CC + + IgIg + + GG + + XnXn [ [X-MX-M]] =

GDPGDP–Depreciation= [what is for sale]

NDPNDP +NFFIEUS–Indirect Business Taxes =

NINI–UUndis Corp Profits–CCorp Inc Taxes -SSoc Secur+TTP=

[PIPI is what you can spendspend, , savesave,, or or pay in taxespay in taxes]

PIPI – Personal Income Taxes =

[DIDI is what you can spendspend or or savesave ]

[“Replacement capital”][“Replacement capital”]

[[GDPGDP and its four cousins] and its four cousins]

--

[16[16thth Ed.] Ed.] National Income AccountingNational Income Accounting

Gross Domestic Product – market value of all finalGross Domestic Product – market value of all final legal output produced in a country in one year. legal output produced in a country in one year.

Year oneYear one

$2.00$2.00 $2.00$2.00 $2.00$2.00

NNominal (money) ominal (money) GDPGDP

=$=$6.006.00

Year TwoYear Two

$3.05$3.05 $3.05$3.05

NNominal (money) ominal (money) GDPGDP=$6.10=$6.10

[R[Recession ecession - decrease in real output]- decrease in real output]

Real GDP Real GDP – measures only output. – measures only output. [measures current output at base-year [measures current output at base-year

prices (prices ($$44)), not current prices , not current prices (($6.10$6.10))].].

Nominal GDP measures Nominal GDP measures current output valued at current output valued at

current prices.current prices.The The base yearbase year is the is the benchmark yearbenchmark yearto which to which other years are comparedother years are compared..

GNPGNP – – OwnershipOwnershipAll goods/services produced All goods/services produced legally for paylegally for pay byby citizens of a country.citizens of a country.[[CitizenshipCitizenship mattered, mattered, not geographynot geography]] Nike inNike in

IndonesiaIndonesiaPlano, TXPlano, TX

ChinaChina EuropeEurope

BMWBMW in Waco in Waco

Provo,UTProvo,UT

Honda in OhioHonda in Ohio

in Chicagoin Chicago

GDPGDP - - LocationLocationAll goods/services produced All goods/services produced legally for pay legally for pay inin a country’s borders.a country’s borders.[[GeographyGeography matters, matters, not citizenshipnot citizenship]]

The difference between GDP & GNP is about The difference between GDP & GNP is about 2/10 of 1%2/10 of 1%..

[[UU..SS..AA.. Profits OverseasProfits Overseas]]

RRestest oof f WWoorldrld

$$220220 bil.bil.

FForeignoreign Profits in Profits in U.U.S.S.A.A.

$$209209 billionbillion

If U.S. Profits in the ROW are greaterIf U.S. Profits in the ROW are greater [$220][$220] than than foreign profits foreign profits in thein the U.S. U.S. [$209][$209],, add the differenceadd the difference..

N.F.F.I. = N.F.F.I. = $11 billion$11 billion

[[UU..SS..AA.. Profits Overseas] Profits Overseas]

RRest est oof f WWorldorld

$200$200 bil.bil.

Foreign Profits in U.U.S.S.A.A.

$$209209 bill.bill.

N.F.F.I.E.U.S. = N.F.F.I.E.U.S. = -$9 billion-$9 billionIf foreign profits in the U.S. [If foreign profits in the U.S. [$209$209] are greater than ] are greater than U.S. U.S. profits in theprofits in the ROW [ ROW [$200$200],], subtract subtract the the differencedifference..

Yes, if there is Full EmploymentFull Employment.The speed limit for GDP growth is 4%4%.

But, if the economy is in recessionrecession,There is no speed limitno speed limit for GDP growth.

0 Real GDP

ADAD11ADAD22 AS1 ASAS22

PL2

PLPL33

Y*1 Y2 YY33

Can sustain a much greater increase in AD if the AS curve isCan sustain a much greater increase in AD if the AS curve isalso shifting to the right, due to also shifting to the right, due to increasing productivityincreasing productivity.

Economy’s Economy’s Speed LimitSpeed Limit at at FFull ull EEmploymentmployment isis 44%%,, instead ofinstead of 2.52.5%%..

In the early 90’s, at FE, 2.5%In the early 90’s, at FE, 2.5%was the speed limit. AS shiftedwas the speed limit. AS shiftedslowly due to low productivity.slowly due to low productivity.

So, at FE, theSo, at FE, the “goldilocks“goldilockseconomy”economy” has expanded.has expanded.

