Macroeconomics - Chapter 7: Measuring Domestic Output and National Income

Durable good

A consumer good with an expected life (use) of 3 or more years

Nondurable good

A consumer good with an expected life (use) of less than 3 years

Consumption (C)

C = Personal (non-government) consumption expenditures The expenditures of households for both durable and nondurable consumer goods • On durable goods • On nondurable goods • On services • Goods or services can be either domestic or foreign produced

What is depreciation also called?

Consumption of fixed capital

Gross output (GO)

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, GDP only accounts for the value of the final output GO is the sales revenue/sales value of materials and product

Expenditures approach (output approach)

The method that adds all expenditures made for final goods and final services to measure the gross domestic product; View GDP as the sum of all the money spent in buying it

Income Approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product; View GDP in terms of the income derived or created from producing it (earnings, allocations, or income approach)

What is a base year/period?

The reference year/point of reflection/benchmark

Computing Real GDP

Use price index to determine real GDP Price Index In Given Year = (Value of Basket In Specific Year) / (Value of Same Basket In Base Year) x 100 Real GDP = (Nominal GDP x 100) / Price Index OR Real GDP = Nominal GDP / (Price Index/100)

Depreciation

Using-up of old capital Called "consumption of fixed capital" by the government

GDP Definition (from PPT slides)

Value (PXQ) of final goods and services (final: output that does not go through any other processing; output purchased by ultimate users, bakery/bread example) • A measure of aggregate output • Measuring final output avoids double/multiple counting - It ignores intermediate goods - Sum of value added at each production stage equals value of final output

Bureau of Economic Analysis (BEA) compiles National Income and Product Accounts (NIPA):

• Assess health of economy • Track long-run course and short-term changes • Formulate policy

Chapter 7 Objectives

• Define GDP, describe how to measure it • The Expenditures Approach - focus on it • The Income Approach • Study relationships between GDP and other income concepts • Describe the GDP price index • Use the GDP price index to get real GDP from nominal GDP • Limitations of real GDP as a measure of economic well being

What does GDP exclude?

• Excludes purely financial transactions - E.g., stock and bond purchases: they are not output (they do not produce any output) • Excludes second-hand sales (no used goods!) - E.g., purchasing used car or an existing house They are not current (this year's) output Excludes foreign output by us also Domestic = within a country

What are the two approaches to GDP?

• Expenditures approach - Count sum of money spent buying the final goods - Four groups of buyers • Income approach - Count income derived from producing output - Add all wages, rental income, interest income, profits

Government purchases (G)

• Expenditures for goods and services of all levels of government: federal, state and local • Wages and salaries of government workers • Excludes transfer payments, e.g. social security checks, unemployment compensation (No transfer payments!)

Nominal and Real GDP

• From the equation Real GDP = (Nominal GDP x 100) / Price Index, we can get... Price Index = (Nominal GDP x 100) / Real GDP For the base year, price index = 100 (always!)

Nominal vs. Real GDP

• GDP is a measure of value of final output Value = PXQ • Using values inflates GDP when P increases even when Q is the same • GDP is also called Nominal GDP It uses current P (prices that prevailed when output was produced) to calculate value • Real GDP: it removes the effect of P changes from Nominal GDP • Uses base year prices

What are the 4 groups of buyers in the expenditure approach?

• Households • Businesses • Government • Foreign buyers

National Income and NDP/GDP

• NDP = GDP - Depreciation and • National income = NDP + Net foreign factor income - Statistical discrepancy • Net foreign factor income = income of U.S. workers and companies (factors of production) abroad - income or foerign factors of production in the U.S.

Other national income accounts (from PPT slides)

• National income (NI) is all income earned through the use of American-owned resources, whether located at home or abroad • Personal income (PI) is all income received by households, whether earned or not. Excludes profits not distributed to shareholders but includes transfer payments (e.g. social security) • Disposable income (DI) is all income received by households minus personal taxes • D.Income = P. Income - Personal taxes • D.Income = spent(consumed,C) + saved (S)

Net vs. Gross

• Net Investment = Gross Investment - Depreciation • NDP = GDP - Depreciation Similarly, • Gross Investment = Net Investment + Depreciation, and • GDP = NDP + Depreciation

Service

An (intangible) act or use for which a consumer, firm, or government is willing to pay

Price Index

An index number that shows how the weighted-average price of a "market basket" of goods changes over time relative to its price in a specific base year

What is the formula for calculating GDP?

GDP = C + I₉ + G + Xₙ

Real GDP

GDP adjusted for inflation; GDP in a year divided by the GDP price index for that year; the index expressed as a decimal; A GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP or Real GDP

What are the shortcomings of GDP?

GDP excludes the following: • Nonmarket but production activities: cooking, child-care by family member (snow shoveling example from online assignment) • Memo: Production = Adding Value • Market but underground (unreported) production activities ("off-the-books" or "cash-only") • Leisure; Improved product quality (the "psychic income" - that many people derive from their work • Adverse effect on the environment • Distribution of income • Noneconomic sources of well-being

Last Words from PPT Slides

GDP is more difficult to measure in the digital age How do you: • Account for the quality improvements? • Internet products that are free of charge? (Apps) Hedonic (pleasure) adjustment Dollar value on time

Nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation; A GDP based on the prices that prevailed when output was produced is called unadjusted GDP or Nominal GDP

Investment (I₉)

Gross private (non-government) domestic investment (I with subscript g) • New machinery, equipment, and tools • All new construction • Research and development (R&D) • Creation of new methods for arts, music, software • Increases/Decreases (changes) in inventories Inventories: Stock of goods waiting to be sold Capital = K = Stock of buildings and machinery

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; measures ONLY the net additions to the economy's total stock of capital

National income accounting

Measures the economy's overall performance

Net exports (NX or Xₙ)

NX = Exports - Imports

What is the formula for Net I?

Net I = Gross I - Depreciation

Intermediate goods and services

Products that are purchased for resale or further processing or manufacturing

Final goods and services

Products that have been purchased for final use (rather than for resale or further processing or manufacturing); Products purchased by their end (final) users

Value added

The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product; The market value of a firm's output less the value of the inputs the firm has bought Value added = sales revenue - intermediate goods bought

Gross Domestic Product (GDP)

This is the favored way (by BEA) to measure aggregate output The total market value of all final goods and services produced annually within the boundaries of a nation

Proprietor

Those who are not corporations, E.g. Hairdresser, landscaper

Multiple counting

Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once

aggregate output

total output This is the primary measure of an economy's performance of goods and services