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  • Apecon Ch.24 (7) National Income

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    Nak Van
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    Economics

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    Apecon Ch.24(7) National Income

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    59 Ansichten11 Seiten

    Apecon Ch.24 (7) National Income

    Hochgeladen von

    Nak Van
    Economics

    Copyright:

    © All Rights Reserved
    Als PDF herunterladen oder online auf Scribd lesen
    Markieren Sie unangemessene Inhalte
    von 11
    CHAPTER 24 Measuring Domestic Output “The subject of Chapter 24 ie national income accounting. ‘The first measure that you will leat about In the chapter is the gross domestic product (GDP), The GDP-is an important economic statistic because It provides the best estimate of the total market valuo of all final goods and services produced by our economy in one year. You vill also discover why GDP is a monetary measure that counts only the value of final goods and services and excludes nonproductive transactions such as secondhand sales. ‘National income accounting involves estimating output, co income, for the nation’s sociely as a viola, rather than for an individual business fm or family. Note that the terms ‘output and income are interchangeable because the nation’s domestic output and its income are identical. The value of the nation’s output equals the total expenditures {or this output, and these expenditures become the income ‘of those who have produced this output. Consequently, ‘there are two equally acceptable methods—expenditures (oF income—for determining GDP, From an expenditure perspective, GDP is composed ‘of four expenditure categories: personal consumption ‘expenditures (C), gross private domestic investment (I), ‘government purchases (G), and net exports (Xa). These ‘expenditures become income for people. or the govern- ment when they are paid out in the form of employee ‘compensation, rents, interest, proprietors’ Income, corpo- rate profits, and taxes on production and imports, GDP can be caloulated from national income by making adjustments, to account for net foreign factor income, a statistical dis- ‘orepancy, and depreciation. In national income aecounting, the amount spent to purchase this year's total output is ‘equal to money income derived from production of this year's output. “This chapter also explains the relationship of GDP to other natlonal Income accounts. These accounts include ‘net domestic product (NDP), national income {NI) as derived trom NOP, personal income (PN), and dispasablo jncome (DI). The relationship between GDP, NDP. NI. PI, ‘and Dlis shown in Tablo 24.4 ofthe text. The circular flow ‘using the expenditures and Income approaches to GOP are illustrated in Figure 24.3 of the tex. “The next to the last section of the chapter shows ‘you how to calculate real GDP from nominal GDP. This, ‘adjustment is important because nominal GDP-is mea- sured In monetary units, 90 if accurate comparisons are tobe made for GDP over time, these monetary measures ‘must be adjusted to take account of changos In the price level. A simple example is presented to show how a GDP. price index is constructed, The index is then-used to adjust nominal GDP to obtain real GDP and make cor- rect GDP comparisons from one year to the next. The toxt also provides data for the U. S. economy so you oan see why the calculation of real GDP is necessary ‘and how It is used. “The last section of the chapter looks at the shortcom- Ings of GOP as a measure of total output and economic welt-being. You will lam about economic factors that are excluded from GDP measurement—nonmarket or illegal transactions, changes in leisure and product quality, di {erences in the composition and distribution of cutput, and the environmental effects of GDP production—and how thelr exclusion can lead fo an under- or overstatement of economic well-being. Although national income accounts are not perfect measures of all economic conditions, they are stil reasonably accurate and useful indicators of the performance of the nafional economy. m CHECKLIST When you have studied this chapter you shoud be able to Identity three ways national income accounting can be Used for economic decision making. 1 Give @ definition of the gross domestic product (GoP). 1 Explain why GDP is a monetary measure. 1 Describe how GDP measures value added and avoids ‘multiple counting. 1D Give examples of two types of nonproduction transac- tions that aro excluded from GDP. © -Desorive the relationship between the expenditures, ‘and income approaches to GDP accounting. 1D List the three typos of expenditures Included’in per- ‘sonal consumption expenditures (C). 1D Identity three items included in gross private domestic, investment (i. Explain how postive or negative changes in invento- ‘affect investment. 1D Distinguish between gross and net investment. 17 Discuss how differences in the amount of net invest- ‘ment affect the production capacity of the economy. TH List the two components includes in goverment purchases (G). 1D Deserihe the meaning and calculation of net exports %. Compute GDP using the expenditures approach winen ‘ven national income accounting data, 297 290 CHAPTER 24 1 Hdeniy the sixincome toms that make up U. 8. national income, 1 List three things that can happen fo corporate profs. Explain why taxes on! production and imports. are included as part of national income 1 Deserts the etfect of net forsign factor income’on national ingomo aecounts, D Define consumption of fixed capital and discuss how it affects national income accounts. 