Economics for Today. 11e Chapter 5: Gross Domestic Product PDF

Economics for Today. 11e Chapter 5: Gross Domestic Product Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be sc...

Economics for Today. 11e Chapter 5: Gross Domestic Product Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Chapter Objectives By the end of this chapter, you should be able to: 1. Define gross domestic product (GDP) and explain why it is an important measure of macroeconomic activity. 2. Compare and contrast how GDP can be measured using the expenditure and income approaches. 3. Outline the shortcomings of GDP as a measure of economic well-being. 4. Summarize other national income accounts beyond GDP. 5. Distinguish nominal and real GDP and explain why real GDP is a better measure of economic activity over time. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Unit 1 Gross Domestic Product Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  What is national income accounting? The system used to measure the aggregate income and expenditures for a nation. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  What is gross domestic product (GDP)? The market value of all final goods and services produced in a nation during a period of time, usually a year. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Why is GDP important? It tells a country how well its economy is doing. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  What transactions are excluded from the calculation of GDP? 1. Secondhand transactions 2. Nonproductive financial transactions Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  What are examples of secondhand transactions? The sale of a used car The sale of a home constructed some years ago Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  What are examples of nonproductive financial transactions? Giving private gifts Buying and selling stocks and bonds Making transfer payments Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  What is a transfer payment? A government payment to individuals not in exchange for goods or services currently produced. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  What are final goods? Finished goods and services produced for the ultimate user. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  What are intermediate goods? Goods and services used as inputs for the production of final goods. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Why are intermediate goods excluded from the calculation of GDP? Including all goods and services produced would inflate GDP by double counting (counting many items more than once). In order to count only final goods and avoid overstating GDP, national income accountants must take care not to include intermediate goods. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  Unit 2 Measuring GDP Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  What is the circular flow model? A diagram showing the exchange of money, products, and resources between households and businesses. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Exhibit 1: The Basic Circular Flow Model Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  What is a flow? A rate of change in a quantity during a given time period, such as dollars per year. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  What are examples of flow? Income and consumption are flows that occur per week, per month, or per year. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  What is a stock? A quantity measured at one point in time. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  What are examples of stocks? An inventory of goods The amount of money in a checking account Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Unit 3 The Expenditure Approach Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 What two approaches are used to calculate GDP? 1. Expenditure approach 2. Income approach Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  What is the expenditure approach? The national income accounting method that measures GDP by adding all the spending for final goods during a period of time. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  What are the four components of expenditures? 1. Personal consumption expenditures 2. Gross private domestic investment 3. Government consumption expenditures and gross investment 4. Net exports Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  What are personal consumption expenditures? Household spending for durable goods, nondurable goods, and services. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  What are durable goods? Anything that lasts beyond three years, such as automobiles, appliances, and furniture. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  What are nondurable goods? Anything considered used up or consumed in less than three years, such as food, clothing, and gasoline. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  What are services? Any transaction not in the form of a tangible object, such as recreation, medical treatment, and education. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  What is gross private domestic investment? The national income account that includes “gross” (all) “private” (not government) “domestic” (not foreign) spending by businesses for investment in capital assets that are expected to earn profits in the future. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 What two components make up gross private domestic investment? 1. Fixed investment expenditures for newly produced capital goods 2. Change in business inventories Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  What is government spending? The value of goods and services government at all levels purchased measured by their costs. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  What are net exports? The difference between exports and imports. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  What are exports? Spending by foreigners for U.S. domestically produced goods. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  What are imports? The dollar amount of U.S. purchases for goods produced abroad. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  How is GDP expressed algebraically using the expenditure approach? GDP = C + I + G + (X – M) Where: C = spending by households (personal consumption expenditures) I = spending by firms (gross private domestic investment) G = spending by government (government consumption expenditures and gross investment) X = exports M = imports Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Exhibit 2: Gross Domestic Product Using the Expenditure National Income Account Approach, 2020of dollars) Amount (trillions Percentage of GDP Personal consumption expenditures (C ) 14.05 67.3 Durable goods $1.62 Nondurable goods 3.04 Services 9.39 Gross private domestic investment (I) 3.64 17.4 Fixed investment 3.7 Change in business inventories -0.059 Government consumption expenditures 3.86 18.5 and gross investment (G ) Federal 1.50 State and local 2.36 Net exports of goods and services (X − M) -0.65 -3.1 Exports 2.12 Imports 2.77 Gross domestic product (GDP ) 20.89 100 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Unit 4 The Income Approach Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  What is the income approach? The national income accounting method that measures GDP by adding all incomes during a period of time, including compensation of employees, rents, net interest, and profits. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38  What is compensation of employees Income earned from wages, salaries, and certain supplements paid by firms and government to suppliers of labor. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39  What is rental income? Rent and royalties received by property owners who permit others to use their assets during a time period. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 What two components make up profits? 1. Proprietors’ income 2. Corporate profits Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41  What is proprietors’ income? All forms of income earned by unincorporated businesses (self-employed proprietorships and partnerships). Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42  What are corporate profits? All income earned by the stockholders of corporations regardless of whether stockholders receive it. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43  What is net interest? The difference between interest income earned and interest payments. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44  What are indirect business taxes? Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the firm’s revenue; firms treat such taxes as production costs. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45  What are examples of indirect business taxes? General sales taxes Excise taxes Customs duties Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46  What is depreciation? An allowance for the portion of capital worn out producing GDP. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 How is GDP expressed algebraically using the income approach? GDP = Compensation of employees + rents + profits + net interest + indirect business taxes + depreciation Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48  Exhibit 3: Gross Domestic Product Using the Income Approach, 2020 National Income Account Amount (trillions of Percentage of GDP dollars) Compensation of employees 11.58 55 Rental income 0.71 4 Profits 3.51 17 Proprietors’ income 1.65 Corporate profits 1.79 Net interest 0.84 4 Indirect business taxes 0.67 3 Depreciation 3.58 17 Gross domestic product (GDP) 20.89 100 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 Exhibit 4: Expenditure and Income Approach to GDP Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 Exhibit 5: An International Comparison of GDPs, 2020 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51  Discussion Activity #1 Is GDP a good measure of the well-being of a society? What might be some other important measures of how well-off a country may be? Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52  Unit 5 GDP Shortcomings Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 Why is GDP considered a less-than- perfect measure of the nation’s economic pulse? It excludes the following factors: Nonmarket transactions Distribution, kind, and quality of products Neglect of quality of life The underground economy Negative externalities Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54  Why are nonmarket transactions excluded from GDP? 1.It would be extremely imprecise to attempt to collect data and assign a dollar value to services people provide for themselves or others without compensation. 2.It is difficult to decide which nonmarket activities to exclude and which ones to include. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55  What conclusion can we make regarding the exclusion of the quality of products from GDP? GDP is a quantitative, rather than a qualitative, measure of the output of goods and services. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56  What is another conclusion we can make regarding the exclusion of the quality of products from GDP? It can be argued that GDP understates national well-being because no allowance is made for variables such as leisure time, life expectancy, infant mortality, literacy rate, and other quality- of-life variables. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57  What conclusion can we make regarding the exclusion of the underground economy from GDP? If the underground economy is sizable, GDP will understate an economy’s performance by a sizable amount. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58  What conclusion can we make regarding the exclusion of negative externalities from GDP? Since the costs of negative by-products are not deducted, GDP overstates the national well- being. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 59  What are some alternative measures for GDP? Measure of Economic Welfare (MEW) Genuine Progress Indicator (GPI) Human Development Index (HDI) Happy Planet Index (HPI) Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 60  Unit 6 Other National Income Accounts Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 61 What other national income accounts measure economic performance? National income Personal income Disposable personal income Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62  What is national income (NI)? The total income earned by resource owners, including wages, rents, interest, and profits. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 63  What is the formula for national income? NI = GDP – depreciation (consumption of fixed capital) Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64 Exhibit 6: National Income Calculated from Gross Domestic Product, 2020 Amount (trillions of dollars) Gross domestic product 20.89 (GDP) Depreciation -3.58 National income (NI) 17.31 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 65  What is personal income (PI)? The total income received by households that is available for consumption, saving, and payment of personal taxes. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66  Exhibit 8: Personal Income Calculated from National Income, 2020 Amount (trillions of dollars) National income (NI) 17.31 Corporate profits -1.79 Contributions for Social Security -1.46 (FICA) Transfer payments and other 5.56 income Personal income (PI) 19.62 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 67  What is disposable personal income (DI)? The amount of income that households actually have to spend or save after payment of personal taxes. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 68  Exhibit 8: Personal Income Calculated from National Income, 2020 Amount (trillions of dollars) Personal income (PI) 19.62 Personal taxes -2.20 Disposable personal income (DI) 17.42 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 69 Exhibit 7: Four Measures of the Macro Economy Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 70  Unit 7 Changing Nominal GDP to Real GDP Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 71  What is nominal GDP? The value of all final goods based on the prices existing during the time period of production. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 72  What is real GDP? The value of all final goods produced during a given time period based on the prices existing in a selected base year. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 73  What is the GDP chain price index? A measure that compares changes in the prices of all final goods during a given year relative to the prices of those goods in a base year; this index is also called GDP price index or simply GDP deflator. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 74  What is the formula for real GDP? Real GDP = (nominal GDP)/(GDP chain price index) x 100 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 75  Exhibit 10a: Nominal GDP, Real GDP and the GDP Chain Price Index for Selected Years Year (1) (2) (3) Nominal GDP (billions of Real GDP (billions of GDP Deflator (2102 dollars) dollars) = 100) 1970 1,073.3 4,954 21.662 1980 2,857.3 6,763 42.246 1990 5,963.1 9,371 63.631 2000 10,251.0 13,138 78.025 2010 15,049.0 15,649 96.166 2012 16,254.0 16,254 100 2015 18,206.0 17,390 104.691 2020 20,893.7 18,384 113.648 Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 76 Exhibit 10b: Nominal GDP, Real GDP and the GDP Chain Price Index for Selected Years Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 77  Self Assessment What concepts introduced in this chapter did you find difficult and thus, need to review? What do you know now that you did not know before? How could you apply what you have learned in this chapter to help you in your personal or professional life? Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 78  Summary Now that the lesson has ended, you should be able to: 1. Define gross domestic product (GDP) and explain why it is an important measure of macroeconomic activity. 2. Compare and contrast how GDP can be measured using the expenditure and income approaches. 3. Outline the shortcomings of GDP as a measure of economic well-being. 4. Summarize other national income accounts beyond GDP. 5. Distinguish nominal and real GDP and explain why real GDP is a better measure of economic activity over time. Tucker, Economics for Today, 11th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 79