Chapter 24

Measuring Domestic Output and National Income

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives
Define and measure GDP GDP and income relationships The GDP price index Nominal GDP vs. real GDP Limitations of the GDP measure

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National Income Accounting

Bureau of Economic Analysis compiles National Income and Product Accounts
Assess health of economy Track long run course Formulate policy

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Gross Domestic Product

Measure of aggregate output Monetary measure Avoid multiple counting
Market value final goods Ignore intermediate goods Count value added
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Gross Domestic Product

Exclude financial transactions
Public transfer payments Private transfer payments Stock (and bond) market transactions

Second hand sales

Sell used car to a friend
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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?
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Two Approaches to GDP

Consumption by Households Investment by Businesses Wages

Rents

Government Purchases

+ +

GDP

Interest

Profits
Statistical Adjustments
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Expenditures By Foreigners

+ + + +

Expenditure Approach
Personal consumption expenditures (C)
Durable consumer goods Nondurable consumer goods Consumer expenditures for services Domestic plus foreign produced
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Expenditure Approach
Gross private domestic investment (I)
Machinery, equipment, and tools All construction Changes in inventories

Creation of new capital asset Noninvestment transactions

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Expenditure Approach

Gross Investment Depreciation

=
Gross Investment Net Investment
Depreciation

Increase Stock of Capital

January 1
Consumption & Government Spending

Stock of Capital
December 31
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Years GDP

Expenditure Approach
Government purchases (G)
Expenditures for goods and services Expenditures for social capital Excludes transfer payments

Net exports (Xn)

Add exported goods Subtract imported goods NX = exports - imports

GDP =

24-11

U.S. Economy 2007

in Billions
Receipts Expenditures Approach
Personal Consumption (C) $ 9734 Gross Private Domestic Investment (Ig) Net Exports (Xn) 2125 Government Purchases (G) 2690

Allocations Income Approach

Compensation Rents Interest Proprietors Income Corporate Profits Taxes on Production and $ 7874 65 603 1043 1627

-708

Imports
National Income

1009
$12,221 96 29 1687
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Net Foreign Factor Income (-) Statistical Discrepancy (+)

Consumption of Fixed
Capital (+) Gross Domestic Product Gross Domestic Product

Comparative GDP
Selected Nations GDPs, 2007
GDP in Trillions of Dollars
0 1 2 3 4 5 6 7 8 9 10 12 13

United States Japan Germany China United Kingdom France Italy Canada Spain Brazil Russia India South Korea Mexico Australia
Source: World Bank

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Components of National Income

Compensation of employees Rents Interest Proprietors income Corporate profits
Corporate income taxes Dividends Undistributed corporate profits

Taxes on production and imports

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Income Approach
From national income to GDP
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) DI = C + S

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U.S. Income Relationships 2007

Gross Domestic Product (GDP) Less: Consumption of Fixed Capital Equals: Net Domestic Product (NDP) Less: Statistical Discrepancy Plus: Net Foreign Factor Income Equals: National Income (NI) Less: Taxes on Production and Imports Less: Social Security Contributions Less: Corporate Income Taxes Less: Undistributed Corporate Profits Plus: Transfer Payments Equals: Personal Income (PI) Less: Personal Taxes Equals: Disposable Income (DI)

$ 13,841 1687 $ 12,154 29 96 $ 12,221 1009 979 467 344 2237 $ 11,659 1482 $ 10,177
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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
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GDP Price Index

Use price index to determine real GDP
Price Index In Given Year

Price of Market Basket In Specific Year Price of Same Basket In Base Year Nominal GDP

x 100

Real GDP

Price Index (in hundredths)

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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
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Underground Economy
As a percentage of GDP, Selected Nations, 2007
Percentage of GDP
10 15 20 25 0 5 30

Mexico South Korea India Italy Spain China Sweden Germany France United Kingdom Japan Switzerland United States

Source: Open Assessment, E-Journal

24-20

Key Terms
national income accounting gross domestic product intermediate goods final goods multiple counting value added expenditures approach income approach personal consumption expenditures gross and net private domestic investment government purchases net exports taxes on production and imports national income consumption of fixed capital net domestic product personal income disposable income nominal GDP real GDP price index
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