7 Compute GDP using tho income approach when givon national income accounting tat. 1 Dofine net domestic product (NDP). U Show how to derive U. S. national income (N} from ‘et domaatc product (NDP). {Define personal income (Pt) in national. income ‘accounts, 1 Explain how to obtain deposable Income (0!) trom personal income (PI. Use Figure 24.3 n he tox to describe the circuler flow ‘model for GDP. Distinguish between nominal and real GDP. Construct price index when given price and quantity data 1 Obtain a price index wien given data on nominal and real GDP. " 1 Discuss some real-word factors thal aifect the GOP price index 1 List seven shortcomings of GDP as @ measure of total output and economic wellbeing. z identity some of the sources of data the Bureau of Economic Analysis uses to estimate consumption, Investment, ovement purehases, and net exports (Last Word). CHAPTER OUTLINE 1. National income accounting consists of concepts that tenable those who use them to measure the economy's ‘output, to compare it with past outputs, to explain ts size and the reasons for changes in iis size, and to formulate policies designed to increase it. 2. The market vahie of all'final_ goods and services produced in the domestic economy during the year is measured by the gross domestic product (GDP). ‘a. GDP isa monetary measurethatis calculated in dollar terms rathar than in terms of physical unis of output b. GDP includes in its calculation only the value of final goods (consumption goods, capital goods, and services purchased by final users and that wifi not bbe resold or processed further during the current year) (1) GDP excludes the value of intermediate goods {ones that are purchased for resale ot further process- ing) because Including both final goods and interme- diate goods would result in multiple counting of the ‘goods and overstate GDP, (2) Another way to avoid mutiple counting is to mea- Sure and add only the value added at each stage of the production process. Value added is the market value of a firs output minus the value of the inputs the firm bought from others to produce the output ©. Nonproduction transactions are not included in GDP. (1) Purely financial transactions such as public trans- fer payments, private transfer payments, and stock market transactions are simply exchanges of mohey or paper assets and do not create output. (2) Sales of secondhand or used goods are excluded because they were counted in past production and do. rot contribute to current procuction, dd, Measurement of GOP can be accomplished by elther the expencitures approach or the income approach, but the eame result is obtained by the two methods. ‘8. Computation of the GDP by the expenditures ap- ‘proach requires the summation of the total amounts of the four types of spehding for final goods aind services, ‘8. Personal consumption expenditures (0) are the expenditures of households for durable goods and nondurable goods and for service. 'b, Gross private domestic investment (I,) is the ‘suin ofthe spending by business firms for machinery, equipment, end tools; spending by firms and house- holds for new construction (buildings); and the changes in the inventories of business fies. (1)-Aninerease in inventoriesin a given year Increases Investment that year because itis part of the output of the economy that was produced but nat sold that year; 22 decrease in inventories in a given year decreases investment that year because It was included es part of the output from a ptlor year. (2) Investment does not include expencitures for stocks or bonds (a transfor of paper assets) or for used or secondhand capital goods (because they were counted as part of investment in the year they were new capital goods) (8) Gross investment exceeds not investment by the value of the capital goods wom out during the year. ‘An economy in which net investment is positive is one with an expanding production capacity, ‘¢. Government purchases (G) are the expenditures made by ll levels of governments (Federal, stato, and local) for final goods from businesses, and for the direct purchases of resources, including labor. ()The government purchases are made to provide public goods and services, and for spending on publicly cowed capital (public goods with a tong ifetime such as highways or schocis). @)it should be noted thet transfer payments made by the government io individuals, such as Social Security payments, are not included in government purchases because they simply transfer income to individuals and do not generate production. 4. Net exports (X;) in an economy Is calculated as te diference between exports (X) and Imports (M). {tis equal to the expenditures made by foreigners for {goods and services produced in the economy minus ‘the expenditures made by the consumers, govern- ments, and investors. of the economy for goods and services produced in foreign nations. i e. In equation form, © + ly + G+ Xa = GDP’ 4. Computation of GDP by the income approach requires ‘adding the Income derived from the production and sales of final goods and services. The six income items are: ‘8. Compeneation of employees (the sum of wages and salarlas and wage and salaty supploments, such as social insurance and private pansion or health funds for workers). 'b. Fonts (the income recsived by property owners). This rent is @ net measure of thé difference between {gross rent and property depreciation. €. Interest (only the interest payments made by finan- clalinsfitutions or business firms are included; interest payments made by government are excluded). dd. Proprietors’ income (the profits or netincome of sole proprietors or unincorporated business firms) ©. Corporate profs (the earrings of corporations). They are allocated in the following three ways: as corporate Income taxes, dividends paid to stockholders, and un istibuted corporate profi retained by corporations. 1. Taxes on production and imports are added be- cause they are iniially Income for households that latar gels paid to government in the form of taxes. This cat- ‘egory includes general sales taxes, excise taxes, busi- ness property taxes, license fees, and custom duties. 9. The eum of all of tho above eix catogories equal rational income (ornployee compensation, rents, inter= et, propritor’s income, corporate profits, and taxes on production and imports). To obtain GDP trom national income, three adjusiments must be made. (1) Net foreign factor Income is subtracted from na- tional income because it refiects income eamned from production ‘outside the United States. Net foreign factor income is income eamed by American-owned resources abroad minus income eamed by foreign- ‘owned resources in the United States. @) Astatistcal discrepancy is added to national income to make the income approach match the expenditures pproach, (8) The consumption of fixed capital is added to national ineome to get to GDP because itis a cost of production that does not add to anyorie's income. It ‘covers depreciation of private capital goods and pub- liely owned capital'goods euch as roads or bridges. 6. Four other national accounts aro important in evaluat: Ing the performance of the economy. Each has a distinct

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