two Main Methods of Measuring GDP (cont'd) Deriving GDP by the expenditure approach
Consumption Expenditure (C) Durable Consumer Goods
Life span of more than three years
Nondurable Consumer Goods Goods that are used up in three years
Services Mental or physical help
8-22
Two Main Methods of Measuring GDP (cont'd) Deriving GDP by the
expenditure approach
Gross Private Domestic Investment (I) The creation of capital goods, such as factories
and machines, that can yield production and hence consumption in the future
Also included: changes in business inventories and repairs made to machines, buildings
8-23
Two Main Methods of Measuring GDP (cont'd) Deriving GDP by the expenditure approach
Gross Private Domestic Investment (I) Producer Durables or Capital Goods
Life span of more than three years
Fixed Investment Purchases by business of newly produced producer durables or
capital goods
Inventory Investment Changes in stocks of finished goods and goods in process, as well
as changes in raw materials
8-24
Two Main Methods of Measuring GDP (cont'd) Deriving GDP by the
expenditure approach
Government Expenditures (G) State, local, and federal
Valued at cost
Net Exports (Foreign Expenditures)
8-25
Net exports (X) = Total exports – Total imports
Two Main Methods of Measuring GDP (cont'd) Presenting the expenditure approach
Where C = consumption expenditures I = investment expenditures G = government expenditures X = net exports
8-26
GDP = C + I + G + X
Two Main Methods of Measuring GDP (cont'd) Depreciation and net domestic product
Deducting for depreciation (capital consumption allowance)
Reduction in the value of capital goods over a one-year period due to physical wear and tear, and also to obsolescence
8-28
NDP = GDP – Depreciation
Two Main Methods of Measuring GDP (cont'd) NDP = GDP – Depreciation GDP = C + I + G + X NDP = C + I + G + X – Depreciation Net Investment = I – Depreciation
Domestic investment minus an estimate of the wear and tear on the existing capital stock
NDP = C + Net I + G + X
8-29
Deriving GDP by the Income Approach Gross Domestic Income (GDI)
The sum of all income—wages, interest, rent, and profits—paid to the four factors of production
Wages: salaries and labor income
Rent: farms, houses, stores
Interest: savings accounts
Profits: sole proprietorships, partnerships, corporations
8-31
Two Main Methods of Measuring GDP
Gross domestic product equals gross domestic income plus indirect business taxes and depreciation
These last items are called non-income expense items
Indirect business taxes
All business taxes except the tax on corporate profits
Include sales and business property taxes
8-32
Figure 8-3 Gross Domestic Product and Gross Domestic Income, 2007 (in billions of 2007 dollars per year)
8-33
Source: U.S. Department of Commerce. First quarter preliminary data annualized.
Figure 8-3 Gross Domestic Product and Gross Domestic Income, 2007 (in billions of 2007 dollars per year)
8-34
Other Components of National Income Accounting
National Income (NI) The total of all factor payments to resource owners
Personal Income (PI) The amount of income that households actually
receive before they pay personal income taxes
Disposable Personal Income (DPI)
Personal income after personal income taxes have been paid
8-35
Distinguishing Between Nominal
and Real Values Nominal Values
Measurements in terms of the actual market prices at which goods are sold; expressed in current dollars, also called money values
8-37
Distinguishing Between Nominal and Real Values Nominal Values
Measurements in terms of the actual market prices at which goods are sold; expressed in current dollars, also called money values
Real Values Measurements after adjustments have been made for changes in
the average of prices between years; expressed in constant dollars
Constant Dollars Dollars expressed in terms of real purchasing power
8-38
Example: Correcting GDP for Price Index Changes Correcting GDP for price index changes
Nominal (current) dollars GDP
Real (constant) dollars GDP
8-39
*Price level: measured by the GDP deflator
Real GDP = x 100Nominal GDP
Price level*
Distinguishing Between Nominal
and Real Values (cont'd) Per capita GDP
Adjusting for population growth
8-41
Per capita real GDP =Real GDP
Population
Comparing GDP Throughout the World Foreign Exchange Rate
The price of one currency in terms of another
Foreign exchange rate & comparing GDP $1.25 = 1 euro, or $1 = 0.80 euros
French per capita income = 23,168.80 euros
French per capita income in terms of dollars equals 23,168.80 euros x $1.25 = $28,961
8-43
Comparing GDPThroughout the World (cont'd) Purchasing Power Parity
Adjustments in exchange rate conversions that takes into account differences in the true cost of living across countries
8-44