Principles of Economics Twelfth Edition Chapter 21 PDF

Principles of Economics Twelfth Edition Chapter 21 Measuring National Output and National Income Cop...

Principles of Economics Twelfth Edition Chapter 21 Measuring National Output and National Income Copyright © 2017 Pearson Education, Inc. 21-1 Copyright Copyright © 2017 Pearson Education, Inc. 21-2 Chapter Outline and Learning Objectives 21.1 Gross Domestic Product Describe GDP fundamentals and differentiate between GDP and GNP. 21.2 Calculating GDP Explain two methods for calculating GDP. 21.3 Nominal versus Real GDP Discuss the difference between real GDP and nominal GDP. 21.4 Limitations of the GDP Concept Discuss the limitations of using GDP to measure well-being. Looking Ahead Copyright © 2017 Pearson Education, Inc. 21-3 Chapter 21 Measuring National Output and National Income national income and product accounts Data collected and published by the government describing the various components of national income and output in the economy. Data are complied by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. While there are literally thousands of variables in the national income and product accounts, in this chapter we discuss only those that are most important. Copyright © 2017 Pearson Education, Inc. 21-4 Copyright © 2017 Pearson Education, Inc. 21-5 Copyright © 2017 Pearson Education, Inc. 21-6 Copyright © 2017 Pearson Education, Inc. 21-7 Gross Domestic Product gross domestic product (GDP) The total market value of all final goods and services produced within a given period by factors of production located within a country. GDP is the total market value of a country’s output. It is the market value of all final goods and services produced within a given period of time by factors of production located within a country. Copyright © 2017 Pearson Education, Inc. 21-8 Final Goods and Services (1 of 2) final goods and services Goods and services produced for final use. intermediate goods Goods that are produced by one firm for use in further processing or for resale by another firm. value added The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. Copyright © 2017 Pearson Education, Inc. 21-9 Final Goods and Services (2 of 2) In calculating GDP, we can sum up the value added at each stage of production or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced. Copyright © 2017 Pearson Education, Inc. 21-10 TABLE 21.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) Stage of Production Value of Sales Value Added (1) Oil drilling $ 3.00 $ 3.00 (2) Refining 3.30 0.30 (3) Shipping 3.60 0.30 (4) Retail sale 4.00 0.40 Total value added $ 4.00 Copyright © 2017 Pearson Education, Inc. 21-11 Exclusion of Used Goods and Paper Transactions GDP is concerned only with new, or current, production. Old output is not counted in current GDP because it was already counted when it was produced. GDP does not count transactions in which money or goods change hands but in which no new goods and services are produced. Copyright © 2017 Pearson Education, Inc. 21-12 Exclusion of Output Produced Abroad by Domestically Owned Factors of Production GDP is the value of output produced by factors of production located within a country. gross national product (GNP) The total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced. Copyright © 2017 Pearson Education, Inc. 21-13 Calculating GDP expenditure approach: A method of computing GDP that measures the total amount spent on all final goods and services during a given period. 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 and services. Copyright © 2017 Pearson Education, Inc. 21-14 The Expenditure Approach (1 of 7) There are four main categories of expenditure: – Personal consumption expenditures (C): household spending on consumer goods – Gross private domestic investment (I): spending by firms and households on new capital—that is, plant, equipment, inventory, and new residential structures – Government consumption and gross investment (G) – Net exports (EX – IM): net spending by the rest of the world, or exports (EX) minus imports (IM) Copyright © 2017 Pearson Education, Inc. 21-15  THE COMPONENTS OF GDP GDP (Y) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX Copyright © 2004 South-Western TABLE 21.2 Components of U.S. GDP, 2014: The Expenditure Approach Billions of Dollars ($) Percentage of GDP (%) Personal consumption expenditures (C) 11,930.3 68.5 Durable goods 1,302.5 7.5 Nondurable goods 2,666.2 15.3 Services 7,961.7 45.7 Gross private domestic investment (l) 2,851.6 16.4 Nonresidential 2,210.5 12.7 Residential 559.1 3.2 Change in business inventories 82.0 0.5 Government consumption and gross investment (G) 3,175.2 18.2 Federal 1,219.2 7.0 State and local 1,956.1 11.2 Net exports (EX – IM) −538.2 −3.1 Exports (EX) 2,337.0 13.4 Imports (IM) 2,875.2 16.5 Gross domestic product 17,418.9 100.0 Source: U.S. Bureau of Economic Analysis, March 27, 2015. Copyright © 2017 Pearson Education, Inc. 21-17 The Expenditure Approach (2 of 7) Personal Consumption Expenditures (C) personal consumption expenditures (C) Expenditures by consumers on goods and services. 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 we buy that do not involve the production of physical things, such as legal and medical services and education. Copyright © 2017 Pearson Education, Inc. 21-18 The Expenditure Approach (3 of 7) Gross Private Domestic Investment (I) gross private domestic investment (I) Total investment in capital—that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sector. nonresidential investment Expenditures by firms for machines, tools, plants, and so on. residential investment Expenditures by households and firms on new houses and apartment buildings. Copyright © 2017 Pearson Education, Inc. 21-19 The Expenditure Approach (4 of 7) Gross Private Domestic Investment (I) change in business inventories The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later. GDP = final sales + change in business inventories Copyright © 2017 Pearson Education, Inc. 21-20 The Expenditure Approach (5 of 7) Gross Private Domestic Investment (I) depreciation The