PL1

4%4%

Real GDP under 4%Real GDP under 4%

17 increases17 increases

““Goldilocks Economy”Goldilocks Economy”[not too fast or slow][not too fast or slow]

Increasing productivity Increasing productivity of the late 90’s allowed of the late 90’s allowed more growth more growth at at FE GDP.FE GDP.

*Represents*Represents “GDP Speed Limit”“GDP Speed Limit” at full employmentat full employment

<10 years without<10 years without a a recession>recession>

Billions of1996 Dollars

$10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,0001970 1975 1980 1985 1990 20001995

Personal Consumption Expenditure Personal Consumption Expenditure ( C )( C )Personal Consumption Expenditure Personal Consumption Expenditure ( C )( C )

GDP = C(66%) + Ig(18%) + G(17%) + XnGDP = C(66%) + Ig(18%) + G(17%) + Xn

•DDurable urable CConsumeronsumer GGoods[12%]oods[12%]

•NNondurableondurables[29s[29%][soup & soap]%][soup & soap]

•Consumer ExpendituresConsumer Expenditures for Services[59%] for Services[59%]

Ferrari Ferrari producedproduced here hereMaytag Maytag producedproduced here here

Spending by HH on all g/sSpending by HH on all g/sexcept for new housing.except for new housing.

COMPOSITION OF CONSUMER Spending, 2005COMPOSITION OF CONSUMER Spending, 2005

ServicesServices$5,155 billion$5,155 billion

(59%)(59%)

Nondurable GoodsNondurable Goods$2,564 billion$2,564 billion

(29%)(29%)

Durable GoodsDurable Goods$1,027 billion$1,027 billion

(12%)(12%)

Total of $8,746 billionTotal of $8,746 billion

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

3 S3 Subcategoriesubcategories [*spending on output not consumed]

A. Business spending on realreal capitalcapital - toolstools, machinerymachinery, & plantsplants

B. New constructionNew construction investment – construction of new new houses and apartmentshouses and apartments [can rent for financial return]. C. Unsold inventoryUnsold inventory investment – change in inventories

[A net net increaseincrease in in inventoriesinventories is investmentinvestment; a netnet decrease decrease in inventoriesin inventories is negative investmentnegative investment or disinvestmentdisinvestment (disinvestmentdisinvestment represents

sale of output output produced in a previous yearproduced in a previous year)

Let’s say this Porsche isLet’s say this Porsche is produced by a foreign co. produced by a foreign co. in Plano, Texas.in Plano, Texas.

Gross Private Domestic Investment Gross Private Domestic Investment (I(IGG))Gross Private Domestic Investment Gross Private Domestic Investment (I(IGG))

U.S. capital stock is over $30 trillion.U.S. capital stock is over $30 trillion.

GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]

Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )Personal Consumption Expenditure ( C )

Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )Gross Private Gross Private DomesticDomestic Investment ( I Investment ( Igg ) )

[“G” purchases of goods/svcs produced (not transfer payments)

3 Subcategories of Government A. Federal government [40%] B. 50 State governments C. 88,000 local governments [60% for state and local]

Government Purchases ( G )Government Purchases ( G )Government Purchases ( G )Government Purchases ( G )

Net Exports( XNet Exports( Xnn)) Net Exports( XNet Exports( Xnn))

Personal Consumption Expenditure Personal Consumption Expenditure (C)(C)Personal Consumption Expenditure Personal Consumption Expenditure (C)(C)

Gross Private Domestic Gross Private Domestic Investment (IInvestment (Igg))Gross Private Domestic Gross Private Domestic Investment (IInvestment (Igg))

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

[M represents production outside a country]

Consumption 69%

Government Purchases

18% Net Exports -3 %

Investment16%

11//11//07 During 2007 1207 During 2007 12//3131//0707

Cal’s CD’s has a capital stock[5 machines] at the end of 2004that equals its capital stock at the beginning of the year[4] +its net investment[+1+1]. Net investmentNet investment is equal to Ig[3]-D[2].Ig[3]-D[2].Cal’s Ig is the 3 new machines 3 new machines bought bought during the yearduring the year, and itsdepreciationdepreciation is the 2 machines 2 machines that Cal scrappedthat Cal scrapped during the year.Capital – Capital – plant, equipment, buildings, & inventories of raw materialsplant, equipment, buildings, & inventories of raw materials& & semi-finished goods that are used to produce other goods/servicessemi-finished goods that are used to produce other goods/services.Investment-increases the capital stock (purchases of capital).Investment-increases the capital stock (purchases of capital).Depreciation-decreases the capital stock(worn out/obsolete)Depreciation-decreases the capital stock(worn out/obsolete)..Net Investment-change in a nation’s capital stock in one yearNet Investment-change in a nation’s capital stock in one year..IInvestment[Ig(3)>depreciation(2)];nvestment[Ig(3)>depreciation(2)]; DDisinvestment[Depreciation(2)>Ig(1)]isinvestment[Depreciation(2)>Ig(1)]..

