Chapter 7: Measuring Domestic Output and National Income

government purchases

1) The third category of expenditures in the national income accounts is government purchases, officially labeled "government consumption expenditures and gross investment." The third category of expenditures in the national income accounts is government purchases government purchases (G) Def: Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services. These expenditures have three components: (1) expenditures for goods and services that government consumes in providing public services; (2) expenditures for publicly owned capital such as schools and highways, which have long lifetimes; and (3) government expenditures on R&D and other activities that increase the economy's stock of know-how. Government purchases (federal, state, and local) include all government expenditures on final goods and all direct purchases of resources, including labor. It does not include government transfer payments because, as we have seen, they merely transfer government receipts to certain households and generate no production of any sort. National income accountants use the symbol G to signify government purchases.

Shortcomings of GDP

1) nonmarket activities 2) leisure 3) improved product quality 4) the Underground Economy

GDP excludes nonproduction transcations, which include:

1) public transfer payments 2) private transfer payments 3) stock market transactions

real GDP

A GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP

taxes on production and imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price. includes: general sales taxes, excise taxes, business property taxes, license fees, and customs duties.

consumption of fixed capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation. The huge depreciation charge made against private and publicly owned capital each year is called consumption of fixed capital

compensation of employees

By far the largest share of national income—$9,655 billion in 2015—was paid as wages and salaries by business and government to their employees. That figure also includes wage and salary supplements, in particular, payments by employers into social insurance and into a variety of private pension, health, and welfare funds for workers.

nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP NOT ADJUSTED for inflation.

net private domestic investment

In contrast, net private domestic investment net private domestic investment Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year. It includes only investment in the form of added capital. The amount of capital that is used up over the course of a year is called depreciation.

Are secondhandsales apart of GDP?

No. It contributes nothing to current production and for that reason are excluded from GDP. ex: Suppose you sell your 2010 Ford Mustang to a friend; that transaction would be ignored in reckoning this year's GDP because it generates no current production. The same would be true if you sold a brand-new Mustang to a neighbor a week after you purchased it.

personal consumption expenditures

The expenditures of households for both durable and nondurable consumer goods.

expenditures approach/output approach

The method that adds all expenditures made for final goods and final services to measure the gross domestic product. Ex: 1) Consumption expenditures by households, 2) investment expenditures by businesses, 3) government purchases of goods and services 4) expenditures by foreigners

income approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic products

aggregate output

The primary measure of the economy's performance is its annual total output of goods and services.

Dividends

These are the part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They thus flow to households—the ultimate owners of all corporations

Corporate Income Taxes

These taxes are levied on corporations' profits. They flow to the government.

depreciation

To avoid understating profit and income in the year of purchase and to avoid overstating profit and income in succeeding years, the cost of such capital must be allocated over its lifetime. The amount allocated is an estimate of how much of the capital is being used up each year is called __________. Accounting for __________________ results in a more accurate statement of profit and income for the economy each year.

price index

a measure of the price of a specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year.

To determine the GDP using the expenditures, we:

add up all the spending on final goods and services that has taken place throughout the year.

Publicly owned capital, such as courthouses and bridges:

also requires a depreciation allowance in the national income accounts.

service

an (intangible) act for which a consumer, firm, or government is willing to pay. About 60 percent of personal consumption expenditures are on services. Example: the work done by lawyers, hair stylists, doctors, mechanics, and other service providers.

multiple counting

occurs when someone counts intermeditae goods, wrongly includes counting intermediate goods in the gross domestic product, counting the same good or service more than once.

Items that make up national income are:

compensation fo employees, rents, interests, proprietor's income, corporate profits, taxes on production and imports.

rent

consist of the income received by the households and businesses that supply property resources. They include the monthly payments tenants make to landlords and the lease payments corporations pay for the use of office space. The figure used in the national accounts is net rent—gross rental income minus depreciation of the rental property.

Interest

consists of the money paid by private businesses to the suppliers of loans used to purchase capital. It also includes such items as the interest households receive on savings deposits, certificates of deposit (CDs), and corporate bonds.

gross private domestic investment

expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories. Also includes: 1) All final purchases of machinery, equipment, and tools by business enterprises. 2) All construction. 3) Changes in inventories. 4) Money spent on research and development (R&D) or for the creation of new works of art, music, writing, film, and so on.

So in moving from national income to GDP, we must take out the:

income Americans gain from supplying resources abroad and add in the income that foreigners gain by supplying resources in the United States. That process provides net foreign factor income.

value added

is the market value of a firm's output less the value of the inputs the firm has bought from others.

National income accounting

measures the economy's overall performance

final goods

products that are purchased by their end users, goods tht have been purchased for final use rather than resale or further processing or manufacturing

intermediate goods

products that are purchased for resale or further processing or manufacturing

durable goods

products that have expected lives of 3 or more years. Roughly 10 percent of these personal consumption expenditures are on durable goods. Example: Automobiles, Refrigerators, and Furniture

non-durable goods

products with less than 3 years of expected life. Another 30 percent of personal consumption expenditures are on nondurable goods. Example: products with less than 3 years of expected life.

Proprietors' Income

proprietors' income, which consists of the net income of sole proprietorships, partnerships, and other unincorporated businesses; and corporate profits. Proprietors' income flows to the proprietors.

Gross/Gross Investment:

referring to all investment goods—both those that replace machinery, equipment, and buildings that were used up (worn out or made obsolete) in producing the current year's output and any net additions to the economy's stock of capital. Gross investment includes investment in replacement capital and in added capital.

Corporate profits

the earnings of a corporation. National income accountants subdivide corporate profits into three categories: corporate income taxes, dividends, and undistributed corporate profits.

national income

the total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports. National income is all the income that flows to American-supplied resources, whether here or abroad, plus taxes on production and imports.

gross domestic product (GDP)

the total value/aggregate output of all final goods and final services produced annually within the boundaries of a nation

base year

the year with which the other years are compared when an index is constructed, for example, the base year for the price index