amount by which an asset’s value falls in a given period. gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. net investment = Gross investment minus depreciation. capitalend of period = capitalbeginning of period + net investment Copyright © 2017 Pearson Education, Inc. 21-21 The Expenditure Approach (6 of 7) Government Consumption and Gross Investment (G) government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services. Copyright © 2017 Pearson Education, Inc. 21-22 The Expenditure Approach (7 of 7) Net Exports (EX – IM) net exports (EX – IM) 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 positive or negative. Copyright © 2017 Pearson Education, Inc. 21-23 The Income Approach (1 of 4) national income The total income earned by the factors of production owned by a country’s citizens. compensation of employees Includes wages, salaries, and various supplements—employer contributions to social insurance and pension funds, for example—paid to households by firms and by the government. proprietors’ income The income of unincorporated businesses. rental income The income received by property owners in the form of rent. Copyright © 2017 Pearson Education, Inc. 21-24 The Income Approach (2 of 4) corporate profits The income of corporations. net interest The interest paid by business. indirect taxes minus subsidies Taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return. net business transfer payments Net transfer payments by businesses to others. surplus of government enterprises Income of government enterprises. Copyright © 2017 Pearson Education, Inc. 21-25 TABLE 21.3 National Income, 2014 Billions of Dollars Percentage of ($) National Income (%) National income 15,070.4 100.0 Compensation of employees 9,221.6 61.2 Proprietors’ income 1,380.2 9.2 Rental income 640.2 4.2 Corporate profits 2,089.8 13.9 Net interest 486.3 3.2 Indirect taxes minus subsidies 1,145.8 7.6 Net business transfer payments 140.6 0.9 Surplus of government enterprises −34.2 −0.2 Source: U.S. Bureau of Economic Analysis, March 27, 2015. Copyright © 2017 Pearson Education, Inc. 21-26 The Income Approach (3 of 4) net national product (NNP) Gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock. statistical discrepancy Data measurement error. personal income The total income of households. Copyright © 2017 Pearson Education, Inc. 21-27 TABLE 21.4 GDP, GNP, NNP, and National Income, 2014 Dollars ($, Billions) GDP 17,418.9 Plus: Receipts of factor income from the rest of the world +827.7 Less: Payments of factor income to the rest of the world −616.0 Equals: GNP 17,630.6 Less: Depreciation −2,736.2 Equals: Net national product (NNP) 14,894.4 Less: Statistical discrepancy −176.0 Equals: National income 15,070.4 Source: U.S. Bureau of Economic Analysis, March 27, 2015. Copyright © 2017 Pearson Education, Inc. 21-28 The Income Approach (4 of 4) disposable personal income or after-tax income Personal income minus personal income taxes. The amount that households have to spend or save. personal saving The amount of disposable income that is left after total personal spending in a given period. personal saving rate 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. Copyright © 2017 Pearson Education, Inc. 21-29 TABLE 21.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2014 Dollars (Billions, $) National income 15,070.4 Less: Amount of national income not going to households −341.8 Equals: Personal income 14,728.6 Less: Personal income taxes −1,742.9 Equals: Disposable personal income 12,985.8 Less: Personal consumption expenditures −11,930.3 Personal interest payments −256.8 Transfer payments made by households −170.3 Equals: Personal saving 628.3 Personal saving as a percentage of disposable personal income: 4.8% Source: U.S. Bureau of Economic Analysis, March 27, 2015. Copyright © 2017 Pearson Education, Inc. 21-30 Nominal versus Real GDP current dollars The current prices that we pay for goods and services. nominal GDP Gross domestic product measured in current dollars. weight The importance attached to an item within a group of items. Copyright © 2017 Pearson Education, Inc. 21-31 Calculating Real GDP base year The year chosen for the weights in a fixed- weight procedure. fixed-weight procedure A procedure that uses weights from a given base year. Copyright © 2017 Pearson Education, Inc. 21-32 TABLE 21.6 A Three-Good Economy (1) (2) (3) (4) (5) (6) (7) (8) Prod Price GDP in GDP in GDP in GDP in Year 2 ucti per Year 1 in Year 2 in Year 1 in in Year 2 on Unit Year 1 Year 1 Year 2 Prices Prices Prices Prices Q1 Q2 P1 P2 P1 × Q1 P1 × Q2 P2 × Q1 P2 × Q2 Good A 6 11 $ 0.50 $ 0.40 $ 3.00 $ 5.50 $ 2.40 $ 4.40 Good B 7 4 0.30 1.00 2.10 1.20 7.00 4.00 Good C 10 12 0.70 0.90 7.00 8.40 9.00 10.80 Total $ 12.10 $ 15.10 $ 18.40 $ 19.20 Nominal Nominal GDP in GDP in year 1 year 2 Copyright © 2017 Pearson Education, Inc. 21-33 Calculating the GDP Deflator Policy makers need not only good measures of how real output is changing but also good measures of how the overall price level is changing. The GDP deflator is one measure of the overall price level. Copyright © 2017 Pearson Education, Inc. 21-34 The GDP Deflator The GDP deflator is calculated as follows: N o m in al G D P G D P d efl ato r =  100 R eal G D P Copyright © 2004 South-Western Limitations of the GDP Concept (1 of 2) GDP and Social Welfare If crime levels went down, society would be better off, but a decrease in crime is not an increase in output and is not reflected in GDP. An increase in leisure is also an increase in social welfare, sometimes associated with a decrease in GDP. Most nonmarket and domestic activities, such as housework and child care, are not counted in GDP. GDP also has nothing to say about the distribution of output among individuals in a society. Copyright © 2017 Pearson Education, Inc. 21-36 Limitations of the GDP Concept (2 of 2) The Informal Economy informal economy The part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP. Gross National Income per Capita gross national income (GNI) GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation. Copyright © 2017 Pearson Education, Inc. 21-37