InitialInitialCapitalCapital

InitialInitialccapitalapital

lesslessddepreceprec..

DDeprec-eprec-

iationiation

CapitalCapital andand

InvestmeInvestmentnt

4

3

2

1

Initial capital

lessdeprec.

GrossGrossIInvestmentnvestment

InitialInitialCapitalCapital

Pos. NetPos. NetInvestInvestmentment

55

0

55

[[Ig(3)Ig(3)>>D(2)D(2)]]

11//11//07 During 2007 1207 During 2007 12//3131//0707

InitialInitialCapitalCapital

InitialInitialccapitalapital

lesslessddepreceprec..

DDeprec-eprec-

iationiation

CapitalCapital andand DisinvestmentDisinvestment [D(2)>[D(2)>Ig(1)Ig(1)]]4

3

2

1

Initial capital

lessdeprec.

GrossGrossIInvestmentnvestment InitialInitial

CapitalCapital

NNeg. eg. NetNetInInvestmentvestment

33

0

Cal’s CD’s has a capital stock[5 machines] at the end of 2004that equals its capital stock at the beginning of the year[4] +its net investment[+1+1]. Net investment is equal to Ig[3]-D[2].Cal’s Ig is the 3 new machines 3 new machines bought bought during the yearduring the year, and itsdepreciationdepreciation is the 2 machines 2 machines that Cal scrappedthat Cal scrapped during the year.Capital – Capital – plant, equipment, buildings, & inventories of raw materialsplant, equipment, buildings, & inventories of raw materials& & semi-finished goods that are used to produce other goods/servicessemi-finished goods that are used to produce other goods/services.Investment-increases the capital stock (purchases of capital).Investment-increases the capital stock (purchases of capital).Depreciation-decreases the capital stock(worn out/obsolete)Depreciation-decreases the capital stock(worn out/obsolete)..Net Investment-change in a nation’s capital stock in one year.Net Investment-change in a nation’s capital stock in one year.IInvestment[Ig(3)>depreciation(2)];nvestment[Ig(3)>depreciation(2)]; DDisinvestment[Depreciation(2)>Ig(1)]isinvestment[Depreciation(2)>Ig(1)]..

[[D(2)>D(2)>Ig(1)Ig(1)]]

ConsumptionConsumption

9,429,3009,429,300[70%][70%]

InvestmentInvestment

$2,186$2,186[16%][16%]

GGovernmentovernment

purchasespurchases

$2,570$2,570[19%][19%]

Export Export SpendingSpending

$1.210$1.210ImportImport

SpendingSpending

$2.238$2.238

-5%-5%

3.53.5

19001900ToTo

20072007

00

1%1%

2%2%

3%3%

4%4%

5%5%

19291929ToTo

19401940

19401940ToTo

19501950

19501950ToTo

19601960

19601960ToTo

19701970

19701970ToTo

19801980

19801980ToTo

19901990

19291929ToTo

20002000

0.8%0.8%

4.5%4.5%

3.3%3.3%

3.8%3.8%

2.8%2.8% 2.7%2.7% 2.6%2.6%LongLongTermTermGGrowthrowth

3.2%3.2%

19901990ToTo

20002000

The key is to keep the economy growing. At The key is to keep the economy growing. At 2.5% growth2.5% growth, the U.S. , the U.S. economy will economy will expand to expand to $23 trillion$23 trillion in in 2525 years years. But – at . But – at 3%3%, it would reach , it would reach $26 trillion$26 trillion, which is like , which is like another Germanyanother Germany, with , with Saudi ArabiaSaudi Arabia thrown in. thrown in.

