macro economics chapter 5
MEASURING U.S. GDP ~Disposable Personal Income
~Disposable Personal Income Consumption expenditure is one of the largest components of aggregate expenditure and one of the main influences on it is disposable personal income. ~Disposable personal income: is the income received by households minus personal income taxes paid.
MEASURING U.S. GDP
~Income includes net profit, so the income approach gives a net measure. ~Expenditure includes investment. Because some new capital is purchased to replace depreciated capital, the expenditure approach gives a gross measure. ~To get gross domestic product from the income approach, we must add depreciation to total income. ~After making these two adjustments the income approach almost gives the same estimate of GDP as the expenditure approach.
THE USE AND LIMITATIONS OF REAL GDP
~Standard of Living Among Countries To compare living standards across countries, we must convert real GDP into a common currency and common set of prices, called purchasing power parity. ~Goods and Services Omitted from GDP Household production Underground production Leisure time Environment quality
GDP, INCOME, AND EXPENDITURE
~Where Produced Within a country ~When Produced During a given time period.
GDP, INCOME, AND EXPENDITURE
-Exports of goods and services are the items that firms in the United States produce and sell to the rest of the world. -Imports of goods and services are the items that households, firms, and governments in the United States buy from the rest of the world.
GDP, INCOME, AND EXPENDITURE
-Government expenditure on goods and services: is the expenditure by all levels of government on goods and services. -Net exports of goods and services is the value of exports of goods and services minus the value of imports of goods and services.
GDP, INCOME, AND EXPENDITURE
Circular Flows in the U.S. Economy -Consumption expenditure: is the expenditure by households on consumption goods and services. Investment: is the purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories.
GDP, INCOME, AND EXPENDITURE
Expenditure Equals Income Because firms pay out everything they receive as incomes to the factors of production, total expenditure equals total income. That is: Y = C + I + G + NX The value of production equals income equals expenditure
MEASURING U.S. GDP
Expenditures Not in GDP -Used Goods Expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods. -Financial Assets When households buy financial assets such as bonds and stocks, they are making loans, not buying goods and services.
MEASURING U.S. GDP
From Net to Gross:: The income approach measures net product. The expenditure approach measures gross product. Gross profit is a firm's profit before subtracting the depreciation of capital. Net profit is a firm's profit after subtracting the depreciation of capital. Depreciation: is the decrease in the value of capital that results from its use and from obsolescence.
GDP, INCOME, AND EXPENDITURE
GDP Defined: Gross domestic product or GDP The market value of all the final goods and services produced within a country in a given time period. Value Produced -Use market prices to value production.
MEASURING U.S. GDP GDP and Related Measures of Production and Income
GDP and Related Measures of Production and Income Gross national product or GNP is the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by residents of the country. U.S. GNP = U.S. GDP + Net factor income from abroad
THE USE AND LIMITATIONS OF REAL GDP
Household Production -Real GDP omits household production and it underestimates the value of the production of many people, most of them women. Underground Production: -Economic activity hidden from government to avoid taxes and regulations or production that is illegal. -Because underground economic activity is unreported, it is omitted from GDP.
GDP, INCOME, AND EXPENDITURE
Income Labor earns wages. Capital earns interest. Land earns rent. Entrepreneurship earns profits. Households receive these incomes.
MEASURING U.S. GDP
Interest, Rent, and Profit income Interest, rent, and profit income, called "net operating surplus" in the national account, is the sum of the incomes earned by capital, land, and entrepreneurship. ~Interest is the income households receive on loans they make minus the interest they pay on their borrowing. ~Rent includes payments for the use of land and other rented inputs. ~Profit includes the profits of corporations and small businesses.
THE USE AND LIMITATIONS OF REAL GDP
Leisure Time -Our working time is valued as part of GDP, but our leisure time is not. Environment Quality ~Pollution is not subtracted from GDP. ~We do not count the deteriorating atmosphere as a negative part of GDP. ~If our standard of living is adversely affected by pollution, our GDP measure does not show this fact.
MEASURING U.S. GDP Net domestic product at factor cost:
Net domestic product at factor cost: is the sum of wages, interest, rent, and profit. -Net domestic product at factor cost is not GDP. -We need to make two adjustments to arrive at GDP: ~One from factor cost to market prices ~One from net product to gross product
THE USE AND LIMITATIONS OF REAL GDP
Other Influences on the Standard of Living Health and Life Expectancy -Good health and a long life do not show up directly in real GDP. Political Freedom and Social Justice -A country with a large real GDP per person might have limited political freedom and social justice. -A country with a lower standard of living might be one in which everyone enjoys political freedom.
