NATIONAL INCOME & GDP

National Income Accounting

Measures the Economy’s overall performance Like a personal

accountant….. But for the economy

Bureau of Economic Accounting (BEA)

Complies the National Income and Product Accounts

Assess economic health Track the long-run of the

economy Develop policies to

improve economy

The GDP Gross Domestic Product

Total market value of all final goods and services in a given year

Included or excluded??1. Fords produced by an American-owned factory in

Detroit2. Hondas produced by a Japanese-owned factory in Ohio

Both Included!

GDP includes all goods and services produced within the country

Gives a Monetary Measure

Year 1: Produce 3 iPods and 2 ZunesYear 2: Produce 2 iPods and 3 Zunes

Which year has a greater output?

Need a price tag!

GDP is based on a monetary measure to gain an accurate measure of economic output

2 Rules of GDP1. Avoid Multiple Counting:

Only accounts for Final Goods

Final Goods/Services:example: Any retail good

Intermediate G/S:example: Peanuts sold from Bob the farmer to Jiffy to make peanut butter

If both transactions were counted in the GDP we would have multiple counting

2 Rules of GDP

Public Transfer Payments SS, Welfare

Private Transfer Payments

Cash for B-day Stocks/Bonds

Do not create production

In reality…. They are just slips of paper!

Sell your ‘03 Toyota Camry to your best friend

……..Just don’t tell them about the brakes……

Financial Transactions Second Hand Sales

2. Excluded Nonproduction Transactions

Two ‘Faces’ of GDP

a.k.a. Output approach

Sum of all money spent

a.k.a. Allocations approach

Sum of income created during production

Expenditure Approach Income Approach

• In general, buying (spending money) and selling (receiving income) are two aspects of the same transactions

Expenditures Approach

GDP= C + Ig + G + Xn

GDP= C+ ………Personal Consumption

Durable consumer goods Cars, appliances, electronics

Nondurable consumer goods Bread, milk, pencils, toothpaste

Consumer Expenditures for Services Lawyers, doctors, barbers

GDP=. . . Ig+. . . Gross Private Domestic Investment

1. Final purchases of machinery, equipment, tools2. All construction

Both residential and nonresidential construction

Why is residential construction not counted in consumption?

Houses could be rented to bring in an income return

3. Changes in inventory Including unsold goods… “unconsumed output”

. . . More about Investment Not counted in investment

Stocks/bonds Resale of tangible goods (houses)

So how does a Realtors Commission fit in? Is it included in GDP?

counted as CONSUMPTION (service)

Overall…. Investment deals with the creation of new capital

GDP=. . . G+. . . Government purchases

“Government consumption expenditures” All government expenditures on final goods

Service- costs for public goods Social capital- highways, schools

What is not counted in G? Transfer payments

GDP= . . . Xn

Net Exports (International Trade)

Net Exports (Xn)= Exports (X) – Imports (M)

GDP Jan. 29th, 2011 Billions of $ % of GDP

Personal Consumption Expenditures (C) 10525.2 70.78% Goods 3533.3 23.76% Durable goods 1135.7 7.64% Nondurable goods 2397.7 16.12% Services 6991.8 47.02%Gross PrivateDomestic Investment (Ig) 1796.7 12.08% Fixed investment 1791.5 12.05% Nonresidential 1457.2 9.80% Structures 384.7 2.59% Equipment and software 1072.5 7.21% Residential 334.3 2.25% Change in private inventories 5.2 0.03%Net Exports of Goods and Services (Xn) -492.2 -3.31% Exports 1923.9 12.94% Goods 1347.7 9.06% Services 576.1 3.87% Imports 2416 16.25% Goods 2002.9 13.47% Services 413.1 2.78%

Government Expenditures and Investment (G) 3040.7 20.45% Federal 1238.7 8.33% National defense 831 5.59% Nondefense 407.7 2.74% State and local 1802 12.12% Gross Domestic Product (Y) 14870.4 100.00%

Nominal 2009 GDP in USD