U.S.Japan

GermanyChina

U.K.France

ItalyCanada

SpainBrazil

S. KoreaIndia

MexicoRussia

Australia

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14Comparative GDPs in Trillions, 2007

13.813.8

4.54.5

2.82.8

795795

2.22.2

2.22.2

2.72.7

1.71.7

1.11.1

790790

780780

770770

763763

708708

1.11.1

U.S.Japan

GermanyChina

U.K.France

ItalyCanada

SpainBrazil

S. KoreaIndia

MexicoRussia

Australia

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14Comparative GDPs in Trillions, 2006

13.813.8

4.54.5

2.82.8

795795

2.22.2

2.22.2

2.72.7

1.71.7

1.11.1

.790.790

780780

770770

763763

708708

1.11.1

Calif. 1.7Calif. 1.7

TX 1.1TX 1.1

[Selected Countries]

Country Per CapitaLLuxembourguxembourg 80,800 80,800QatarQatar 75,90075,900BermudaBermuda 60,00060,000NorwayNorway 55,60055,600KuwaitKuwait 55,30055,300U.A.E.U.A.E. 55,20055,200U.S.U.S. $46,000 $46,000IrelandIreland 45,60045,600Hong KongHong Kong 42,00042,000SwitzerlandSwitzerland 39,80039,800IcelandIceland 39,40039,400CanadaCanada 38,20038,200AustraliaAustralia 37,50037,500DenmarkDenmark 37,40037,400

China and India are still poorer than he U.S. was in 1900.China and India are still poorer than he U.S. was in 1900.7575% of % of Africans live on less than $2 a day Africans live on less than $2 a day & it is& it is getting worse. getting worse.

Country Per CapitaSweden 36,900U.K. 35,300Germany 34,400France 33,800Japan 33,800Italy 31,000Australia 24,000Russia 14,600Mexico 12,500China 5,300Swaziland 4,800Liberia 500Zimbabwe 500Congo, Rep of 300

12 tril.12 tril.

10 tril.10 tril.

9 tril.9 tril.

8 tril.8 tril.

7 tril.7 tril.

6 tril.6 tril.

5 tril.5 tril.

4 tril.4 tril.

3 tril.3 tril.

2 tril.2 tril.

1 tril.1 tril.

001929 1940 1950 1960 1970 1980 1990 2007 1929 1940 1950 1960 1970 1980 1990 2007

709709 773773 1,2041,2041,6651,665

2,4162,4163,1873,187

4,1524,152

13.8 tril.13.8 tril.

Per Per CapitaCapita

$$46,00046,000[If GDP increases, p[If GDP increases, per er ccapitaapita income increases] income increases]

1313 tril. tril.

GDP Per CapitaGDP Per Capita[in 1992 dollars][in 1992 dollars]

TThe he PoorestPoorest NationNationssNation Nation Per CapitaPer Capita1.1. Congo, Rep. ofCongo, Rep. of$300$3002.2. ZimbabweZimbabwe $500$5003.3. LiberiaLiberia $500$5004.4. SomaliaSomalia $600$6005.5. EthiopiaEthiopia $700$7006.6. NigerNiger $700$7007.7. Cen. African Rep.Cen. African Rep. $700$7008.8. Gambia, TheGambia, The $800$8009.9. Sierra LeoneSierra Leone $800$80010.10. MalawiMalawi $800$800 DjiboutiDjibouti $1,000$1,000

There are 6.6 billion people on our planet; 5 b5 billion illion are are in thein the Third ThirdWorldWorld. 2.5 billion2.5 billion live on less than $2 a dayless than $2 a day. The direst povertydirest poverty is in AfricaAfrica, home of the world’s 10world’s 10 poorest countriespoorest countries. Over ½½ the people of Sub-Sahara Africathe people of Sub-Sahara Africa live on less thanless than $2 a day$2 a day.

8 million people die each year because they are too poor to stay alive.8 million people die each year because they are too poor to stay alive.

$6,538$6,538

19291929

$15,931$15,931

19671967

$25,989$25,989

19961996

$46,000$46,000

20072007

½ of the world’s ½ of the world’s population have population have yet to yet to make theirmake their first phone call.first phone call.

GDPGDP – – measures legal production in U.S. measures legal production in U.S. in one year. in one year.

GDP measures allGDP measures all final goods/services final goods/services produced produced by by workers workers and and capital located capital located in the U.S.in the U.S., regardless of ownership., regardless of ownership. [[Domestically located resourcesDomestically located resources] ] Final goodsFinal goods are goods are goods ready for consumptionready for consumption..

1. 1. Intermediate GoodsIntermediate Goods – components of the final good. – components of the final good. A. Ford buys A. Ford buys batteries or tiresbatteries or tires for its cars. for its cars.

