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Measuring National Output and National Income
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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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Chapter Outline
Gross Domestic Product Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output Produced Abroad by Domestically Owned Factors of Production Calculating GDP The Expenditure Approach The Income Approach Nominal versus Real GDP Calculating Real GDP Calculating the GDP Deflator The Problems of Fixed Weights Limitations of the GDP Concept GDP and Social Welfare The Underground Economy Gross National Income Per Capita Looking Ahead
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national income and product accounts Data collected and published by the government describing the various components of national income and output in the economy.
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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 countrys 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.
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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 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.
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Tires taken from that pile and mounted on the wheels of the new car before it is sold are considered intermediate goods to the auto producer. Tires from that pile to replace tires on your old car are considered final goods. If, in calculating GDP, we included the value of the tires (an intermediate good) on new cars and the value of new cars (including the tires), we would be double counting.
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TABLE 6.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED
$ 1.00 1.30
$ 1.00 0.30
(3) Shipping
(4) Retail sale Total value added
1.60
2.00
0.30
0.40 $ 2.00
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. We do not use the value of total sales in an economy to measure how much output has been produced.
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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 countrys citizens, regardless of where the output is produced.
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CALCULATING GDP
CHAPTER 19: Measuring National Output and National Income
expenditure approach A method of computing GDP that measures the amount spent on all final goods during a given period.
income approach A method of computing GDP that measures the incomewages, rents, interest, and profitsreceived by all factors of production in producing final goods.
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CALCULATING GDP
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Expenditure Categories: Personal consumption expenditures (C): household spending on consumer goods Gross private domestic investment (I): spending by firms and households on new capital, i.e., 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 + G + (EX - IM)
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CALCULATING GDP
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TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure Approach
BILLIONS OF DOLLARS PERCENTAGE OF GDP
Personal consumption expenditures (C) Durable goods Nondurable goods Services Gross private domestic investment (l) Nonresidential Residential Change in business inventories Government consumption and gross investment (G) Federal State and local Net exports (EX IM) Exports (EX) Imports (IM) Gross domestic product (GDP)
Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.
8,214.3 987.8 2,368.3 4,858.2 1,928.1 1,198.8 673.8 55.4 2,215.9 827.6 1,388.3
70.0 8.4 20.2 41.4 16.4 10.2 5.7 0.5 18.9 7.1 11.8
-624.0
1,173.8 1,797.8 11,734.3
- 5.3
10.0 15.3 100.0
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CALCULATING GDP
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Personal Consumption Expenditures (C) personal consumption expenditures (C) A major component of GDP: expenditures by consumers on goods and services.
There are three main categories of consumer expenditures: durable goods, nondurable goods, and services.
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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.
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CALCULATING GDP
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Gross Private Domestic Investment (I) gross private domestic investment (I) Total investment in capitalthat 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.
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CALCULATING GDP
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residential investment Expenditures by households and firms on new houses and apartment buildings.
Change in Business Inventories
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
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CALCULATING GDP
CHAPTER 19: Measuring National Output and National Income Gross Investment versus Net Investment
CALCULATING GDP
CHAPTER 19: Measuring National Output and National Income
Government Consumption and Gross Investment (G) government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services.
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CALCULATING GDP
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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.
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CALCULATING GDP
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THE INCOME APPROACH national income The total income earned by the factors of production owned by a countrys citizens.
TABLE 6.3 National Income, 2004
BILLIONS OF DOLLARS PERCENTAGE OF NATIONAL INCOME
National Income Compensation of employees Proprietors income Corporate profits Net interest Rental income
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compensation of employees Includes wages, salaries, and various supplementsemployer contributions to social insurance and pension funds, for examplepaid 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.
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corporate profits The income of corporate businesses. 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.
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net business transfer payments Net transfer payments by businesses to others. surplus of government enterprises Income of government enterprises.
TABLE 6.4 GDP, GNP, NNP and National Income, 2004
DOLLARS (BILLIONS)
GDP
Plus: Receipts of factor income from the rest of the world
Less: Payments of factor income to the rest of the world
Equals: GNP
Less: Depreciation
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
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net national product (NNP) Gross national product minus depreciation; a nations total product minus what is required to maintain the value of its capital stock.
TABLE 6.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2004
DOLLARS (BILLIONS) 10,275.9 - 562.6 9,713.3 - 1,049.1 8,664.2
- 8,214.3 -186.7 -111.5 151.8 1.8%
National income Less: Amount of national income not going to households Equals: Personal income Less: Personal income taxes Equals: Disposable personal income Personal consumption expenditures Personal interest payments Transfer payments made by households Equals: Personal saving Personal saving as a percentage of disposable personal income:
Source: See Table 6.2.
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statistical discrepancy Data measurement error. personal income The total income of households before paying personal income taxes. disposable personal income or aftertax income Personal income minus personal income taxes. The amount that households have to spend or save.
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CHAPTER 19: Measuring National Output and National Income
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.
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current dollars The current prices that one pays 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.
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PRICE PER UNIT YEAR 1 YEAR 2 P1 P2 $.50 .30 .70 $ .40 1.00 .90
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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.
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Overall price increases can be sensitive to the choice of the base year. For this reason, using fixed-price weights to compute real GDP has some problems.
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underground 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.
Whenever sellers looking for a profit come into contact with buyers willing to pay, markets will arise, often underground.
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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.
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U.S. DOLLARS 52,030 48,230 41,400 40,650 37,180 35,270 34,280 33,940 32,790 32,300 31,700 31,030 30,120 30,090 28,390 26,900 26,120 21,210 16,610
COUNTRY Portugal South Korea Czech Republic Mexico Argentina Turkey South Africa Brazil Romania Jordan Colombia Philippines China Indonesia India Pakistan Nepal Rwanda Ethiopia
U.S. DOLLARS 14,350 13,980 9,150 6,770 3,720 3,750 3,630 3,090 2,920 2,140 2,000 1,170 1,290 1,140 620 600 260 220 110
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