AGENDA Mon 1/25

• QOD #7: Shares of BBQ

• HW Review (pp 485-494 Q#2,4,7)

• National Income Review

• Jump Start: P #4,5,7

• HW pp 494-500 P #4,5,7

• Study for CH 23-24 Assessment

• Parent Syllabus review

LO1 24-1

QOD #7: Shares of BBQ

Assume that a national restaurant firm called

BBQ builds 10 new restaurants at a cost of $1

million per restaurant. It outfits each restaurant

with an additional $200,000 of equipment and

furnishings. To help partially defray the cost of

this expansion, BBQ issues and sells 200,000

shares of stock at $30 per share.

a) What is the amount of economic investment

that has resulted from BBQ’s actions?

b) How much purely financial investment took

place? LO1 24-2

QOD #7: Shares of BBQ Solution

a) What is the amount of economic investment that has

resulted from BBQ’s actions?

a) $12 million in economic investment occurred (= $10 million

for restaurants + $2 million for equipment).

b) How much purely financial investment took place?

b) The purely financial investment was $6 million (= $30 x

200,000).

LO1 24-3

• National Income Accounting measures

economy’s overall performance

• Bureau of Economic Analysis compiles

National Income and Product Accounts

• Assess health of economy

• Track long run course

• Formulate policy

Assessing the Economy’s Performance

LO1 24-4

Gross Domestic Product

• Measure of aggregate output

• Monetary measure

• Avoid multiple counting

• Market value final goods

• Ignore intermediate goods

• Count value added

LO1 24-5

Gross Domestic Product

(1)

Stage of Production

(2)

Sales Value

Of Materials

Or Product

$ 0

Firm A, sheep ranch 120

Firm B, wool producer 180

Firm C, coat manufacturer 220

Firm D, clothing manufacturer 270

Firm E, retail clothier 350

Total Sales Value $1140

Value Added (total income)

(3)

Value

Added

]--------$120 (= $120 - $ 0)

]-------- 60 (= 180 - 120)

]-------- 40 (= 220 - 180)

]-------- 50 (= 270- 220)

]-------- 80 (= 350 – 270)

$350

LO1 24-6

Gross Domestic Product

• Exclude financial transactions

• Public transfer payments

• Private transfer payments

• Stock (and bond) market

transactions

• Exclude second hand sales

• Sell used car to a friend

LO1 24-7

Two Approaches to GDP

• Income approach

• Count income derived from

production

• Wages, rental income, interest

income, profit

• Expenditure approach

• Count sum of money spent buying

the final goods

• Who buys the goods? LO2 24-8

G

D

P

= =

+ Consumption by

Households

Investment by

Businesses

Government

Purchases

Expenditures

By Foreigners

+

+

+ + +

Wages

Rents

Interest

Profits

Statistical

Adjustments

+

Two Approaches to GDP

Expenditures or

Output Approach

Income or

Allocations Approach

LO2 24-9

Expenditures Approach

• Personal consumption

expenditures (C)

• Durable consumer goods

• Nondurable consumer goods

• Consumer expenditures for

services

• Domestic plus foreign goods

produced

LO2 24-10

Expenditures Approach

• Gross private domestic investment (Ig)

• Machinery, equipment, and tools

• All construction

• Changes in inventories

• Creation of new capital assets

• Noninvestment transactions excluded

LO2 24-11

Expenditures Approach

January 1 Year’s GDP December 31

Consumption & Government

Spending

Depreciation

Net Investment

Gross Investment

Stock of Capital

Increase

Stock of Capital

Gross Investment

Depreciation

Net Investment

- =

LO2 24-12

Expenditures Approach

• Government purchases (G)

• Expenditures for goods and services

• Expenditures for publicly owned capital

• Excludes transfer payments

• Net exports (Xn)

• Add exported goods

• Subtract imported goods

• Xn = exports – imports

• GDP = C + Ig + G + Xn

LO2 24-13

Compensation

Rents

Interest

Proprietor’s Income

Corporate Profits

Taxes on Production and

Imports

National Income

Net Foreign Factor Income (-)

Statistical Discrepancy (+)

Consumption of Fixed

Capital (+)

Gross Domestic Product

$ 7792

268

788

1041

1309

1090

$12,288

105

209

1864

$ 14,256

Personal Consumption (C)

Gross Private Domestic

Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Gross Domestic Product

In Billions Receipts Expenditures Approach

Allocations Income Approach

$10,089

1628

2931

-392

$ 14,256

U.S. Economy 2009

LO2 24-14

Comparative GDP

LO2 24-15

The Income Approach

• Compensation of employees

• Rents

• Interest

• Proprietor’s income

• Corporate profits

• Corporate income taxes

• Dividends

• Undistributed corporate profits

• Taxes on production and imports LO2 24-16

The Income Approach

• From national income to GDP

• Subtract net foreign factor income

• Statistical discrepancy

• Consumption of fixed capital

• Other national accounts

• Net domestic product (NDP)

• National income (NI)

• Personal income (PI)

• Disposable income (DI) LO2 24-17

U.S. Income Relationships 2009

Gross Domestic Product (GDP)

Less: Consumption of Fixed Capital

Equals: Net Domestic Product (NDP)

Less: Statistical Discrepancy

Plus: Net Foreign Factor Income

Equals: National Income (NI)

Less: Taxes on Production and Imports

Less: Social Security Contributions

Less: Corporate Income Taxes

Less: Undistributed Corporate Profits

Plus: Transfer Payments

Equals: Personal Income (PI)

Less: Personal Taxes

Equals: Disposable Income (DI)

$ 14,256

1864

$ 12,392

209

105

$ 12,288

1090

967

315

418

2528

$ 12,026

1102

$ 10,924

LO2 24-18

Circular Flow Revisited

LO2 24-19

Nominal vs. Real GDP

• GDP is a dollar measure of

production

• Using dollar values creates problems

• Nominal GDP

• Use prevailing price

• Real GDP

• Reflect changes in price

• Use base year price

LO3 24-20

GDP Price Index

• Use price index to determine real

GDP

Price Index In Given Year

= x 100

Price of Market Basket In Specific Year

Price of Same Basket In Base Year

Real GDP =

Nominal GDP

Price Index (in hundredths)

LO3 24-21

GDP Price Index

• Calculating Real GDP (Base Year = Yr 1)

Year

(1)

Units of

Output

(2)

Price of

Pizza

Per Unit

(3)

Price Index

(Year 1 = 100)

(4)

Unadjusted,

or Nominal,

GDP

(1) X (2)

(5)

Adjusted,

or

Real,

GDP

1 5 $10 100 $ 50 $50

2 7 20 200 140 70

3 8 25 250 200 80

4 10 30 --- --- ---

5 11 28 --- --- ---

LO3 24-22

Shortcomings of GDP

• Nonmarket activities

• Leisure

• Improved product quality

• The underground economy

• GDP and the environment

• Composition and distribution of the

output

• Noneconomic sources of well-being

LO4 24-23

Underground Economy

LO4 24-24

Sources of BEA Data

• Consumption

• Census Bureau’s Retail Trade

Survey

• Census Bureau’s Survey of

Manufacturers

• Census Bureau’s Service Survey

• Industry Trade Sources

LO4 24-25

Sources of BEA Data

• Investment

• All consumption data sources

• Census Bureau’s Housing Starts

Survey and Housing Sales Survey

• Retail Trade Survey

• Wholesale Trade Survey

• Survey of Manufacturing

LO4 24-26

Sources of BEA Data

• Government Purchases

• Office of Personnel Management

• Construction Surveys

• Census Bureau’s Survey of

Government Finance

• Net Exports

• U.S. Customs Service

• BEA Surveys and Analysis

LO4 24-27