B. KFC buys B. KFC buys chickenschickens to eventually sell to customers. to eventually sell to customers.

Value AddedValue Added – increase in the market value at each stage

$1$1

$4$4

$7$7

$8$8

$1$1 $1$1 $1$1

$4$4$4$4

$7$7

Val

ue

of

Ou

tpu

t($)

Val

ue

of

Ou

tpu

t($)

$20$20

$12$12

$5$5

$1$1

Final GoodFinal GoodRetail ShirtRetail Shirt

WWholesaleholesale

ShirtShirt

ClothCloth

CottonCotton

Val

ue

Ad

ded

($)

Val

ue

Ad

ded

($)

Intermediate GoodIntermediate Good

SSum = um = $$3838CottonCottonFarmerFarmer

TextileTextileMillMill

ShirtShirtManufacturerManufacturer

00RetailRetailStoreStore

$20 = sum$20 = sum

88

77

44

11

So, to avoidSo, to avoid “multiple counting”“multiple counting”, we count the, we count the $20$20 final price, notfinal price, not $38$38..

$20 $20 ““Wife-beaterWife-beater””Shirt from KohlsShirt from Kohls

Only Only Final SalesFinal Sales($20)($20) CountCount [[to prevent to prevent “multiple counting”“multiple counting”(($38$38))]]

[It has not been produced again[It has not been produced again in in 19631963 & & would not count.]would not count.]

2. 2. 2nd Hand Sales2nd Hand Sales – – no no current production.current production. A. 1957 Chevy boughtA. 1957 Chevy bought in in 20072007

The salesman is doing productive work. His commission would count.The salesman is doing productive work. His commission would count.B. Boots producedB. Boots produced in in 1980 are bought 1980 are bought in ain a Thrift Store in 07. Thrift Store in 07.

They also have not been produced again.They also have not been produced again.Salesman’s commission would count.Salesman’s commission would count.You are buying his services.You are buying his services.

SalesmanSalesman

Shoe salesmanShoe salesman

57 Chevy57 Chevy

3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. Ex: If 100 shares of Dell stock100 shares of Dell stock is bought

I’m not buying a Dell computerI’m not buying a Dell computerbut part ownership of Dell.but part ownership of Dell.

Exchanging one financial asset for anotherExchanging one financial asset for another

Buying stock is not buying a product but Buying stock is not buying a product but buying buying ownership of the firmownership of the firm. .

4. 4. Transfer PaymentTransfer Paymentss –welfare, unemployment, social security –welfare, unemployment, social security. [There is nono contribution to final productioncontribution to final production]

“Now that I’ve gotten my welfare check, I can get an iPhone”

Unreported “legal”“legal” business activity does not count.This is two-thirdstwo-thirds of the “underground economy.”“underground economy.”

Then he has LASIK but the

surgeon doesn’t reportdoesn’t report

$500$500 of his $3,400 bill?

And what if thiswaitress doesn’tdoesn’treport all tipsreport all tips?

And what if the dentist doesn’t doesn’t report $400 forreport $400 forteeth whiteningteeth whitening?

Before LASIK SurgeryBefore LASIK Surgery

Illegal business activity, because it goes unreported, also does

not count. Making up 1/31/3 of the “underground economy,”“underground economy,” it includes murder for hire, gambling, drugs, and prostitution.

And, what about

“Jane Ho”?

“I’m getting $1,000 to killyou, Ziggy, but at least itwill not count in GDP.”

SSelf elf EEmployedmployed $255$255

OOther ther Legal $25Legal $25RRents & ents & RoyaltiesRoyalties $ $3030

CCorporate

orporate Profits $50

Profits $50

Interest $55

Interest $55

Wages andWages andSalaries $185Salaries $185

Drugs $120

Drugs $120

Bribery $35

Bribery $35Gambling andGambling andLoan Sharking $10

Loan Sharking $10

Pornography $20Pornography $20

Fraud $30

Fraud $30

Other I

llegal $

20

Other I

llegal $

20

Prost

itutio

n $30

Prost

itutio

n $30

Stol

en G

oods

$35

Sto

len

Goo

ds $

35

IIllegalllegal$300 B$300 B

LLegalegal$600 B$600 B

What gets reported isWhat gets reported isthe “Above Ground”the “Above Ground”

WWhat hat doesn’t get reporteddoesn’t get reportedis the “Underground”is the “Underground”

