Chapter 6 Measuring National Output and National Income. Kazu Matsuda IBEC 203 Macroeconomics

Chapter 6 Measuring National Output and National Income Kazu Matsuda IBEC 203 Macroeconomics

MEASURING NATIONAL OUTPUT AND NATIONAL INCOME 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.

= The total market value of all final goods and services produced within a given period by factors of production located within a country. Principles of [1] Final goods & Services Principle Final goods and services = Goods and services produced for final use. = Goods that are produced by one firm for use in further processing by another firm.

Wheels & Tires = $4,000. Suspension & Steering & Transmission & Brake & Body = $6,000 Interior = $5,000 Glass = $2,000 Assembly and Engine = $7,000 Retail Sale = $28,000

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. Value of Sales Value added Parts $17,000 $ Assembly and Engine $24,000 $ Retail Sale $28,000 $

[2] Exclusion of used goods & Paper transactions Principle GDP is concerned only with?.

[3] Exclusion of Output Produced Abroad by Domestically Owned Factors of Production GDP is the value of output produced by factors of production located?. The output produced by US citizen abroad? counted in US GDP because the output is not produced within the US. Profits earned abroad by US companies? counted in US GDP. The output produced by foreigners working in the US? counted in US GDP because the output is produced within the US. Profits earned in the US by foreign-owned companies? counted in US GDP.

= 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. The output produced by US citizen abroad? counted in US GNP. Profits earned abroad by US companies? counted in US GNP. The output produced by foreigners working in the US? counted in US GNP. Profits earned in the US by foreign-owned companies? counted in US GNP.

For most countries, the difference between GDP and GNP is?. 2004: U.S. GNP = $11,788 billion, U.S. GDP = $11,734.3 billion. Profit by U.S. GDP American Honda Motor Co. Nintendo of America Toshiba America, Inc. Hitachi America, Ltd. McDonald s Japan Starbucks Japan MSFT Japan Coca Cola Japan U.S. GNP

CALCULATING GDP = A method of computing GDP that measures the amount spent on all final goods during a given period. = A method of computing GDP that measures the income wages, rents, interest, and profits received by all factors of production in producing final goods.

THE EXPENDITURE APPROACH Expenditure Categories [1] The? part of GDP. There are three main categories of consumer expenditures: (1)? = Goods that last a relatively long time. (2)? = Goods that are used up fairly quickly. (3)? = The things we buy that do not involve the production of physical things.

Expenditure Categories [2] THE EXPENDITURE APPROACH (1)? = Expenditures by firms for machines, tools, plants. (2)? = Expenditures by households and firms on new houses and apartment buildings. (3)? = The amount by which firm s inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.

GDP is not the market value of total? during a period it is the market value of total?.

THE EXPENDITURE APPROACH Expenditure Categories [3] Expenditures by? governments for final goods and services. Final goods: Services:

THE EXPENDITURE APPROACH Expenditure Categories [4]

List of countries by exports U.S. Exports & U.S. Imports List of the largest trading partners of the United States Balance of Trade List of countries by current account balance

TABLE 6.2 Components of U.S. GDP, 2004: The Expenditure Approach BILLIONS OF DOLLARS PERCENTAGE OF GDP Personal consumption expenditures (C) 8,214.3 70.0 Durable goods Nondurable goods Services 987.8 2,368.3 4,858.2 8.4 20.2 41.4 Gross private domestic investment (l) 1,928.1 16.4 Nonresidential Residential Change in business inventories 1,198.8 673.8 55.4 10.2 5.7 0.5 Government consumption and gross 2,215.9 18.9 investment (G) Federal State and local 827.6 1,388.3 7.1 11.8 Net exports (EX IM) 624.0 5.3 Exports (EX) 1,173.8 10.0 Imports (IM) 1,797.8 Gross domestic product (GDP) 11,734.3 100.0 ote: Numbers may not add exactly because of rounding. ource: U.S. Department of Commerce, Bureau of Economic Analysis. 15.3

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. 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.

TABLE 6.3 National Income, 2004 BILLIONS OF DOLLARS National Income 10,275.9 100.0 PERCENTAGE OF NATIONAL INCOME Compensation of employees 6,687.6 65.1 Proprietors income Rental income 889.6 134.2 8.7 1.3 Corporate profits 1,161.5 11.3 Net interest 505.5 4.9 Indirect taxes minus subsidies Net business transfer payments Surplus of government enterprises 809.3 91.1 3.0 7.9 0.9 0.0 ource: See Table 6.2.

