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by: Kymesha White

Macroeconomics ECON 2203

Kymesha White
OK State

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Chapter 6 Notes
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This 24 page Class Notes was uploaded by Kymesha White on Monday February 15, 2016. The Class Notes belongs to ECON 2203 at Oklahoma State University taught by Staff in Spring 2016. Since its upload, it has received 28 views. For similar materials see in Economcs at Oklahoma State University.


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Date Created: 02/15/16
Measuring National Output and National 6 Income C H A P T E R O U T L I N E Gross Domestic Product Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output ProducedAbroad by Domestically Owned Factors of Production Calculating GDP The ExpenditureApproach The IncomeApproach 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 Informal Economy Gross National Income per Capita Looking Ahead national income and product accounts Data collected and published by the government describing the various components of national income and output in the economy. While there are literally thousands of variables in the national income and product accounts, in this chapter we discuss only the most important. 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. Final Goods and Services 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. 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—avoids double counting. TABLE 6.1 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 $3.00 (2) Refining 3.30 0.30 (3) Shipping 3.60 0.30 (4) Retail sale 4.00 0.40 Total value added $4.00 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 changes hands but in which no new goods and services are produced. 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. 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. The Expenditure Approach There are four main categories of expenditure: Personal consumption expenditures (C): household spending on consumer goods Gross private domestic investment (I): 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 + G + (EX − IM) TABLE 6.2 Components of U.S. GDP, 2012: The Expenditure Approach Billions of Dollars Percentage of GDP Personal consumption expenditures (C) 11,119.5 70.9 Durable goods 1,218.8 7.8 Nondurable goods 2,563.0 16.3 Services 7,337.7 46.8 Gross private domestic investment (l) 2,059.5 13.1 Nonresidential 1,616.6 10.3 Residential 382.4 2.4 Change in business inventories 60.6 0.4 Government consumption and gross 3,063.6 19.5 investment (G) Federal 1,214.2 7.7 State and local 1,849.4 11.8 Net exports (EX – IM) −566.7 −3.6 Exports (EX) 2,179.7 13.9 Imports (IM) 2,746.3 17.5 Gross domestic product 15,676.0 100.0 Note: Numbers may not add exactly because of rounding. 2015 I II III %of GDP 2015:Q3 Gross domestic product 17649.3 17913.7 18060.2 Personal consumption expenditures 12055.5 12228.4 12359 68.4% Goods 3901.5 3978.1 4024.1 22.3% Durable goods 1301.8 1326.4 1339.6 7.4% Nondurable goods 2599.7 2651.8 2684.4 14.9% Services 8153.9 8250.2 8334.9 46.2% Gross private domestic investment 2995.9 3025.5 3030.6 16.8% Fixed investment 2868.6 2897.9 2935.3 16.3% Nonresidential 2280.7 2297.9 2319.4 12.8% Structures 499.3 503.8 496 2.7% Equipment 1063.5 1064.6 1090.9 6.0% Intellectual property products 717.8 729.6 732.4 4.1% Residential 588 600 615.9 3.4% Change in private inventories 127.3 127.5 95.3 0.5% Net exports of goods and services -551.6 -519.3 -530.4 -2.9% Exports 2257.3 2280 2259.8 12.5% Goods 1517.5 1535.5 1508.9 8.4% Services 739.8 744.5 750.9 4.2% Imports 2808.9 2799.3 2790.2 15.4% Goods 2311.7 2299.9 2285.4 12.7% Services 497.2 499.5 504.7 2.8% Government consumption expenditures and gross investment 3149.5 3179.2 3201 17.7% Federal 1218.2 1220.7 1224.3 6.8% National defense 739 740.1 738.2 4.1% Nondefense 479.2 480.6 486.1 2.7% State and local 1931.3 1958.4 1976.6 10.9% 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. E C O N O M I C S I N PRAC T I C E Where Does eBay Get Counted? eBay’s business is to provide a marketplace for exchange. In doing so, it uses labor and capital and creates value. In return for creating this value, eBay charges fees to the sellers that use its site. The value of these fees enter into GDP. Items that people sell on eBay do not contribute to current GDP. The cost of finding an interested buyer for those goods, however, does get counted. THINKING PRACTICALLY 1. John has a 2009 Honda Civic. In 2013, he sells it to Mary for $10,000. Is that $10,000 counted in the GDP for 2013? 