Underground EconomyUnderground Economy [compared to “above ground”][compared to “above ground”]

Unreported exchanges that take place - Unreported exchanges that take place - legal legal and and Illegal [Hidden – “off the books”]Illegal [Hidden – “off the books”]

Total Total illegal illegal activities - activities - $300 billion$300 billionTotalTotal legallegal activities - activities - $600 billion$600 billionTotalTotal legallegal and and illegalillegal - - $900 billion$900 billion

Underground EconomyUnderground Economy 1. 1. Illegal business activitiesIllegal business activities ( (1/31/3) – gambling, ) – gambling, narcotics trade, prostitution, loan sharking, etc.narcotics trade, prostitution, loan sharking, etc.

2. 2. Unreported legal business activitiesUnreported legal business activities ( (2/32/3)) a. waitresses not reporting all of her tipsa. waitresses not reporting all of her tips b. Cabdriver not reporting all of his incomeb. Cabdriver not reporting all of his income c. Self employedc. Self employed cheat the most. cheat the most. Off-the-books cash transactionsOff-the-books cash transactions

d. $300 billiond. $300 billion

*IRS*IRS estimates that about estimates that about $300 billion$300 billion in income taxes from in income taxes from the underground economy escapes federal taxes each year.the underground economy escapes federal taxes each year.$300 B$300 B

Source: Journal of Economic Literature

[as a Percentage of GDP for Select Nations]

GreeceItaly

SpainPortugalBelgiumSweden

GermanyFrance

HollandUnited Kingdom

JapanUnited States

Switzerland

0 5 10 15 20 25 30 Percentage of GDP

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

You need to do some ofYou need to do some ofthis housework.this housework.

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

So, don’t marry your don’t marry your maidmaid, , gardenergardener, or , or fitness instructorfitness instructor, or you will hurt GDP.

IfIf U. S. corporationsU. S. corporations produce goods overseasproduce goods overseas, it does not count in GDP, but would count in GNP.it does not count in GDP, but would count in GNP.Remember, we are measuring production insideRemember, we are measuring production insidethe U.S. Imports represent production outside ofthe U.S. Imports represent production outside ofthe U.S. the U.S.

GM in GM in FranceFrance

Nike in Nike in IndonesiaIndonesia

1. Second Hand Sales[no production]2. Public/Private Transfer Payments3. Purely Financial Transactions4. Intermediate Goods

5. U.S. Corporations producing overseas6. Non-market transactions [household or volunteer work]Underground EconomyUnderground Economy7. Illegal business activity8. Unreported legal business activity

- WWhen Outback buys potatoes for baked potatoeshen Outback buys potatoes for baked potatoes- When a tattoo business buys When a tattoo business buys ink for tattoosink for tattoos- When Tom Thumb buys When Tom Thumb buys spam to sell it to you spam to sell it to you - WhenWhen the the popsicle maker buys popsicle maker buys the the stickssticks- Dell buys a computer monitor frame Dell buys a computer monitor frame - Ice cream Ice cream that Braums buys for sundaesthat Braums buys for sundaes- A bakery A bakery buys anbuys an apple to put apple to put in itsin its pies pies- WWhen hen FFord ord buys abuys a windshield wiper windshield wiper for a carfor a car

- WhenWhen hooker, J-Lo Ho, is paid $200.00 hooker, J-Lo Ho, is paid $200.00

___ ___ 1. New Toyota Tundra truckNew Toyota Tundra truck manufactured in San Antonio and sold to your economics teachersold to your economics teacher the year it was producedthe year it was produced.

___ ___ 2. You buy a new Wii at GameStop in 2007. Does it count if you resell it on eBay in March of 2008resell it on eBay in March of 2008?

On the next slide, read each sentence and determine,On the next slide, read each sentence and determine,

““To BeTo Be or or Not To Be Counted?” That Not To Be Counted?” That is theis the question. question.

If If “Yes”“Yes”, put , put “Y”“Y” and tell if it is and tell if it is “C”, “Ig”, “G”, or “X”.“C”, “Ig”, “G”, or “X”.

If If “No”“No”, put , put “N”“N” and give the number from below on and give the number from below on why it is not counted in GDP.why it is not counted in GDP.GDP DOES NOT INCLUDEGDP DOES NOT INCLUDE1. Second hand salesSecond hand sales [no current production] [but the salesman’s commission counts]2. Public/Private transfer paymentstransfer payments [no current production]3. Purely financial transactionsPurely financial transactions [no current production] [broker’s fees do count]4. Intermediate goodsIntermediate goods [component of final good]5. U.S. corporations producing overseasU.S. corporations producing overseas.6. Non-market transactionsNon-market transactions [ household or volunteer work. Underground Economy [not reported]Underground Economy [not reported]7. Illegal business activityIllegal business activity [prostitution, murder-for-hire, illegal drugs, etc.]8. Unreported legal business activityUnreported legal business activity [“off the books”]

Example:Example:

YYCC

11 NN

___ ___ 1. You buy a purple “Tinky Winky”“Tinky Winky” from Wal-Mart.___ ___ 2. You and your family paint your housepaint your house. [labor involved]___ ___ 3. You marry your housemaidmarry your housemaid. [“working-for-love”] [her services]___ ___ 4. You buy 100 shares of Microsoftbuy 100 shares of Microsoft Corporation.___ ___ 5. You volunteer to babysit your little sisterbabysit your little sister to help your parents while they work.___ ___ 6. Bob buys a 1965 ford Mustang1965 ford Mustang convertible which is in mint condition.___ ___ 7. The salesman gets a commissioncommission [pay] for selling that 1965 Ford Mustang1965 Ford Mustang in 2008.___ ___ 8. You and your friend volunteer to cookvolunteer to cook at the senior class picnic.___ ___ 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it.

Does the $500 the dentist keeps$500 the dentist keeps and doesn’t report count?___ ___ 10. You are given s suitcase full of $100 bills$100 bills from the sale of smuggled drugssmuggled drugs.___ ___ 11. Your mother is teaching you to readmother is teaching you to read [and not having much success].___ ___ 12. Your dad bakes you a home-baked loaf of breadbakes you a home-baked loaf of bread. [his labor]___ ___ 13. You buy a loaf of breadbuy a loaf of bread from Kroger’s Grocery Store.___ ___ 14. The U.S. government purchases 5 more B-2 Bombersgovernment purchases 5 more B-2 Bombers for $2 billion each.___ __ 15. Ford buys a ton of sheet metal used in making car doorston of sheet metal used in making car doors.___ ___ 16. You buy a new “iPod Video”“iPod Video” from the Apple store, ___ ___ 17. You send in a $90 check to your dentist for cleaning your teethcleaning your teeth.___ ___ 18. Your family buys a new housebuys a new house which sits next to the mansion of Bill Gates.___ ___ 19. 100 additional teachers are hiredteachers are hired by the Frisco ISD.___ ___ 20. GM invest in $500 million worth of robots$500 million worth of robots to assemble their cars.___ ___ 21. You volunteer 10 hours a weekvolunteer 10 hours a week of your time to work for senior citizens.___ ___ 22. Ford produces 25,000 new F150s25,000 new F150s which are not sold by the end of the year.___ ___ 23. Russia buys 3,000 Dell computersDell computers as they become Rusky Dell DudesRusky Dell Dudes.___ ___ 24. A man’s wifeman’s wife does all his cooking and sewing, working for him 16 hours per dayworking for him 16 hours per day.___ ___ 25. Nike producesproduces $10 million worth of Nike Air Jordan’s in VietnamNike Air Jordan’s in Vietnam.

YYCCNN66NN66NN33NN66NN11YYCCNN

88 NN

NN77NN66

66

NN66YYCCYYGGNN44YYCCYYCCYYIgIgYYGGYYIgIgNN66YYIgIgYYXXNN66NN55

-Personnel Personnel TaxesTaxes-$1,113-$1,113

$7,304$7,304[“C”][“C”]

CConsumptiononsumption[66%][66%] $9,053$9,053

[R[Replacementeplacementcapital]capital]

[births-deaths][births-deaths]

““AvailableAvailablefor sale”for sale”

$8,929$8,929

PI is what we PI is what we can spend, save,can spend, save,or or paypay in in taxes.taxes.

““Income Income

received received bybyhouseholds,households,

whether whether earned orearned orunearned”unearned”

$7,816$7,816

DIDIis what we canis what we can

SPENDSPENDoror

SAVESAVE..

