07

Measuring Domestic Output and

National Income

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Assessing the Economy’s Performance
• National Income Accounting measures
economy’s overall performance
• Bureau of Economic Analysis compiles
National Income and Product Accounts
• Assess health of economy
• Track long run course
• Formulate policy

LO1 7-2
 Gross Domestic Product

• Measure of aggregate output

• Monetary measure
• Avoid multiple counting
• Market value final goods
• Ignore intermediate goods
• Count value added

LO1 7-3
Gross Domestic Product (GDP)

GDP is the market value of new, final

goods and services produced year within
the nation’s borders in a given time period.

GDP is our basic

measure of economic
activity
 Final versus Intermediate Goods

A final good or service is produced for a

final user and not as a component of a final
good.

Examples: Cars, pizzas, luggage

An intermediate good or service is used

as a component of a final good or service

Examples: Radiator hoses, flour, plastics.

 Gross Domestic Product
(2)
Sales Value (3)
(1) Of Materials Value
Stage of Production Or Product Added
$ 0
Firm A, sheep ranch 120 ]--------$120 (= $120 - $ 0)
Firm B, wool producer 180
Firm C, coat manufacturer 220 ]-------- 60 (= 180 - 120)
Firm D, clothing manufacturer 270
]-------- 40 (= 220 - 180)
Firm E, retail clothier 350
Total Sales Value $1140 ]-------- 50 (= 270- 220)
Value Added (total income) ]-------- 80 (= 350 – 270)

$350

LO1 7-6
To count the new
coat in GDP, we
count the final
transaction only.
Otherwise, we
would be
counting value
added twice.
 Gross Domestic Product

• Exclude financial transactions

• Public transfer payments
• Private transfer payments
• Stock (and bond) market
transactions
• Exclude second hand sales
• Sell used car to a friend

LO1 7-8
 Two Approaches to GDP
• Income approach
• Count income derived from
production
• Wages, rental income, interest
income, profit
• Expenditure approach
• Count sum of money spent buying
the final goods
• Who buys the goods?
LO2 7-9
 Two Approaches to GDP
Expenditures or Income or
Output Approach Allocations Approach
Consumption by Wages

+
Households

+
Investment by Rents
Businesses G +
+ = D= Interest
Government
Purchases P +
Profits

+
Expenditures
+
Statistical
By Foreigners Adjustments
LO2 7-10
 Expenditures Approach

• Personal consumption
expenditures (C)
• Durable consumer goods
• Nondurable consumer goods
• Consumer expenditures for
services
• Domestic plus foreign goods
produced

LO2 7-11
 Consumer Spending by Type, 2009 (in billions)

Spending in Total spending by

2009 Percent U.S. households
Category (billions) of Total in 2009 was a
Durables $1,034.4 10 $10.1
Nondurables 2,223.3 22 trillion
Services 6,835.0 68

Source: Bureau of Economic Analysis

 Expenditures Approach

• Gross private domestic investment (Ig)

• Machinery, equipment, and tools
• All construction
• Changes in inventories
• Creation of new capital assets
• Noninvestment transactions excluded

LO2 7-13
 Expenditures Approach
Gross Investment
- Depreciation
= Net Investment
Net
Investment
Gross
Investment
Depreciation

Increase
Consumption
Stock of & Government Stock of
Capital Spending Capital
January 1 Year’s GDP December 31

LO2 7-14
 Expenditures Approach
• Government purchases (G)
• Expenditures for goods and services
• Expenditures for publicly owned capital
• Excludes transfer payments
• Net exports (Xn)
• Add exported goods
• Subtract imported goods
• Xn = exports – imports
• GDP = C + Ig + G + Xn
LO2 7-15
 U.S. Economy 2009
In Billions
Receipts Allocations
Expenditures Approach Income Approach
Personal Consumption (C) $10,089 Compensation $ 7792
Gross Private Domestic Rents 268
Investment (Ig) 1628 Interest 788
Government Purchases (G) 2931 Proprietor’s Income 1041
Net Exports (Xn) -392 Corporate Profits 1309
Taxes on Production and
Imports 1090
National Income $12,288

