Measuring National Output and National Income

6 Measuring National Output and National Income Prepared by: Fernando Quijano and Yvonn Quijano 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair National Income and Product Accounts National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy. The Department of Commerce is responsible for producing and maintaining the "National Income and Product Accounts" that keep track of GDP. ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Gross Domestic Product Gross domestic product (GDP) is the total market value of all final goods and services produced within a given period by factors of production located within a country. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Final Goods and Services The term final goods and services refers to goods and services produced for final use. Intermediate goods are goods produced by one firm for use in further processing by another firm. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Value Added Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) STAGE OF PRODUCTION (1) Oil drilling VALUE OF SALES VALUE ADDED $ .50 $.50 (2) Refining .65 .15 (3) Shipping .80 .15 (4) Retail sale Total value added 1.00 .20 $1.00 ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Value Added Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) STAGE OF PRODUCTION (1) Oil drilling VALUE OF SALES VALUE ADDED $ .50 $.50 (2) Refining .65 .15 (3) Shipping .80 .15 (4) Retail sale Total value added 1.00 .20 $1.00 ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Exclusions from GDP GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair GDP Versus GNP GDP is the value of output produced by factors of production located within a country. Output produced by a country's citizens, regardless of where the output is produced, is measured by gross national product (GNP). © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Calculating GDP GDP can be computed in two ways: The expenditure approach: A method of computing GDP that measures the amount spent on all final goods during a given period. The income approach: A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods. ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Expenditure Approach The expenditure approach calculates GDP by adding together these four components of spending. In equation form: GDPCIG(X M) © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Expenditure Approach The expenditure approach calculates GDP by adding together these four components of spending. In equation form: GDPCIG(X M) © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Expenditure Approach The expenditure approach calculates GDP by adding together these four components of spending. In equation form: GDPCIG(X M) © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Personal Consumption Expenditures Personal consumption expenditures (C) are expenditures by consumers on the following: Durable goods: Goods that last a relatively long time, such as cars and household appliances. Nondurable goods: Goods that are used up fairly quickly, such as food and clothing. Services: The things that we buy that do not involve the production of physical things, such as legal and medical services and education. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Components of GDP, 1999: The Expenditure Approach Components of GDP, 1999: The Expenditure Approach BILLIONS OF DOLLARS PERCENTAGE OF GDР Total gross domestic product 9,299.2 100.0 Personal consumption expenditures (C) 6,268.7 67.4 Durable goods 761.3 8.2 Nondurable goods Services 1,845.5 19.8 3,661.9 39.4 Gross private domestic investment (1) Nonresidential 1,650.1 17.7 1,203.1 12.9 Residential 403.8 4.3 Change in business inventories 43.3 0.5 Government consumption and gross investment (G) Federal 1,634.4 17.6 568.6 6.1 State and local 1,065.8 11.5 Net exports (EX – IM) Exports (ЕX) & 254.0 2.7 990.2 10.6 Imports (/M) 1,244.2 13.4 Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Gross Private Domestic Investment Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on. Residential investment includes expenditures by households and firms on new houses and apartment buildings. Change in inventories computes the amount by which firms' inventories change during a given period. Inventories are the goods that firms produce now but intend to sell later. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Gross Private Domestic Investment Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on. Residential investment includes expenditures by households and firms on new houses and apartment buildings. Change in inventories computes the amount by which firms' inventories change during a given period. Inventories are the goods that firms produce now but intend to sell later. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair capital Gross Investment versus Net Investment Gross investment is the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. Depreciation is the amount by which an asset's value falls in a given period. Net investment equals gross investment minus depreciation. end of period - 2002 Prentice Hall Business Publishing capitalpeginning of period + K net investment Principles of Economics, 6/e Karl Case, Ray Fair Government Consumption and Gross Investment Government consumption and gross investment (G) counts expenditures by federal, state, and local governments for final goods and services. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Net Exports Net exports (EX- IM) is the difference between exports (sales to foreigners of U.S.-produced goods and services) and imports (U.S. purchases of goods and services from abroad). The figure can be Hcusenoias positive or negative. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Income Approach Components of GDP, 1999: The Income Approach BILLIONS OF DOLLARS PERCENTAGE OF GDP Gross domestic product 9,299.2 100.0 National income 7,469.7 80.3 Compensation of employees 5,299.8 57.0 Proprietors' income 663.5 7.1 Corporate profits 856.0 9.2 Net interest 507.1 5.5 Rental income 143.4 1.5 Depreciation Indirect taxes minus subsidies Net factor payments to the rest of the world Other 1,161.0 12.5 689.7 7.4 11.0 0.1 32.2 0.3 Source: See Table 17.2. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Income Approach Components of GDP, 1999: The Income Approach BILLIONS OF DOLLARS PERCENTAGE OF GDP Gross domestic product 9,299.2 100.0 National income 7,469.7 80.3 Compensation of employees 5,299.8 57.0 Proprietors' income 663.5 7.1 Corporate profits 856.0 9.2 Net interest 507.1 5.5 Rental income 143.4 1.5 Depreciation Indirect taxes minus subsidies Net factor payments to the rest of the world Other 1,161.0 12.5 689.7 7.4 11.0 0.1 32.2 0.3 Source: See Table 17.2. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair From GDP to Disposable Income Personal income is the total income of households. Equals (national income) minus (corporate profits minus dividends) minus (social insurance payments) plus (interest income received from the government and households). Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair From GDP to Disposable Income Personal income is the total income of households. Equals (national income) minus (corporate profits minus dividends) minus (social insurance payments) plus (interest income received from the government and households). Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair From GDP to Disposable Income Personal income is the total income of households. Equals (national income) minus (corporate profits minus dividends) minus (social insurance payments) plus (interest income received from the government and households). Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Disposable Personal Income and Personal Saving The personal saving rate is the percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Disposable Personal Income and Personal Saving The personal saving rate is the percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Nominal versus Real GDP . Nominal GDP is GDP measured in current dollars, or the current prices we pay for things. Nominal GDP includes all the components of GDP valued at their current prices. When a variable is measured in current dollars, it is described in nominal terms. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair A Three-Good Economy Calculating Real GDP (1) (2) (3) (4) IN PRODUCTION PRICE PER UNIT YEAR 1 (5) GDP IN YEAR 1 IN YEAR 1 (6) GDP IN YEAR 2 (7) GDP IN (8) GDP IN YEAR 1 YEAR 2 IN IN YEAR 2 YEAR 2 YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES Q Q2 P P2 Px Q P₁x Q2 P2x Q P2X Q2 Good A 6 11 $.50 $.40 $3.00 $5.50 $2.40 $4.40 Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00 Good C 10 12 .70 .90 7.00 8.40 9.00 10.80 Total $12.10 $15.10 $18.40 $19.20 Nominal GDP in year 1 Nominal GDP in year 2 © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair A Three-Good Economy Calculating Real GDP (1) (2) (3) (4) IN PRODUCTION PRICE PER UNIT YEAR 1 (5) GDP IN YEAR 1 IN YEAR 1 (6) GDP IN YEAR 2 (7) GDP IN (8) GDP IN YEAR 1 YEAR 2 IN IN YEAR 2 YEAR 2 YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES Q Q2 P P2 Px Q P₁x Q2 P2x Q P2X Q2 Good A 6 11 $.50 $.40 $3.00 $5.50 $2.40 $4.40 Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00 Good C 10 12 .70 .90 7.00 8.40 9.00 10.80 Total $12.10 $15.10 $18.40 $19.20 Nominal GDP in year 1 Nominal GDP in year 2 © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Calculating the GDP Price Index The GDP price index is one measure of the overall price level. The old procedure used by the Bureau of Economic Analysis (BEA) to estimate changes in the overall price level used the quantities produced in a chosen year (the base year) as weights. But overall price increases are sensitive to the choice of the base year. The new procedure, known as the chained price index, avoids the problems associated with the use of fixed weights. ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Problems of Fixed Weights The use of fixed price weights to estimate real GDP leads to problems because it ignores: 1. Structural changes in the economy. 2. Supply shifts, which cause large decreases in price and large increases in quantity supplied. 3. The substitution effect of price increases. 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair . Limitations of the GDP Concept GDP accounting rules do not adjust for production that pollutes the environment. GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP. GDP is neutral to the kinds of goods an economy produces. ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair . Limitations of the GDP Concept GDP accounting rules do not adjust for production that pollutes the environment. GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP. GDP is neutral to the kinds of goods an economy produces. ©2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Underground Economy The underground economy is the part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Per Capita GDP/GNP Per Capita GNP for Selected Countries, 1998 COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS Switzerland 40,080 Portugal 10,690 Norway 34,330 Argentina 8,970 Denmark 33,260 South Korea 7,970 Japan 32,380 Czech Republic 5,040 United States 29,340 Brazil 4,570 Austria 26,850 Mexico 3,970 Germany 25,850 Turkey 3,160 Sweden 25,620 South Africa 2,880 Belgium 25,380 Colombia 2,600 France 24,940 Jordan 1,520 Netherlands 24,760 Romania 1,390 Finland 24,110 Philippines 1,050 United Kingdom 21,400 China 750 Australia 20,300 Indonesia 680 Italy 20,250 Pakistan 480 Canada 20,020 India 430 Ireland 18,340 Rwanda 230 Israel 15,940 Nepal 210 Spain 14,080 Ethiopia 100 Greece 11,650 Source: The World Bank Atlas, 2000. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Per Capita GDP/GNP Per Capita GNP for Selected Countries, 1998 COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS Switzerland 40,080 Portugal 10,690 Norway 34,330 Argentina 8,970 Denmark 33,260 South Korea 7,970 Japan 32,380 Czech Republic 5,040 United States 29,340 Brazil 4,570 Austria 26,850 Mexico 3,970 Germany 25,850 Turkey 3,160 Sweden 25,620 South Africa 2,880 Belgium 25,380 Colombia 2,600 France 24,940 Jordan 1,520 Netherlands 24,760 Romania 1,390 Finland 24,110 Philippines 1,050 United Kingdom 21,400 China 750 Australia 20,300 Indonesia 680 Italy 20,250 Pakistan 480 Canada 20,020 India 430 Ireland 18,340 Rwanda 230 Israel 15,940 Nepal 210 Spain 14,080 Ethiopia 100 Greece 11,650 Source: The World Bank Atlas, 2000. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair