Measuring National Output

1. Measuring National Output Chapter 5

2. Economic goals • Economic growth • Full employment • Low inflation • An economy grows because of increases in available resources and improvements in technology. • Economic growth is not smooth

3. Output • The value of goods and services produced is the single most important measure of the nation’s output.

4. Output • Output of goods and services is diverse, running the gamut • One way to measure output is to classify the goods and services produced according to who is purchasing output

5. Four Sectors of Output • Households  Consumption • Business  Investment • Government  Government • Foreign Sector  Net exports

6. Gross Domestic Output (GDP) • The market value of the final goods and services produced in the economy within some time period, usually one quarter or one year • Key terms • Market value – price paid • Final goods – goods to ultimate consumer • Intermediate goods – goods used to make other goods

7. Expenditure Approach • Method of computing GDP that sums consumption, gross investment, government purchases, and net exports. • GDP = C + I + G + NX

8. Consumption • Purchasing by households • 70% of GDP • Durable goods • Nondurable goods

9. Investment • Spending now in order to increase output or productivity later; includes spending on capital, new housing, and changes in business inventories • 16% of GDP • Purchases by firms on capital such as new factories and machines • Consumers’ purchases of new housing, a form of consumer capital • The market value of change in business inventories

10. Change in Inventories • Increase in inventories: part of firms production is not sold, economy slows down • Decrease in inventories: firm’s production falls short of sales, economy speeds up

11. Gross investment The total amount of investment Net investment Gross investment minus depreciation Depreciation Reduction in value of an asset due to its use Net investment is positive then economy growing Net investment is negative then economy falling Investment

12. Government • Federal, state and local levels • 19% of GDP • Purchases goods and services • Transfer payments such as social security are not included

13. Net Exports • Exports – foreign purchase of domestic products • Imports – domestic purchases of foreign products • Net Exports = Exports minus Imports • -4.6% of GDP

14. Income Approach • Method of computing GDP that sums various forms of income Compensation of employees + Proprietor’s income + Rental income of persons + Corporate profits + Net interest + Capital consumption allowance + Indirect business taxes + Net income of foreigners

15. GDP as value added • Value added – the difference between the revenue and the cost of purchased inputs.

16. Gross National Product Differs in that the value added to production by resources located outside the US but owned by US citizens is counted in GNP GNP excludes value added within the US by foreign owned resources. Contrasting GDP to GNP

17. Underground economy Market transactions that go unreported to government Household production Environmental issues Measure of Economic Welfare - Tobin Shortcomings to GDP

18. Nominal Vs. Real GDP • GDP = P X Q • Nominal GDP – GDP that is stated without adjusting for inflation • Real GDP – the value of GDP after nominal GDP is adjusted for inflation

19. GDP Price Index • Is an index of prices that measures price changes over time, linking each year with the next. • Real GDP = Nominal GDP X 100 GDP price index

20. Nations of the world compute the value of real GDP for their economics The size of a nation’s real GDP is probably the best indicator of the size of a country’s economy Real GDP across countries

21. Business Cycle • Refers to the expansions and contractions in economic activity that take place over time. REAL GDP Peak Recession Expansion Trough Time

22. Expansion Economic growth GDP  Income (Y) , C , GDP , u Recession Contraction Sustained decrease in real GDP GDP  Income  C  GDP  U  Business Cycle

23. Peak – highest level of economic activity Full employment Potential GDP is reached Trough – lowest level of economic activity Highest level of unemployment Overall economic trend is to grow Business Cycle

24. Leading Indicators • Statistics that are expected to change direction before the economy of large does, thereby indicating where the economy is headed • Business inventories • Housing starts • Durable goods production

25. National Income Accounting GDP Less: Depreciation Net Domestic Production -indirect business taxes -business transfer payments National income – payments to owners of capital -corporate profits -net interest -social security taxes Personal income = -personal taxes Disposable income = Consumption + Savings