Measuring Domestic Output, National Income and the Price Level

1. Measuring Domestic Output, National Income and the Price Level Time period = 1 week

2. Assessing the Economy • National income accounts serve a purpose just as income statements do for a business • Compare conditions with other countries • Provides a basis for public policies to improve economic performance

3. Gross Domestic Product (GDP) • GDP = the total market value of all final goods and services produced within a country in one year • Measured in quarters (every 3 months) • 1st = January - March • 2nd = April - June • 3rd = July – September • 4th = October - December

4. GDP • Includes only final goods = g & s that are purchased for final use by the consumer • Does not include intermediate goods = g & s that are resold or go on for further processing or manufacturing • This avoids multiple counting • Is the value of what has been produced, not what was actually sold

5. GDP Excludes Nonproduction Transactions • Existing assets or property that is sold or transferred, including used items, is NOT counted • Public or private transfer payments --public = SS or welfare payments --private = student allowance or alimony --sale of stocks and bonds --broker services rendered ARE counted

6. More Nonproduction Transactions • Secondhand sales • Unreported business activities done in cash (ie unreported tips) • Illegal activities • “Non-market” activities like volunteering or family work • US corporation’s production in overseas plants

7. 2 ways to look at GDPExpenditures Approach • GDP has 4 components GDP = C + Ig + G + Xn • C = Personal Consumption • durable & nondurable finished g & s (but not houses)

8. Expenditures Approach • Ig = Gross Private Domestic Investment (Gross Investment) • Purchases of machinery, equipment & tools • Factory equipment maintenance • All construction (including houses) • Unsold inventory of products

9. Expenditures Approach • G = Government Spending • Government purchase of resources (mainly labor) • Again, it excludes transfer payments like SS

10. Expenditures Approach • Xn = Net Exports (exports – imports) --All spending on g & s produced in the US must be included in the GDP, whether the purchase is made here or abroad --For decades, Xn has been a negative (= trade deficit)

11. Expenditures Approach • C + Ig + G + Xn = GDP

12. Income Approach • W + R + I + P + SA = GDP

13. Income Approach to GDP • Compensation of Employees (Wages) --largest part of the GDP --includes wages, salaries, fringe benefits, health care and pension plans

14. Income Approach • Rents • Tenant payments • Lease payments

15. Income Approach • Interests • Money paid by private businesses to suppliers of money capital • Includes interests households receive on savings and bond payments

16. Income Approach • Proprietor’s Income and corporate profits (Profits) • Net income of unincorporated businesses • Corporate profits: corporate income tax, dividends and undistributed corporate profits

17. Income Approach • Statistical Adjustments • Indirect business taxes • General sales tax, business property tax, license fees and custom duties • Consumption of Fixed Capital (CFC) (depreciation)

18. Statistical Adjustment continued • Net foreign factor income in US • Income of foreign nationals must be + • Income of American income earned abroad must be – • GDP measures the output of geographical US regardless of the nationality of the contributors

19. Income Approach • W + R + I + P + SA = GDP