PRINCIPLE OF ECONOMICS

MEASURING NATIONAL OUTPUT AND INCOMEPRINCIPLE OF ECONOMICS

Measuring of National Income and Outputmeasures of national income and outputare used ineconomicsto estimate total economic activity in a country or region, includinggross domestic product, gross national product, and net national income.

All are specially concerned with counting the total amount of goods and services produced within some "boundary".

The boundary is usually defined by geography or citizenship, and may also restrict the goods and services that are counted. For instance, some measures count only goods and services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods byimputingmonetary values to them.

Gross Domestic Product

Gross domestic product (GDP) is the total market value of all final goods and services produced within a given period by factors of production located within a country

National Income and Product Accounts4 of 38National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy.

The U.S. Department of Commerce is responsible for producing and maintaining the National Income and Product Accounts that keep track of GDP.

Final Goods and Services5 of 38The term final goods and services in GDP refers to goods and services produced for final use.

Intermediate goods are goods produced by one firm for use in further processing by another firm.

Value Added6 of 38Value added is 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.

In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales.

Exclusions of Used Goodsand Paper Transactions7 of 38GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.

Exclusion of Output Produced Abroadby Domestically Owned Factors of Production8 of 38

GDP is the value of output produced by factors of production located within a country. Output produced by a countrys citizens, regardless of where the output is produced, is measured by gross national product (GNP).

Calculating GDPGDP can be computed in two ways:The expenditure approach: A method of computing GDP that measures the total amount spent on all final goods during a given period.

The income approach: A method of computing GDP that measures the incomewages, rents, interest, and profitsreceived by all factors of production in producing final goods

Personal Consumption Expenditures10 of 38Personal consumption expenditures (C) are expenditures by consumers on the following:

Durable goods: Goods that last a relatively long time, .Nondurable goods: Goods that are used up fairly quickly, .Services: Things that do not involve the production of physical things,.

Gross Private Domestic Investment11 of 38Investment refers to the purchase of new capital.

Total investment by the private sector is called gross private domestic investment. .

Gross Private Domestic Investment12 of 38Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on.

Residential investment includes expenditures by households and firms on new houses and apartment buildings.

Change in inventories computes the amount by which firms inventories change during a given period. Inventories are the goods that firms produce now but intend to sell later.

12The relationship between total production and total sales is:GDP = final sales + change in business inventories

Gross Private Domestic Investment13 of 38Remember that GDP is not the market value of total sales during a periodit is the market value of total production.

The relationship between total production and total sales is:GDP = final sales + change in business inventories

13The relationship between total production and total sales is:GDP = final sales + change in business inventories

Gross Investmentversus Net Investment14 of 38Gross investment is the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period.Depreciation is the amount by which an assets value falls in a given period.Net investment equals gross investment minus depreciation.capitalend of period = capitalbeginning of period + net investment

Government Consumptionand Gross Investment15 of 38Government consumption and gross investment counts expenditures by federal, state, and local governments for final goods and services.

Net Exports16 of 38Net exports (EX IM) is the difference between exports and imports. The figure can be positive or negative.

Exports (EX) are sales to foreigners of U.S.-produced goods and services.

Imports (IM) are U.S. purchases of goods and services from abroad).

The Income Approach17 of 38National income is the total income earned by the factors of production owned by a countrys citizens.

The income approach to GDP breaks down GDP into four components:GDP = national income + depreciation + (indirect taxes subsidies) + net factor payments to the rest of the world + other

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From GDP to Disposable Personal Income18 of 38Net national product equals gross national product minus depreciation; a nations total product minus what is required to maintain the value of its capital stock.

Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes.

Disposable Personal Income and Personal Saving19 of 38The personal saving rate is the percentage of disposable personal income that is saved.

If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.

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Nominal Versus Real GDP20 of 38

Nominal GDP is GDP measured in current dollars, or the current prices we pay for things. Nominal GDP includes all the components of GDP valued at their current prices.

When a variable is measured in current dollars, it is described in nominal terms.

Calculating Real GDP21 of 38

A weight is the importance attached to an item within a group of items.

A base year is the year chosen for the weights in a fixed-weight procedure.

A fixed-weight procedure uses weights from a given base year.

Calculating the GDP Deflator22 of 38

The GDP deflator is one measure of the overall price level. The GDP deflator is computed by the Bureau of Economic Analysis (BEA).

Overall price increases can be sensitive to the choice of the base year. For this reason, using fixed-price weights to compute real GDP has some problems.

The Problems of Fixed Weights23 of 38Structural changes in the economy.Supply shifts, which cause large decreases in price and large increases in quantity supplied.The substitution effect of price increases.The use of fixed price weights to estimate real GDP leads to problems because it ignores:

GDP and Social Welfare24 of 38Society is better off when crime decreases, however, a decrease in crime is not reflected in GDP.

An increase in leisure is an increase in social welfare, but not counted in GDP.

Nonmarket and household activities are not counted in GDP even though they amount to real production.

GDP and Social Welfare25 of 38GDP accounting rules do not adjust for production that pollutes the environment.

GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP.

GDP is neutral to the kinds of goods an economy produces.

The Underground Economy26 of 38The underground economy is the part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.

Gross National Income per Capital27 of 38To make comparisons of GNP between countries, currency exchange rates must be taken into account.

Gross National Income (GNI) is a measure used to make international comparisons of output. GNI is GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.

GNI divided by population equals gross national income per capita.