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Principles of Economics Thirteenth Edition Chapter 21 Measuring National Output and National Income Copyright © 2020, 2016, 2011 Pearson Education, Inc...

Principles of Economics Thirteenth Edition Chapter 21 Measuring National Output and National Income Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 Dollar 3 point 00 $3.00 Dollar 3 point 00 (2) Refining $3.30 $0.30 (3) Shipping $3.60 $0.30 (4) Retail sale $4.00 Dollar 4 point 00 $0.40 Total value added Blank $4.00 Dollar 4 point 00 Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 ) : a 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) GDP=C + I a +G + (EX – IM ) Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 21.2 Components of U.S. GDP, 2017: The Expenditure Approach Blank Billions of Billions of Percentage of Percentage Dollars ($) Dollars ($) GDP (%) of GDP (%) Personal consumption expenditures (C) 13,395.5 Blank 69.1 Blank Blank Blank Durable goods 1,473.8 7.6 Blank Blank Nondurable goods 2,851.5 14.6 Blank Blank Services 9,100.2 46.9 Gross private domestic investment I ( ) a Blank Blank Left parenthesis I super a right parenthesis. 3,212.8 16.6 Blank Blank Nonresidential 2,449.6 12.6 Blank Blank Residential 747.6 3.9 Blank Blank Change in business inventories 15.7 0.1 Blank Blank Government consumption and gross investment (G) 3,353.8 17.3 Blank Blank Federal 1,260.7 6.5 Blank Blank State and local 2,093.2 10.8 -571.6 -2.9 Minus 571.6 Blank Minus 2.9 Blank Net exports(EX − IM) 2,334.0 Blank 2,334 point 0 Blank Exports (EX) 12.1 Exports (EX) Blank 2,915.6 Blank 15.0 15 point 0 100.0 100 point 0 Gross domestic product 19,390.6 Blank Blank Source: U.S. Bureau of Economic Analysis, March 28, 2018. MyLab Economics Real-time data Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Expenditure Approach (3 of 7) Gross Private Domestic Investment ( I ) a gross private domestic investment ( I ) Total a 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Expenditure Approach (4 of 7) Gross Private Domestic Investment ( I ) a 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Expenditure Approach (5 of 7) Gross Private Domestic Investment ( I ) a 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 21.3 National Income, 2017 Billions Billions Percentage Percentage of of Blank of National of National Dollars Dollars Income (%) Income (%) ($) ($) National income 16,607.7 Blank 100.0 100 point 0 Blank Compensation of employees Blank 10,307.2 Blank 62.1 Proprietor’s income Blank 1,386.0 1,386 point 0 Blank 8.3 Rental income Blank 743.9 Blank 4.5 Corporate profits Blank 2,164.6 Blank 13.0 13 point 0 Net interest Blank 586.4 Blank 3.5 Indirect taxes minus subsidies Blank 1,268.8 Blank 7.6 Net business transfer payments Blank 161.8 Blank 1.0 1 point 0 Surplus of government enterprises Blank -11.0Minus 11 point 0 Blank -0.1 Minus 0 point 1 Source: U.S. Bureau of Economic Analysis, March 28, 2018. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Income Approach (3 of 4) net national product (NNP) Gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock. statistical discrepancy Data measurement error. personal income The total income of households. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 21.4 GDP, GNP, NNP, and National Income, 2017 Blank Billions of Dollars ($) GDP 19,390.6 Plus: Receipts of factor income from the rest of the +934.7 Plus 934.7 world Less: Payments of factor income to the rest of the -717.9 Minus 717.9 world Equals: GNP 19,607.4 Less: Depreciation -3,034.7 Minus 3,034.7 Equals: Net national product (NNP) 16,572.7 Less: Statistical discrepancy -( -35.0) Minus open parenthesis minus 35 point 0 right parenthesis Equals: National income 16,607.7 Source: U.S. Bureau of Economic Analysis, March 28, 2018. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 21.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2017 Blank Billions of Dollars ($) National income 16,607.7 Less: Amount of national income not going to households -180.4 Minus 180.4 Equals: Personal income 16,427.3 Less: Personal income taxes -2,048.3 Minus 2,048.3 Equals: Disposable personal income 14,379.0 14,379 point 0 Less: Personal consumption expenditures -13,395.5 Minus 13,395.5 Personal interest payments -300.5 Minus 300.5 Transfer payments made by households -197.0 Minus 197 point 0 Equals: Personal saving 485.9 Personal saving as a percentage of disposable personal 3.4% income: Source: U.S. Bureau of Economic Analysis, March 28, 2018. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Table 21.6 Three-Good Economy Blank (1) (3) (5) (6) (7) (8) Production (2) Price per (4) GDP in GDP in GDP in GDP in Year 1 Production Unit Price per Year 1 in Year 1 in Year 2 in Year 2 in Q1 Year 2 Year 1 Unit Year 1 Year 1 Year 2 Year 2 Q sub 1 Q2 P1 Q sub 2 Year 2 P sub 1 Prices Prices Prices Prices P2 P1 ×Q 2 P P2 ×Q1 P2 ×Q 2 P sub 2 P sub 1 times Q sub 1 P sub 1 times Q sub 2 P sub 2 times Q sub 2 P1 ×Q1 sub 2 times Q sub 1 Good A 6 11 $0.50 $0.40 $3.00 Dollar 3 point 00 $5.50 $2.40 $4.40 $1.00 $7.00 $4.00 Good B 7 4 $0.30 Dollar 1 point 00 $2.10 $1.20 Dollar 7 point 00 Dollar 4 point 00 Good C 10 12 $0.70 $0.90 $7.00 Dollar 7 point 00 $8.40 $9.00 Dollar 9 point 00 $10.80 $12.10 $15.10 $18.40 $19.20 Total Blank Blank Blank Blank Nominal Nominal GDP in in GDP in in Year 1 Year 2 Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Problems of Fixed Weights Many structural changes took place in the U.S. economy between the 1950s and 1987. The use of fixed-price weights does not account for the responses in the economy to supply shifts. The fixed-weight procedure ignores the substitution away from goods whose prices are increasing and toward goods whose prices are decreasing or whose prices are increasing less rapidly. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved 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 © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Review Terms and Concepts (1 of 2) base year gross investment change in business inventories gross national income (GNI) compensation of employees gross national product (GNP) corporate profits gross private domestic current dollars investment ( I ) a depreciation income approach disposable personal income, or after-tax income indirect taxes minus subsidies durable goods informal economy expenditure approach intermediate goods final goods and services national income fixed-weight procedure national income and product accounts government consumption and gross investment (G) net business transfer payments gross domestic product (GDP) Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Review Terms and Concepts (2 of 2) net exports (EX − IM) rental income net interest residential investment net investment services net national product (NNP) statistical discrepancy nominal GDP surplus of government enterprises nondurable goods value added nonresidential investment weight personal consumption Equations: expenditures (C) Expenditure approach to GDP: personal income personal saving personal saving rate GDP = C + I a + G + ( EX – IM ) proprietors’ income GDP =Final sales+Change in business inventories capitalend of period = capitalbeginning of period + net investment Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved