Lecture 9 Measuring The Total Product PDF

Chapter C h a p t e r 27 01/07/25 Measuring domestic output and natio...

Chapter C h a p t e r 27 01/07/25 Measuring domestic output and national income Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Learning Objectives Explain why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy. McGraw-Hill/Irwin Explain how gross domestic product (GDP) is defined and measured. Describe how expenditures on goods and services can be Copyright © 2015 by McGraw-Hill Education. All rights reserved. summed to determine GDP. Explain how GDP can be determined by summing up all of the incomes that were derived from producing the economy’s output of goods and services. Describe the relationships among GDP, net domestic product, national income, personal income, and disposable income. Discuss the nature and function of a GDP price index and describe the difference between nominal GDP and real GDP. 3-2 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Definition Macroeconomics studies the behavior of the economy as a whole. 01/07/25 It is primarily concerned with two topics: long-run economic growth and the short-run fluctuations in output and employment that are often referred to as the business cycle. National income accounting measures the economy’s overall performance. It does for the economy as a whole what private accounting does for the individual firm or for the individual household. 3-3 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Measuring GDP GDP is a monetary measure GDP includes only the market value of final 01/07/25 goods and ignores intermediate goods altogether. Nonproduction transactions are excluded from GDP and are of two types: purely financial transactions and secondhand sales Public transfer payments Private transfer payments Stock market transactions Secondhand sales 3-4 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Measuring GDP Production Approach – Final transaction / Value Added method 01/07/25 3-5 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Relation between approaches 01/07/25 3-6 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Expenditure Approach GDP = C + Ig + G + Xn 01/07/25 Consumption nondurable goods (10%) —products with less than 3 years of expected life like food, clothing, and gasoline, durable goods (30%) —products that include new automobiles, furniture, and refrigerators, Services (60%) —the work done by lawyers, hair stylists, doctors, mechanics, and other service providers 3-7 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Expenditure Approach Government purchase Expenditures for goods and services that 01/07/25 government consumes in providing public services; Expenditures for publicly owned capital such as schools and highways, which have long lifetimes; Government expenditures on R&D and other activities that increase the economy’s stock of know-how Net exports, Xn Net exports (Xn) = exports (X) − imports (M) 3-8 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  The Income Approach Compensation of Employees Rents 01/07/25 Interest Noncorporate profits Corporate profits Corporate income taxes ∙ Dividends ∙ Undistributed corporate profits Taxes on Production and Imports Statistical Discrepancy 3-9 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Other National Accounts Net domestic product (NDP): NDP = GDP − consumption of fixed capital 01/07/25 (depreciation) National Income (NI) NI = NDP - Statistical discrepancy + Net foreign factor income Personal income (PI) PI = NI - Taxes on production and imports - Social Security contributions - Corporate income taxes - Undistributed corporate profits + Transfer payments Disposable income (DI) DI = PI - Personal taxes 3-10 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Example 01/07/25 3-11 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Macroeconomic indicators Gross domestic product, measures the value of final goods and services produced within the borders of a country during a specific period of time, typically a year. 01/07/25 Nominal GDP vs Real GDP Inflation is an increase in the overall level of prices. The cost of a goods and services bought by a typical over time Inflation rate -(CPI) GDP price index Unemployment is the state a person is in if he or she cannot get a job despite being willing to work and actively seeking work. – Work force 3-12 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  01/07/25 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  GDP price index McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education. All rights reserved. 3-14 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Shortcomings of GDP Nonmarket Activities – unpaid work Leisure 01/07/25 Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of Output Noneconomic Sources of Well-Being The Importance of Intermediate Output 3-15 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.