2. If John is an automobile dealer, does that change your answer to Question 1 at all? Gross Private Domestic Investment (I) gross private domestic investment (I) Total 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. Also now includes expenditures on computer software, research and development (R&D) and for entertainment, literary, and artistic originals -provide long-lasting service to the businesses, nonprofit institutions, and government agencies that use them; used repeatedly in production processes. 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. Change in Business Inventories GDP = Final sales + Change in business inventories (CBI) or CBI=GDP-Final Sales Government Consumption and Gross Investment (G) government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services. 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. The Income Approach 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. Largest income component of GDP. proprietors’ income The income of unincorporated businesses. rental income The income received by property owners in the form of rent. corporate profits The income of corporations. net interest The interest paid by business. 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. Nominal versus Real GDP current dollars The current prices that we pay for goods and services. constant dollars Prices from a base or benchmark year. nominal GDP Gross domestic product measured in current dollars. real GDP Gross domestic product measured in constant (base year) dollars. weight The importance attached to an item within a group of items. Calculating Real GDP TABLE 6.6 A Three-Good Economy (1) (2) (3) (4) (5) (6) (7) (8) GDP in GDP in GDP in GDP in Year 1 in Year 2 in Year 1 in Year 2 in Production Price per Unit Year 1 Year 1 Year 2 Year 2 Year 1 Year 2 Year 1 Year 2 Prices Prices Prices Prices Q1 Q2 P1 P2 P1× Q 1 P 1 Q 2 P2× Q 1 P2× Q 2 Good A 6 11 $0.50 $0.40 $3.00 $5.50 $2.40 $4.40 Good B 7 4 0.30 1.00 2.10 1.20 7.00 4.00 Good C 10 12 0.70 0.90 7.00 8.40 9.00 10.80 Total $12.10 $15.10 $18.40 $19.20 Nominal (15.1-12.1)/12.1=0.248 or 24.8%l GDP in GDP in (19.2-18.4)/18.4=0.043 or 4.3 % year 1 year 2 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. chain-weighted Use average of calculations with different fixed weights Calculating the GDP Deflator Policy makers not only need 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. Calculated as the ratio of nominal GDP to real GDP for a year, multiplied by 100. Base year=100.Year 1: (12.1/12.1)*100=100; Year 2: (19.2/15.1)*100=127.2 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 increasing less rapidly. Overstates GDP growth after the base year (understates prior to the base year). Weights Q↑ too much (P falling) and weights Q↓ too little (P rising)→overstates growth Limitations of the GDP Concept 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 even though they amount to real production. GDP also has nothing to say about the distribution of output among individuals in a society. E C O N O M I C S I N PRAC T I C E Green Accounting Recently many economists and policy makers have become concerned about the exclusion of one particularly large and important nonmarket activity from the national income accounts: the environment. The market goods that many industries produce go into the national income and product accounts, but the environmental costs of air pollution are not subtracted. Recent work by Nick Muller, Robert Mendelsohn, and Bill Nordhaus estimates that including properly valued air pollution in the national income and product accounts as an offset to the value of the marketed goods produced by some industries would make their contribution to our nation’s GDP negative! THINKING PRACTICALLY 1. Why do you think we have not counted pollution in GDP measures in the past? 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.  FIGURE 6.1 Per Capita Gross National Income for Selected Countries, 2011 R E V I E W T E R M S A N D C O N C E P T S base year gross domestic product (GDP) change in business inventories gross investment compensation of employees gross national income (GNI) corporate profits gross national product (GNP) current dollars gross private domestic investment (I) depreciation income approach disposable personal income, or after-tax indirect taxes minus subsidies income informal economy durable goods intermediate goods expenditure approach national income final goods and services national income and product accounts fixed-weight procedure net business transfer payments government consumption and gross investment (G) R E V I E W T E R M S A N D C O N C E P T S 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 expenditures (C) Expenditure approach to GDP: GDP = personal income C + I + G + (EX − IM) GDP = Final sales + Change in personal saving personal saving rate business inventories capital = capital + proprietors’ income end of period beginning of period net investment


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