TABLE 6.4 GDP, GNP, NNP and National Income, 2004 DOLLARS (BILLIONS) GDP 11,734.3 Plus: Receipts of factor income from the rest of the world + 415.4 Less: Payments of factor income to the rest of the world 361.7 Equals:? 11,788.0 Less: Depreciation 1,435.3 Equals:? 10,352.8 Less: Statistical discrepancy 76.9 Equals:? 10,275.9 ource: See Table 6.2.

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.

TABLE 6.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2004 BILLIONS $ National income 10,275.9 Less: Amount of national income not going to households 562.6 Equals:? 9,713.3 Less: Personal income taxes 1,049.1 Equals:? 8,664.2 Personal consumption expenditures 8,214.3 Personal interest payments 186.7 Transfer payments made by households 111.5 Equals:? 151.8? 1.8%

NOMINAL VERSUS REAL GDP Current dollars = The current prices that one pays for goods and services. Nominal GDP = Gross domestic product measured in current dollars. Real GDP =

NOMINAL VERSUS REAL GDP All the main issues involved in computing real GDP can be discussed using a simple three-good economy and 2 years. VS

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 YEAR 2 YEAR 1 YEAR 2 IN IN IN IN PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2 YEAR1 YEAR 2 YEAR1 YEAR 2 PRICES PRICES PRICES PRICES Q 1 Q 2 P 1 P 2 P 1 x Q 1 P 1 x Q 2 P 2 x Q 1 P 2 X Q 2 Tea 6 11 $.50 $.40 VS 7 4.30 1.00 Car 10 12.70.90 Total

The procedure that the BEA used prior to 96 was to pick a base year and to use the prices in that base year as weights to calculate real GDP. This is a fixed-weight procedure because the weights used, which are the prices, are the same for all years the prices that prevailed in the base year. New Procedure: Calculating Real GDP Growth [1] Split the difference. [2] Change of base year.

NOMINAL VERSUS REAL GDP CALCULATING THE GDP DEFLATOR The GDP deflator is one measure of the overall price level.

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 YEAR 2 YEAR 1 YEAR 2 IN IN IN IN PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2 YEAR1 YEAR 2 YEAR1 YEAR 2 PRICES PRICES PRICES PRICES Q 1 Q 2 P 1 P 2 P 1 x Q 1 P 1 x Q 2 P 2 x Q 1 P 2 X Q 2 Tea 6 11 $.50 $.40 VS 7 4.30 1.00 Car 10 12.70.90 Total

About GDP List of countries by GDP (Nominal) List of countries by GDP (Real) List of countries by GDP (Real, per capita)

LIMITATIONS OF THE GDP CONCEPT GDP AND SOCIAL WELFARE Society is better off when crime decreases; however, a decrease in crime is not reflected in GDP. List of countries by murder rate United States cities by crime rate Highest Prison Population Rates An increase in leisure is an increase in social welfare, but not counted in GDP. Countries with highest work hours Nonmarket and household activities are not counted in GDP even though they amount to real production.

LIMITATIONS OF THE GDP CONCEPT GDP seldom reflects losses or social ills. GDP also has nothing to say about the distribution of output among individuals in a society. List of countries by income equality Neutrality about the kinds of goods an economy produces.? = 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.

HDI HDI Measure of Well-Being, Standard of Living Despite these limitations, GDP is a highly useful measure of economic activity and well-being. GROSS NATIONAL INCOME PER CAPITA 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.

TABLE 6.7 Per Capita Gross National Income for Selected Countries, 2004 COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS Norway 52,030 Portugal 14,350 Switzerland 48,230 South Korea 13,980 United States 41,400 Czech Republic 9,150 Denmark 40,650 Mexico 6,770 Japan 37,180 Argentina 3,720 Sweden 35,270 Turkey 3,750 Ireland 34,280 South Africa 3,630 United Kingdom 33,940 Brazil 3,090 Finland 32,790 Romania 2,920 Austria 32,300 Jordan 2,140 Netherlands 31,700 Colombia 2,000 Belgium 31,030 Philippines 1,170 Germany 30,120 China 1,290 France 30,090 Indonesia 1,140 Canada 28,390 India 620 Australia 26,900 Pakistan 600 Italy 26,120 Nepal 260 Spain 21,210 Rwanda 220 Greece 16,610 Ethiopia 110 ource: World Bank, 2005.