Measuring the Nation’s OutputMeasuring the Nation’s Output

Objectives: Describe methods by which the U.S. Objectives: Describe methods by which the U.S. measures domestic output, national income, and price measures domestic output, national income, and price level.level.

Identifying the contribution of final goods & services to Identifying the contribution of final goods & services to the computation of the GDP.the computation of the GDP.

Comparing data from various regions of the U.S. and Comparing data from various regions of the U.S. and other national economies.other national economies.

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

The dollar amount of all final goods and The dollar amount of all final goods and services produced within a country’s services produced within a country’s national borders in a year. national borders in a year.

Includes goods & services made within U.S. Includes goods & services made within U.S. borders.borders.

Gives us a measure of the health of our Gives us a measure of the health of our economy.economy.

National Income AccountingNational Income Accounting

A system of statistics and accounts that A system of statistics and accounts that keeps track of production, consumption, keeps track of production, consumption, saving, and investment. saving, and investment.

Used to track overall economic Used to track overall economic performance.performance.

Computing GDPComputing GDP

Multiply all of the final goods & services Multiply all of the final goods & services produced in a 12 month period by their produced in a 12 month period by their prices, and then add them up to get the total prices, and then add them up to get the total dollar value of production.dollar value of production.

See Fig. 13.1 p. 342See Fig. 13.1 p. 342

Things Not Included in GDPThings Not Included in GDP

Intermediate ProductsIntermediate Products

Products used to make other products already Products used to make other products already counted in GDP.counted in GDP.

Example: If you purchase replacement tires for Example: If you purchase replacement tires for your car, these are counted in GDP. If you your car, these are counted in GDP. If you purchase a new car, the tires are not counted purchase a new car, the tires are not counted separately because their value is built into the car.separately because their value is built into the car.

Keeps items from being count twice.Keeps items from being count twice.

Secondhand SalesSecondhand Sales

The sales of used goods. The sales of used goods.

Examples: used car, house, clothes. Examples: used car, house, clothes.

Only the original sale is included in GDPOnly the original sale is included in GDP

Nonmarket TransactionsNonmarket Transactions

Transactions that do not take place in the market. Transactions that do not take place in the market.

Difficult to measure.Difficult to measure.

Example: Value of services when you mow your Example: Value of services when you mow your own lawn or perform your own home maintenance. own lawn or perform your own home maintenance.

Counted only when they are done for pay outside Counted only when they are done for pay outside the home. the home.

Underground EconomyUnderground Economy

Unreported legal and illegal activities such Unreported legal and illegal activities such as gambling, smuggling, prostitution, drugs, as gambling, smuggling, prostitution, drugs, & counterfeiting.& counterfeiting.

Illegal and not reported in GDP.Illegal and not reported in GDP.

The Measure of National The Measure of National IncomeIncome

Objective: Describe methods by which Objective: Describe methods by which the U.S. measures domestic output, the U.S. measures domestic output, national income, and price level.national income, and price level.

National Income & Product AccountsNational Income & Product Accounts

NIPANIPA

1.1. GNPGNP

2.2. Net National Product (NNP)Net National Product (NNP)

3.3. National Income (NI)National Income (NI)

4.4. Personal Income (PI)Personal Income (PI)

5.5. Disposable Personal Income (DI)Disposable Personal Income (DI)

Gross National Product (GNP)Gross National Product (GNP) The dollar value of all final goods, services, and The dollar value of all final goods, services, and

structures produced in one year with labor and structures produced in one year with labor and property supplied by a country’s residents.property supplied by a country’s residents.

GNP measures the value of all Americans, GNP measures the value of all Americans, whether the goods and services are produced in whether the goods and services are produced in the United States or in other countries. the United States or in other countries.

To go from GDP to GNP, it is necessary to add all To go from GDP to GNP, it is necessary to add all payments that Americans receive from outside the payments that Americans receive from outside the U.S., then subtract all payments made to foreign-U.S., then subtract all payments made to foreign-owned resources in the U.S.owned resources in the U.S.

Net National ProductNet National Product

GNP less depreciation, which represents GNP less depreciation, which represents the capital equipment that has worn out or the capital equipment that has worn out or become obsolete over the year.become obsolete over the year.

Depreciation: The capital equipment that Depreciation: The capital equipment that has worn out or become obsolete over the has worn out or become obsolete over the year.year.

National IncomeNational Income

The income left after all taxes except the The income left after all taxes except the corporate profits tax are subtracted from corporate profits tax are subtracted from NNP. NNP.

Examples: excise taxes, property taxes, Examples: excise taxes, property taxes, licensing fees, customs duties, & general licensing fees, customs duties, & general sales taxes.sales taxes.

Personal IncomePersonal Income

The total amount of income going to The total amount of income going to consumers before individual income taxes consumers before individual income taxes are subtracted. are subtracted.

Disposable Personal IncomeDisposable Personal Income

The total income the consumer sector has at The total income the consumer sector has at its disposal after personal income taxes.its disposal after personal income taxes.

The Output-Expenditure The Output-Expenditure ModelModel

Objective: Describe methods by which Objective: Describe methods by which the United States measures domestic the United States measures domestic output, national income, and price output, national income, and price level.level.

Output-Expenditure ModelOutput-Expenditure Model

Is a macroeconomic model used to show Is a macroeconomic model used to show aggregate demand by the consumer, aggregate demand by the consumer, investment, government, and foreign investment, government, and foreign sectors. sectors.

GDP= C+I+G+(X-M)GDP= C+I+G+(X-M)

Consumer SectorConsumer Sector

Spends its income on the goods & services Spends its income on the goods & services used by households.used by households.

Receives its income in the form of Receives its income in the form of disposable personal income. Income left disposable personal income. Income left over after all of the depreciation, business over after all of the depreciation, business taxes, and FICA payments are made.taxes, and FICA payments are made.

Investment or Business SectorInvestment or Business Sector

Spends its income on plants, offices, equipment, Spends its income on plants, offices, equipment, inventories, & other investment goods. These inventories, & other investment goods. These expenditures represent the total value of capital expenditures represent the total value of capital goods created in the economy during the year.goods created in the economy during the year.

Made up of proprietorships, partnerships, and Made up of proprietorships, partnerships, and corporations. Responsible for bringing the factors corporations. Responsible for bringing the factors of production together to produce output.of production together to produce output.

Government SectorGovernment Sector

Spends its income on many categories, including Spends its income on many categories, including national defense, income security, interest on the national defense, income security, interest on the national debt, health care, roads, and education. national debt, health care, roads, and education.

Includes all local, state, and federal levels of Includes all local, state, and federal levels of government. Recieves its income from sources government. Recieves its income from sources such as indirect business taxes, corporate income such as indirect business taxes, corporate income taxes, Social Security contributions, and personal taxes, Social Security contributions, and personal income taxes from the consumer or household income taxes from the consumer or household sector. sector.

Foreign SectorForeign Sector

Buys many goods and services—tractors, computers, Buys many goods and services—tractors, computers, airplanes, and agricultural products—that make up GDP. airplanes, and agricultural products—that make up GDP. In treturn it supplies such products as Japanese cars, In treturn it supplies such products as Japanese cars, Korean shirts, and Brazilian shoes to be consumed at Korean shirts, and Brazilian shoes to be consumed at home. home.

Includes all consumers and producers outside the United Includes all consumers and producers outside the United States.States.

Net Exports of goods & services: difference between the Net Exports of goods & services: difference between the United State’s exports & its imports.United State’s exports & its imports.

Represents the dollar value of goods purchased from Represents the dollar value of goods purchased from abroad, (x-m)abroad, (x-m)

GDP & Changes in the Price GDP & Changes in the Price LevelLevel

Objective: Describing the function Objective: Describing the function & construction of the CPI.& construction of the CPI.

InflationInflation

A rise in the general price level. A rise in the general price level.

The dollar value of the final output of GDP The dollar value of the final output of GDP usually appears to go up without any usually appears to go up without any changes in the quantity of goods and changes in the quantity of goods and services produced.services produced.

