gdp and the standard of living chapter 5 eye ons business cyclegdp consumption expendituregnp...
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GDP and the Standard of Living
CHAPTER5EYE ONS
Business Cycle GDPConsumption expenditure GNPDepreciation Real GDPDisposable personal income Real GDP/personIntermediate good or service Nominal GDPFinal good or service Standard of livingGDP deflator Statistical discrepancyGovt expenditure on goods & services InvestmentExports of goods & servicesImports of goods & servicesNet domestic product at factor costNet exports of goods & services
When American Airlines buys a new reservations software package, is that expenditure an expenditure on a final good or an intermediate good?
Before 1999, the national income accountants counted the purchase of software as expenditure on an intermediate good—and it was excluded from GDP.
Since 1999, the national income accountants have classified the purchase of new software as investment—and is now included in GDP.
Is a Computer Program an Intermediate Good or a Final Good?
How big of a deal is this?
When the Bureau of Economic Analysis (BEA) recalculated the 1996 GDP, the estimate of GDP in 1996 increased by $115 billion—a lot of money.
In 1996, GDP was $7,662 billion, so the increase of $115 billion is 1.5 percent of GDP.
This example shows how the BEA works to measure GDP as accurately as possible.
Is a Computer Program an Intermediate Good or a Final Good?
Where in the National Income and Product Accounts do your transactions appear? How can you use information about GDP in your life?
Your Contribution to GDP
Your own economic transactions show up in the National Income and Product Accounts on both the expenditure side and the income side.
Most of your expenditure is part of Consumption Expenditure.
If you were to buy a new home, that expenditure would appear as part of Investment.
Making GDP Personal
Because you buy goods produced in another country, expenditure on these goods shows up as part of Imports.
If you have a job, your income appears in Compensation of Employees.
Because the GDP measure of the value of production includes only market transactions, some of your own production of goods and services is most likely not counted in GDP.
What are the nonmarket goods and services that you produce? How would you go about valuing them?
Making GDP Personal
Making Sense of the Numbers
To use the GDP numbers in a news report, you must first check whether the reporter is referring to nominal GDP or real GDP.
Using U.S. real GDP per person, check how your income compares with the average income in the United States.
When you see GDP numbers for other countries, compare your income with that of a person in France, or Canada, or China.
Making GDP Personal
DEFINITION
GDP
1. The market value
2. of all the final goods and services
3. produced within a country
4. in a given time period.
• Does GDP count the value of everything produced?
• Does GDP count the market value of a new home?
• Does GDP count purchases of Stocks and Bonds?
VALUE Produced
WHAT Produced
WHERE Produced
WHEN Produced
DEFINITION
Total Expenditure = C+I+G+NX Also, the total amount received by the producers of final goods and services
C = Consumption
nondurables (food), durables (DVD), services (haircut), rent (apts/houses)
I = Investment
new capital goods (machines), additions to inventory, new home purchases
G = Government
Anything purchased by any level of government
NX= Net Exports
export goods – import goods
Market Flows
DEFINITION
Total Income (Y) = C+S+NT Expenditure = Income (b/c firms pay out everything they receive as income to the factors of production
Y = Total Income
wages, interest, rent, profit EARNED FROM labor, capital, land, entr.
C = Consumption
food, housing, vacations, Walmart, etc.
S = Savings
amount of income NOT SPENT on taxes or consumption goods
NT= Net Taxes
taxes paid – cash benefits received from government
GDP - EXPENDITURE APPROACH
Does not include: Intermediate goods Used goods
Financial Assets (loans not assets)
Values Goods at MARKET PRICE
GDP – INCOME APPROACH
Income from ALL factors of production: Wages, interest, rent, profit
Values Goods at FACTOR COST
GDP – INCOME APPROACH
Indirect taxes (sales tax) = make MKT price > FTR cost = MUST ADD Subsidies = make FTR cost > MKT price = MUST SUBTRACT
Values Goods at FACTOR COST
GDP – INCOME APPROACH
GDP Exp – GDP Inc = Statistical Discrepancy Tips are missed in income but caught in expenditure when spent Most income is reported through IRS but expenditures are typically estimated
Values Goods at FACTOR COST
Expenditure Approach WINS!
GNP
GNP = GDP + Net Factor Income from Abroad
DISPOSABLE PERSONAL INCOME
GDP – NOMINAL vs REAL
X =
X =
X =
WHY?
REAL GDP PER PERSON
Real GDP per person = Real GDP / populationValue of goods & services a person can enjoy
Long-Term trend?Short-Term fluctuations?
Doubles every 30 yrs
Business cycle
WHAT DOES Real GDP PER PERSON MEASURE?
Standard of living ?Cost of living ?
GDP – NOMINAL vs REAL
2001 verse 2008Edition 5
When Did the Recession Begin?
Edition 5
STANDARD OF LIVING <> COST OF LIVING
Omitted from GDPHousehold ProductionUnderground ProductionLeisure TimeEnvironment Quality
Decreasing
80’s, 90’s
Increases overtime
OTHER INFLUENCES on STANDARD OF LIVING
Health and Life ExpectancyPolitical Freedom and Social JusticeThus, . . .
HDI – Human Development Index
The Human Development Index
The figure shows the relationship between real GDP per person and the Human Development Index (HDI).
Each dot represents a country.
The small Africa country of Sierra Leone has the lowest HDI and the second lowest real GDP per person.
The Human Development Index
The United States has the third highest real GDP per person but has the eighth highest HDI.
Why is the United States not ranked higher on the HDI?
Because the people who live in seven countries live longer, have better access to health care and education than do Americans.
FORMULAS
Expenditure Approach: GDP = C + I + G + NX
(Consumption, Investment, Government, Net Exports)
Income Approach: GDP = W + I + R + P + Indirect taxes – Subsidies + Depreciation
GDP = Net domestic product at factor cost+ Indirect taxes – Subsidies + Depreciation
Net Domestic Product at Factor Cost = Wages + Interest + Rent + Profit
Total Income: Y = C + S + NT (Consumption + Savings + Net Taxes)
Income = Expenditure
Net Exports = Exports - Imports
Savings = Y – C - NT
Edition 5
Edition 5