Net Foreign Factor Income (-) 105

Statistical Discrepancy (+) 209
Consumption of Fixed
Capital (+) 1864

Gross Domestic Product $ 14,256 Gross Domestic Product $ 14,256

LO2 7-16
 Comparative GDP

LO2 7-17
 The Income Approach
• Compensation of employees
• Rents
• Interest
• Proprietor’s income
• Corporate profits
• Corporate income taxes
• Dividends
• Undistributed corporate profits
• Taxes on production and imports
LO2 7-18
 The Income Approach
• From national income to GDP
• Subtract net foreign factor income
• Statistical discrepancy
• Consumption of fixed capital
• Other national accounts
• Net domestic product (NDP)
• National income (NI)
• Personal income (PI)
• Disposable income (DI)
LO2 7-19
 U.S. Income Relationships 2009
Gross Domestic Product (GDP) $ 14,256
Less: Consumption of Fixed Capital 1864
Equals: Net Domestic Product (NDP) $ 12,392
Less: Statistical Discrepancy 209
Plus: Net Foreign Factor Income 105
Equals: National Income (NI) $ 12,288
Less: Taxes on Production and Imports 1090
Less: Social Security Contributions 967
Less: Corporate Income Taxes 315
Less: Undistributed Corporate Profits 418
Plus: Transfer Payments 2528
Equals: Personal Income (PI) $ 12,026
Less: Personal Taxes 1102
Equals: Disposable Income (DI) $ 10,924

LO2 7-20
 Circular Flow Revisited

LO2 7-21
 Nominal vs. Real GDP
• GDP is a dollar measure of
production
• Using dollar values creates problems
• Nominal GDP
• Use prevailing price
• Real GDP
• Reflect changes in price
• Use base year price
LO3 7-22
 GDP Price Index

• Use price index to determine real

GDP

Price Price of Market Basket

Index In Specific Year
In Given = Price of Same Basket
x 100
Year In Base Year

Real Nominal GDP

GDP =
Price Index (in hundredths)

LO3 7-23
 GDP Price Index

• Calculating Real GDP (Base Year = Yr 1)

(4) (5)
(2) Unadjusted, Adjusted,
(1) Price of (3) or Nominal, or
Units of Pizza Price Index GDP Real,
Year Output Per Unit (Year 1 = 100) (1) X (2) GDP
1 5 $10 100 $ 50 $50
2 7 20 200 140 70
3 8 25 250 200 80
4 10 30 --- --- ---
5 11 28 --- --- ---

LO3 7-24
 GDP per Person in the United States

35000
www.economagic.com
30000

25000

20000

15000

10000

5000

0
60 65 70 75 80 85 90 95

Nominal Chained 1996 dollars

The residential construction industry is in a
major slump.
2005 = 100
Net Exports (NX) of the U.S. (Monthly)
 Quarter-to-Quarter Change of Real GDP (in billions)
300
Recesssions are shaded
200

100

-100

-200

-300
90 92 94 96 98 00 02 04 06 08 10
Year/Quarter
Source: www.bea.gov
 Shortcomings of GDP
• Nonmarket activities
• Leisure
• Improved product quality
• The underground economy
• GDP and the environment
• Composition and distribution of the
output
• Noneconomic sources of well-being

LO4 7-30
 Underground Economy

LO4 7-31
 Sources of BEA Data
• Consumption
• Census Bureau’s Retail Trade
Survey
• Census Bureau’s Survey of
Manufacturers
• Census Bureau’s Service Survey
• Industry Trade Sources

LO4 7-32
 Sources of BEA Data
• Investment
• All consumption data sources
• Census Bureau’s Housing Starts Survey and Housing
Sales Survey
• Retail Trade Survey
• Wholesale Trade Survey
• Survey of Manufacturing

LO4 7-33
 Sources of BEA Data
• Government Purchases
• Office of Personnel Management
• Construction Surveys
• Census Bureau’s Survey of
Government Finance
• Net Exports
• U.S. Customs Service
• BEA Surveys and Analysis
LO4 7-34