MEASURING U.S. GDP Real GDP and Nominal GDP
Real GDP: is the value of the final goods and services produced in a given year expressed in the prices of the base year. Nominal GDP: is the value of the final goods and services produced in a given year expressed in the prices of that same year. The method of calculating real GDP changed in recent years. Here we describe the essence of the calculation. The appendix gives the technical details.
MEASURING U.S. GDP Statistical Discrepancy
Statistical Discrepancy The income approach and the expenditure approach do not deliver exactly the same estimate of GDP—there is a statistical discrepancy. Statistical discrepancy: is the discrepancy between the expenditure approach and income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total.
APPENDIX: MEASURING REAL GDP
The BEA method uses the prices of both years. The three steps in the method are -Value production in the prices of adjacent years. -Find the average of the two percentage changes. -Link (chain) to the base year.
MEASURING U.S. GDP
The Expenditure Approach Measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports.
MEASURING U.S. GDP
The Income Approach Measures GDP by summing the incomes that firms pay households for the factors of production they hire. The U.S. National Income and Product Account divide incomes into two big categories: ~Wage income ~Interest, rent, and profit income
How Do We Track the Booms and Busts of Our Economy?
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee determines the dates of U.S. business cycle turning points. To identify the date of a business cycle peak, the NBER committee looks at data on industrial production, total employment, real GDP, and wholesale and retail sales. The two most reliable measures of aggregate domestic production are real GDP measured using the expenditure approach and the income approach.
MEASURING U.S. GDP From Factor Cost to Market Price
The expenditure approach values goods at market prices; the income approach values them at factor cost. Indirect taxes (such as sales taxes) make market prices exceed factor cost. Subsidies (payments by government to firms) make factor cost exceed market prices. To convert the value at factor cost to the value at market prices, we must: ~~Add indirect taxes and subtract subsidies
MEASURING U.S. GDP Calculating Real GDP
The goal of calculating real GDP is to measure the extent to which total production has increased. Real GDP removes the influence of price changes from the nominal GDP numbers. To focus on the principles and keep the numbers easy to work with, we'll calculate real GDP for an economy that produces only one consumption good, one capital good, and one government service. Again, we calculate nominal GDP by multiplying the quantity of each item produced by its price and then sum the expenditures to find nominal GDP in 2011. The increase in real GDP will tell by how much the quantity of good and services has increased.
GDP, INCOME, AND EXPENDITURE
Total expenditure is the total amount received by producers of final goods and services. Consumption expenditure: C Investment: I Government expenditure on goods and services: G Net exports: NX Total expenditure = C + I + G + NX
THE USE AND LIMITATIONS OF REAL GDP Tracking the Course of the Business Cycle
Tracking the Course of the Business Cycle Fluctuations in the pace of expansion of real GDP is called the business cycle. The business cycle is a periodic, but irregular, up- and down-movement of total production and other measures of economic activity. The four stages of a business cycle are expansion, peak, recession, and trough.
THE USE AND LIMITATIONS OF REAL GDP
Two features of our changing standard of living are: 1) The growth of potential GDP per person 2) Fluctuations of real GDP per person around potential GDP ~Potential GDP is the value of real GDP when all the economy's factors of production —labor, capital, land, and entrepreneurial ability—are fully employed.
MEASURING U.S. GDP
Wage Income Wage income, called compensation of employees in the national accounts, is the payment for labor services. It includes net wages and salaries plus fringe benefits paid by employers such health-care insurance, Social Security contributions, and pension fund contributions.
THE USE AND LIMITATIONS OF REAL GDP
We use estimates of real GDP for three main purposes: ~To compare the standard of living over time ~To track the course of the business cycle ~To compare the standard of living among countries The Standard of Living Over Time To compare living standards we calculate real GDP per person—real GDP divided by the population.
GDP, INCOME, AND EXPENDITURE
What Produced -Final good or service: is a good or service that is produced for its final user and not as a component of another good or service. -Intermediate good or service: is a good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service. GDP includes only those items that are traded in markets.
THE USE AND LIMITATIONS OF REAL GDP
When some factors of production are unemployed, real GDP is less than potential GDP. When some factors of production are over-employed and working hard, real GDP exceeds potential GDP. In the short term, real GDP fluctuates around potential GDP. To measure the trend in the standard of living, we remove the influence of short-term fluctuations and focus on potential GDP.
MEASURING U.S. GDP
interest, Rent, and Profit income Interest, rent, and profit income, called net operating surplus in the national account, is the sum of the incomes earned by capital, land, and entrepreneurship. Interest is the income households receive on loans they make minus the interest they pay on their borrowing. Rent includes payments for the use of land and other rented inputs. Profit includes the profits of corporations and small businesses.