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Measuring Measuring Domestic Domestic Output,Output,

and National and National IncomeIncome

Measuring Measuring Domestic Domestic Output,Output,

and National and National IncomeIncome

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Assessing the Economy’sAssessing the Economy’sPerformancePerformance

Assessing the Economy’sAssessing the Economy’sPerformancePerformance

National Income Accounting:National Income Accounting:

•Health of the EconomyHealth of the Economy

•Comparisons Over TimeComparisons Over Time

•Formulation of Public PolicyFormulation of Public Policy

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√√ The idea was created by The idea was created by Simon KuznetsSimon Kuznets (1901-1985) (1901-1985) beginning in 1930 shortly after the beginning of the beginning in 1930 shortly after the beginning of the Great Depression.Great Depression. He received the Nobel Prize in He received the Nobel Prize in Economics in 1971 for his effort.Economics in 1971 for his effort.√√ The The tools of collectiontools of collection of the data were developed by of the data were developed by the team led by Dr. Kuznets. the team led by Dr. Kuznets.

√ √ The The Bureau of Economic Analysis (part of the (part of the

Commerce Department) compiles the numbers Commerce Department) compiles the numbers

(http://www.bea.gov/).(http://www.bea.gov/).

National Income accounting: National Income accounting: measuring overall performance measuring overall performance

of the economyof the economy

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GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT

Market ValueMarket Value of the of the total total

goods and servicesgoods and services

produced produced within the within the

boundaries of the USboundaries of the US

whether whether by Americans or by Americans or

foreignersforeigners in one year. in one year.

Defining…Defining…

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• • uses monetary measureuses monetary measure√ √ attach a “price tag” to products attach a “price tag” to products

producedproduced√ √ use market value of use market value of FINALFINAL goods goods

and servicesand services

• • avoid multiple counting- avoid multiple counting- √ √ ignore transactions involving ignore transactions involving

intermediateintermediate goods. goods.

GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT

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• Excludes Non-productive Transactions

• Financial Transactions•Public Transfer Payments•Private Transfer Payments•Security Transactions

• Secondhand Sales

GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT

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+

+

+

++

++

GROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT

ConsumptionConsumptionby Householdsby Households

InvestmentInvestmentby Businessesby Businesses

GovernmentGovernmentPurchasesPurchases

ExpendituresExpendituresby Foreignersby Foreigners

Expenditures ApproachExpenditures Approach Income ApproachIncome ApproachWagesWages

RentsRents

InterestInterest

ProfitsProfits

StatisticalStatisticalAdjustmentsAdjustments

= =GDP

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GDP = C + G + IGDP = C + G + Igg + X + Xnn

Consumption Spending Consumption Spending

Government SpendingGovernment Spending

Investment SpendingInvestment Spending

Net Export Spending Net Export Spending

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C for Consumption SpendingC for Consumption SpendingLargest portion of GDP — about 65%Largest portion of GDP — about 65%

√√ Durables consumption Durables consumption (more than 3 yrs use) (more than 3 yrs use)

√√ Non durable consumption Non durable consumption (less than 3 yrs use) (less than 3 yrs use)

√ √ ServicesServices

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G for Government SpendingG for Government SpendingFederal SpendingFederal Spending

State and Local SpendingState and Local Spending

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IIgg for Investment Spending for Investment Spending

4. 4. change in business change in business inventoriesinventories

2. 2. new commercial construction new commercial construction

3. 3. tools and machinestools and machines

1. 1. new residential constructionnew residential construction

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Net InvestmentNet Investment

Gross InvestmentGross InvestmentDepreciationDepreciation——

==

Stock ofStock ofCapitalCapital

ConsumptionConsumptionandand

GovernmentGovernmentSpendingSpending

Stock ofStock ofCapitalCapital

DepreciationDepreciation

NetNetInvestmentInvestment

January 1January 1 Year’s GDPYear’s GDP December 31December 31

IncreasedIncreased

GrossGrossInvestmentInvestment

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XXnn for Net Export Spending for Net Export Spending

√√ ImportsImports (goods and services from (goods and services from other countries purchased by American other countries purchased by American citizens) citizens)

√√ ExportsExports (goods and services from (goods and services from America purchased by citizens of other America purchased by citizens of other countries. countries.

XXnn = Exports-Imports = Exports-Imports

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0 1 2 3 4 5 6 7 8 9 100 1 2 3 4 5 6 7 8 9 10United StatesUnited States

JapanJapanGermanyGermany

United United KingdomKingdom

FranceFranceChinaChina

ItalyItalyCanadaCanadaMexicoMexico

SpainSpainBrazilBrazilIndiaIndia

Korea, Rep.Korea, Rep.NetherlandsNetherlands

AustraliaAustralia

GLOBAL PERSPECTIVEGLOBAL PERSPECTIVEComparative GDPs in Trillions, 2001

Source: World Bank

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• Compensation of EmployeesCompensation of Employees• RentsRents• InterestInterest• Proprietors’ IncomesProprietors’ Incomes• Corporate ProfitsCorporate Profits

• Corporate Income TaxesCorporate Income Taxes• DividendsDividends• Undistributed Corporate ProfitsUndistributed Corporate Profits

THE INCOME APPROACHTHE INCOME APPROACHTHE INCOME APPROACHTHE INCOME APPROACH

National In

come

National In

come

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From National Income, subtract:From National Income, subtract:

• Indirect Business Taxes

• Consumption of Fixed

Capital (Depreciation)

• Net Foreign Factor Income

THE INCOME APPROACHTHE INCOME APPROACHTHE INCOME APPROACHTHE INCOME APPROACH

From National Income to GDPFrom National Income to GDP

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Net Domestic ProductNet Domestic Product

By subtracting DEPRECIATION By subtracting DEPRECIATION or Consumption of Fixed Capital or Consumption of Fixed Capital

from the GDP, a figure for the true from the GDP, a figure for the true amount of new goods and services amount of new goods and services

can be determined. can be determined.

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Personal IncomePersonal IncomeSubtracting losses to income (Social Subtracting losses to income (Social Security contribution, corporate Security contribution, corporate profits and retained earnings) and profits and retained earnings) and adding a source of income (transfer adding a source of income (transfer payments) to the National Income, a payments) to the National Income, a figure is determined that shows the figure is determined that shows the personal income available to the personal income available to the nation.nation.

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Disposable IncomeDisposable IncomeBy subtracting from Personal Income, By subtracting from Personal Income, the dollars lost to taxes, we have the the dollars lost to taxes, we have the Disposable Income.Disposable Income.

This is the “bottom” line of national This is the “bottom” line of national income accounting.income accounting.

This figure of Disposable Income This figure of Disposable Income gives us the funds available for gives us the funds available for spending and/or saving.spending and/or saving.

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Gross Domestic Product Gross Domestic Product $10,446 $10,446 (GDP)(GDP)Consumption of fixed capitalConsumption of fixed capital -1,393-1,393

Net Domestic Product Net Domestic Product $9,053 $9,053 (NDP)(NDP)Net foreign factor income earned Net foreign factor income earned in the U.S.in the U.S. - 10 - 10Indirect business taxesIndirect business taxes -695-695

National Income National Income $8,348 $8,348 (NI)(NI)Social security contributionsSocial security contributions -748 -748Corporate income taxesCorporate income taxes -213 -213 Undistributed corporate profitsUndistributed corporate profits -141 -141Transfer paymentsTransfer payments +1,683+1,683

Personal Income Personal Income $8,929 $8,929 (PI)(PI)Personal TaxesPersonal Taxes -1,113 -1,113

Disposable Income Disposable Income $7,816 $7,816 (DI)(DI)

U.S. GDP, NDP, NI, PI, & DI, 2002U.S. GDP, NDP, NI, PI, & DI, 2002

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NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

Nominal GDPNominal GDP … … reflects the current price level reflects the current price level of goods and services and ignores of goods and services and ignores the effect of inflation on the the effect of inflation on the growth of GDP. growth of GDP. … … this measure is called Current this measure is called Current Dollar GDP. Dollar GDP.

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Real GDP Real GDP … … measures the value of goods and services measures the value of goods and services adjusted for change in the price level. It will adjusted for change in the price level. It will reflect the real change in output.reflect the real change in output. … … This measure is called the Constant Dollar This measure is called the Constant Dollar GDP. GDP. … … indicates what the GDP would be if the indicates what the GDP would be if the purchasing power of the dollar has not changed purchasing power of the dollar has not changed from what it was in a base year. The from what it was in a base year. The government currently uses 2000 as its base year government currently uses 2000 as its base year for Real GDP measurement. for Real GDP measurement.

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

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Nominal Values• Deflate GDP when prices rise• Inflate GDP when prices fall

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

1122334455

557788

10101111

$ 10$ 102020252530302828

100100200200250250

----

$ 50$ 50140140200200

----

$ 50$ 5070708080

----

(2)(2)PricePricePizzaPizza

Per UnitPer Unit

(1)(1)Units ofUnits ofOutputOutput

YearYear

(3)(3)Price IndexPrice Index

Year 1 =Year 1 =100100

(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,

GDP,GDP,(1)x(2)(1)x(2)

(5)(5)Adjusted,Adjusted,Or Real,Or Real,

GDPGDP

Calculating Real GDP

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GDP Price IndexGDP Price Index

Price IndexPrice Indexin a givenin a given

yearyear==

Price of market basketPrice of market basketin specific yearin specific year

Price of same marketPrice of same marketbasket in base yearbasket in base year

x 100x 100

Real GDPReal GDP ==Nominal GDPNominal GDP

Price IndexPrice Index(in hundredths)(in hundredths)

Price Index(in hundredths)

=Nominal GDP

Real GDP

An Alternative MethodAn Alternative Method

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

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GDP Index NumbersGDP Index Numbers

YearYear GDP IndexGDP Index

20002000 100.00100.00

20012001 102.402102.402

20022002 104.097104.097

20032003 106.003106.003

2004 Q2004 Q33 108.551108.551