Price IndexPrice Index A statistical series that can be used to measure changes in prices over A statistical series that can be used to measure changes in prices over

time. (compiled for a specific product or a group of products.)time. (compiled for a specific product or a group of products.)

Select a base year: a year that serves as the basis of comparison for Select a base year: a year that serves as the basis of comparison for all other years. all other years.

Select a market basket: a representative selection of commonly Select a market basket: a representative selection of commonly purchased goods and services. purchased goods and services.

Record the price of each item in the market basket.Record the price of each item in the market basket.

Total the prices. The total represents the base-year market basket Total the prices. The total represents the base-year market basket price and is assigned a value of 100%.price and is assigned a value of 100%.

See Fig. 13.5 p. 352See Fig. 13.5 p. 352

Major Price IndicesMajor Price Indices

Consumer Price Index (CPI)Consumer Price Index (CPI)

Reports on price changes for about 80,000 items in 364 Reports on price changes for about 80,000 items in 364 categories. categories.

See fig. 13.5 p. 352See fig. 13.5 p. 352

Prices for the goods & services currently sampled are Prices for the goods & services currently sampled are taken from 85 geographically distributed areas around the taken from 85 geographically distributed areas around the country & compared to their 1982-84 base-year prices. country & compared to their 1982-84 base-year prices.

Information on price changes is collected by the Bureau of Information on price changes is collected by the Bureau of Labor Statistics employees. The BLS compiles the index Labor Statistics employees. The BLS compiles the index monthly and then publishes it for the economy as a whole.monthly and then publishes it for the economy as a whole.

Producer Price IndexProducer Price Index

Measures price changes paid by domestic producers for Measures price changes paid by domestic producers for their inputs. their inputs.

Based on a sample of about 100,000 commodities & uses Based on a sample of about 100,000 commodities & uses 1982 as the base year. 1982 as the base year.

The Bureau of Labor Statistics reports the producer price The Bureau of Labor Statistics reports the producer price index every month.index every month.

Compiled for all commodities and is also broken down into Compiled for all commodities and is also broken down into subcategories including farm products, fuels, chemicals, subcategories including farm products, fuels, chemicals, rubber, pulp and paper, and processed foods.rubber, pulp and paper, and processed foods.

Implicit GDP Price DeflatorImplicit GDP Price Deflator

An index of average levels of prices for all An index of average levels of prices for all goods & services in the economy. goods & services in the economy.

Computed quarterly and has a base year of Computed quarterly and has a base year of 1996. 1996.

Good long-run indicator of the price changes Good long-run indicator of the price changes that consumers face.that consumers face.

Real Vs. Current GDPReal Vs. Current GDP

Current GDP: When GDP is not adjusted to Current GDP: When GDP is not adjusted to remove the effects of inflation.remove the effects of inflation.

Real GDP: When the distortions of inflation Real GDP: When the distortions of inflation have been removed. This measure reflects have been removed. This measure reflects what the GDP would have been if prices had what the GDP would have been if prices had not changed from what they were in the not changed from what they were in the base year.base year.

Converting GDP to Real DollarsConverting GDP to Real Dollars

Real GDP = GDP in current dollars divided by implicit GDP Real GDP = GDP in current dollars divided by implicit GDP price deflator X 100price deflator X 100

Example: GDP estimate for the first quarter of 2003 was Example: GDP estimate for the first quarter of 2003 was $10,688.4 billion. The GDP deflator for that period was $10,688.4 billion. The GDP deflator for that period was 111.90. So, prices in 2003 were 111.90 percent higher 111.90. So, prices in 2003 were 111.90 percent higher than in 1996.than in 1996.

$10,688.4 billion divided by 111.90 X 100 = $9.551.7 billion $10,688.4 billion divided by 111.90 X 100 = $9.551.7 billion

$9.551.7 billion is the dollar value of all goods and services $9.551.7 billion is the dollar value of all goods and services produced, if measured in 1996 prices.produced, if measured in 1996 prices.