Measuring National Output and National Income Chapter 18 PDF

C HAPTER 18 Measuring National Output and National Income Prepared by: Fernando Quijano an...

C HAPTER 18 Measuring National Output and National Income Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair  Gross Domestic Product C H A P T E R 18: Measuring National Output and National Income 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 38  Final Goods and Services C H A P T E R 18: Measuring National Output and National Income The term final goods and services in GDP 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 4 of 38  Value Added C H A P T E R 18: Measuring National Output and National Income Value added is 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. In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 5 of 38  Value Added C H A P T E R 18: Measuring National Output and National Income Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED (1) Oil drilling $.50 $.50 (2) Refining.65.15 (3) Shipping.80.15 (4) Retail sale 1.00.20 Total value added $1.00 © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 6 of 38  Exclusion of Output Produced Abroad by Domestically Owned Factors of Production C H A P T E R 18: Measuring National Output and National Income 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). © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 8 of 38  Calculating GDP C H A P T E R 18: Measuring National Output and National Income GDP can be computed in two ways: The expenditure approach: A method of computing GDP that measures the total 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 9 of 38  The Expenditure Approach C H A P T E R 18: Measuring National Output and National Income Expenditure categories: Personal consumption expenditures (C)—household spending on consumer goods. Gross private domestic investment (I)—spending by firms and households on new capital: plant, equipment, inventory, and new residential structures. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 10 of 38  The Expenditure Approach C H A P T E R 18: Measuring National Output and National Income Expenditure categories: Government consumption and gross investment (G) Net exports (EX – IM)—net spending by the rest of the world, or exports (EX) minus imports (IM) © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 11 of 38  The Expenditure Approach C H A P T E R 18: Measuring National Output and National Income The expenditure approach calculates GDP by adding together the four components of spending. In equation form: GDP  C  I  G  ( EX  IM ) © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 12 of 38  Personal Consumption Expenditures C H A P T E R 18: Measuring National Output and National Income Personal consumption expenditures (C) are expenditures by consumers on the following: Durable goods: Goods that last a relatively long time, such as cars and appliances. Nondurable goods: Goods that are used up fairly quickly, such as food and clothing. Services: Things that do not involve the production of physical things, such as legal services, medical services, and education. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 14 of 38  Gross Private Domestic Investment C H A P T E R 18: Measuring National Output and National Income Investment refers to the purchase of new capital. Total investment by the private sector is called gross private domestic investment. It includes the purchase of new housing, plants, equipment, and inventory by the private sector. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 15 of 38  Gross Private Domestic Investment C H A P T E R 18: Measuring National Output and National Income 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 16 of 38  Gross Private Domestic Investment C H A P T E R 18: Measuring National Output and National Income Remember that GDP is not the market value of total sales during a period—it is the market value of total production. The relationship between total production and total sales is: GDP = final sales + change in business inventories © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 17 of 38  Gross Investment versus Net Investment C H A P T E R 18: Measuring National Output and National Income 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. capitalend of period = capitalbeginning of period + net investment © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 18 of 38  Government Consumption and Gross Investment C H A P T E R 18: Measuring National Output and National Income Government consumption and gross investment (G) counts expenditures by federal, state, and local governments for final goods and services. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 19 of 38  Net Exports C H A P T E R 18: Measuring National Output and National Income Net exports (EX – IM) is the difference between exports and imports. The figure can be positive or negative. Exports (EX) are sales to foreigners of U.S.-produced goods and services. Imports (IM) are U.S. purchases of goods and services from abroad). © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 20 of 38  The Income Approach C H A P T E R 18: Measuring National Output and National Income National income is the total income earned by the factors of production owned by a country’s citizens. The income approach to GDP breaks down GDP into four components: GDP = national income + depreciation + (indirect taxes – subsidies) + net factor payments to the rest of the world + other © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 21 of 38  From GDP to Disposable Personal Income C H A P T E R 18: Measuring National Output and National Income Net national product equals gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock. Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 24 of 38  Disposable Personal Income and Personal Saving C H A P T E R 18: Measuring National Output and National Income Disposable Personal Income and Personal Saving, 2002 DOLLARS (BILLIONS) Disposable personal income 7,417.7 Less: Personal consumption expenditures  7063.5 Interest paid by consumers to business  204.3 Personal transfer payments to foreigners  31.3 Equals: personal saving 118.6 Personal savings as a percentage of disposable personal income: 1.6% Source: See Table 18.2. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 25 of 38  Disposable Personal Income and Personal Saving C H A P T E R 18: Measuring National Output and National Income 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 26 of 38  Nominal Versus Real GDP C H A P T E R 18: Measuring National Output and National Income 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 27 of 38  Calculating Real GDP C H A P T E R 18: Measuring National Output and National Income Real GDP = Nominal GDP \ GDP Deflator GDP Deflator= Index number of consumer price in basis year GDP deflator is eliminated the inflation © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 29 of 38  The Underground Economy C H A P T E R 18: Measuring National Output and National Income 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 35 of 38