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Fifth EditionFifth Edition

EconomicsA Contemporary IntroductionA Contemporary Introduction

William A. McEachernWilliam A. McEachern

Measuring Economic Aggregates Measuring Economic Aggregates and the Circular Flow of Incomeand the Circular Flow of Income

Fifth EditionFifth Edition

EconomicsA Contemporary IntroductionA Contemporary Introduction

William A. McEachernWilliam A. McEachern

Measuring Economic Aggregates Measuring Economic Aggregates and the Circular Flow of Incomeand the Circular Flow of Income

2Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 1: Computation of Value Added Exhibit 1: Computation of Value Added for a New Deskfor a New Desk

Exhibit 1: Computation of Value Added Exhibit 1: Computation of Value Added for a New Deskfor a New Desk

Cost of Sale Intermediate Value

Stage of Value Goods Added

Production (1) (2) (3)

Logger $ 20 —— $ 20

Miller 50 $ 20 30

Manufacturer 120 50 70

Retailer 200 120 80

$200

3Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 2: Exhibit 2: The Circular The Circular Flow of Flow of Income and Income and ExpenditureExpenditure

Exhibit 2: Exhibit 2: The Circular The Circular Flow of Flow of Income and Income and ExpenditureExpenditure

4Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 3: Hypothetical Example of Exhibit 3: Hypothetical Example of a Price Index (base year = 1997)a Price Index (base year = 1997)

Exhibit 3: Hypothetical Example of Exhibit 3: Hypothetical Example of a Price Index (base year = 1997)a Price Index (base year = 1997)

Price of Bread Price of Breadin Current Year in Base Year Price Index

Year (1) (2) (3) = (1)/(2)x100

1997 $1.25 $1.25 100

1998 1.30 1.25 104

1999 1.40 1.25 112

5Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 4a: Hypothetical Market Exhibit 4a: Hypothetical Market Basket Used to Develop the Basket Used to Develop the

Consumer Price IndexConsumer Price Index

Exhibit 4a: Hypothetical Market Exhibit 4a: Hypothetical Market Basket Used to Develop the Basket Used to Develop the

Consumer Price IndexConsumer Price Index

Quantity in Price in Cost of BasketGood or Market Basket Base Year in Base YearService (1) (2) (3 ) = (1) x (2)

Twinkies 365 packages $0.84/pkg. $ 324.85

Fuel Oil 500 gallons 1.00/gallon 500.00

Cable TV 12 months 30.00/month 360.00

$1,184.85

6Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 4: Hypothetical Market Exhibit 4: Hypothetical Market Basket Used to Develop the Basket Used to Develop the

Consumer Price IndexConsumer Price Index

Exhibit 4: Hypothetical Market Exhibit 4: Hypothetical Market Basket Used to Develop the Basket Used to Develop the

Consumer Price IndexConsumer Price Index

Prices in Cost of BasketGood or Current Year in Base YearService (4) (5) = (1) x (4)

Twinkies $ 0.79 $ 288.35

Fuel Oil 1.50 750.00

Cable TV 30.00 360.00

$1,398.35

7Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 5: Gross Domestic Product: Exhibit 5: Gross Domestic Product: Current Dollars Versus Chained Current Dollars Versus Chained

(1992) Dollars(1992) Dollars

Exhibit 5: Gross Domestic Product: Exhibit 5: Gross Domestic Product: Current Dollars Versus Chained Current Dollars Versus Chained

(1992) Dollars(1992) Dollars

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Trill

ion

s o

f d

olla

rs

1960 1965 1970 1975 1980 1985 1990 1995 1998

Current dollars

Chained (1992) dollars

Source: Developed from estimates by the U.S. Dept. of Commerce in Survey of Current Business, 77 (August 1997) and 79 (January 1999).

8Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 6: Deriving Net Domestic Product Exhibit 6: Deriving Net Domestic Product and National Income Using 1998 Data and National Income Using 1998 Data

(in trillions of dollars)(in trillions of dollars)

Exhibit 6: Deriving Net Domestic Product Exhibit 6: Deriving Net Domestic Product and National Income Using 1998 Data and National Income Using 1998 Data

(in trillions of dollars)(in trillions of dollars)

Gross domestic product (GDP)$8.51Minus depreciation –0.91

Net domestic product7.60

Plus net earnings of Americanresources abroad minus indirectbusiness taxes (net of subsidies) –0.60

National income$7.00

Source: Economic Report of the President, February 1999, and Survey of Current Business, 79 (February 1999).

9Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 7: Deriving Personal Income Exhibit 7: Deriving Personal Income and Disposable Income Using 1998 Data and Disposable Income Using 1998 Data

(in trillions of dollars)(in trillions of dollars)

Exhibit 7: Deriving Personal Income Exhibit 7: Deriving Personal Income and Disposable Income Using 1998 Data and Disposable Income Using 1998 Data

(in trillions of dollars)(in trillions of dollars)National income $7.00

Minus income earned but not received(Social Security taxes, corporate incometaxes, undistributed corporate profits) –2.06

Plus income received but not earned(government and business transfers,net personal interest income) 2.18

Personal income 7.12

Minus personal tax andnontax charges –1.10

Disposable income $6.02

Source: Economic Report of the President, February 1999, and Survey of Current Business, 79 (February 1999).

10Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 8a: Expenditure and Income Exhibit 8a: Expenditure and Income Statement for the U.S. Economy Using Statement for the U.S. Economy Using

1998 Data (in trillions of dollars)1998 Data (in trillions of dollars)

Exhibit 8a: Expenditure and Income Exhibit 8a: Expenditure and Income Statement for the U.S. Economy Using Statement for the U.S. Economy Using

1998 Data (in trillions of dollars)1998 Data (in trillions of dollars)

Aggregate Expenditure

Consumption (C) $5.81

Gross investment (I) 1.37

Government purchases (G) 1.49

Net exports (X – M) –0.16

GDP $8.51

Source: Economic Report of the President, February 1999, and Survey of Current Business, 79 (February 1999).

11Measuring Economic Aggregates and the Circular Flow of Income

Exhibit 8b: Expenditure and Income Exhibit 8b: Expenditure and Income Statement for the U.S. Economy Using Statement for the U.S. Economy Using

1998 Data (in trillions of dollars)1998 Data (in trillions of dollars)

Exhibit 8b: Expenditure and Income Exhibit 8b: Expenditure and Income Statement for the U.S. Economy Using Statement for the U.S. Economy Using

1998 Data (in trillions of dollars)1998 Data (in trillions of dollars)Allocation of IncomeDepreciation $0.91

Net earnings of Americanresources abroad –0.02

Net indirect business taxes 0.62

Compensation of employees 4.98

Proprietors’ income 0.58

Corporate profits 0.83

Net interest 0.45

Rental income of persons 0.16

GDP $8.51

Source: Economic Report of the President, February 1999; annual estimates based on figures for three quarters.