YY received/not earned received/not earned

Y Y earned/not receivedearned/not received

GDPGDP NDPNDP NINI PIPI DIDI

GGrossross P PrivaterivateDomestic Domestic InvestmentInvestment

$1,593$1,593

GovernmentGovernmentPurchasesPurchases

$1,973$1,973

Xn(X-M) Xn(X-M) -$424-$424

--DepreciationDepreciation$1,393$1,393

$8,018$8,018

[“indirect” tax][“indirect” tax](Tax on the G/S,(Tax on the G/S,not on profits)not on profits)

[sales, property,[sales, property,excise, tariffs, &excise, tariffs, &

license fees]license fees]

““Income earnedIncome earnedby U.S. resources”by U.S. resources”

-Indirect bus. Tax

$695

+N.F.F.I.+N.F.F.I.$10$10

+$1,683 +$1,683 TTrans Payrans Pay

-$141 -$141 UUndis Cor Prondis Cor Pro-$213 -$213 CCorp Inc Taxorp Inc Tax-$748 -$748 SSoc Sec Conoc Sec Con

ROW[$220]ROW[$220]

U.S. [$230]U.S. [$230]

NFFI = -$10NFFI = -$10

For For NINISubtract Subtract NNIINN == NFFNFFIIII = = IIndirectndirect

businessbusiness taxestaxes

““UU CCanan SSee ee TThunderducks”hunderducks”

DepreciationDepreciation19331933

$7.6 billion$7.6 billion[in current dollars][in current dollars]

DepreciationDepreciation, , IInvestmentnvestment && DisinvestmentDisinvestment

Positive Net InvestmentPositive Net InvestmentIgIg exceedsexceeds DepreciationDepreciation

Negative Net InvestmentNegative Net InvestmentDepreciationDepreciation exceedsexceeds IgIg

IIgg

$1.6 billion$1.6 billion

DDisinvestmentisinvestment

of $6 billionof $6 billionDeclining Declining

productive productive capacitycapacity

IIg($1.6)g($1.6) -- D($7.6)D($7.6) == (Disinv. of $6)(Disinv. of $6)(Disinvest. of $6)(Disinvest. of $6) ++ D($7.6)D($7.6)==($1.6)($1.6)IIg($1.6)g($1.6)––DDisinvisinv.($6).($6)==((Depr.Depr. of $7.6) of $7.6)

IIg($2,105)g($2,105) -- D($1,574)D($1,574) == (In of $531)(In of $531)IIn($531)n($531) ++ D($1,574)D($1,574) = = ((IIg of $2,105)g of $2,105)IIg($2,105)g($2,105)--IIn($531)n($531)=(=(Depr. ofDepr. of $$1,574)1,574)

DepreciationDepreciation

20052005$1,574$1,574 Trillion Trillion

IIgg

$2,105 $2,105 TrillionTrillion

IInvestmentnvestment

ofof $$531 bil.531 bil.Expanding Expanding productive productive capacitycapacity

Manufacturing 22%

Government 10%

THE MIX OF OUTPUT IN 1900

Construction and Mining 9%

Farming 37%Services 22%

Services 54%

Government 18%

Manufacturing 20%

Construction and Mining 6%

THE MIX OF OUTPUT IN 2000

Farming 2%

N.F.F.I. = -N.F.F.I. = -$10 billion$10 billion

[[UU..SS..AA.. Profits OverseasProfits Overseas]]

RRestest oof f WWoorldrld

$220$220 bil.bil.

FForeignoreign Profits in Profits in U.U.S.S.A.A.

$$210210 billionbillion

If U.S. profits in the ROW [If U.S. profits in the ROW [$220$220] are greater than ] are greater than foreign profits foreign profits in thein the U.S. [ U.S. [$210$210],], addadd the the differencedifference..

[[UU..SS..AA.. Profits Overseas] Profits Overseas]

RRest est oof f WWorldorld

$200$200 bil.bil.

Foreign Profits in U.U.S.S.A.A.

$$212212 bill.bill.

If foreign profits in the U.S. [If foreign profits in the U.S. [$212$212] are greater than ] are greater than U.S. profits U.S. profits in thein the ROW [ ROW [$200$200],], subtract subtract the the differencedifference..

N.F.F.I.E.U.S. = N.F.F.I.E.U.S. = $12 billion$12 billion

CC + + IgIg + + GG + + XnXn[[X-MX-M]] =

GDPGDP–Depreciation= [what is for sale]

NDPNDP +NFFIEUS–Indirect Business Taxes =

NINI–UUndis Corp Profits–CCorp Inc Taxes -SSoc Secur+TTP=

[PIPI is what you can spendspend, , savesave,, or or pay in taxespay in taxes]

PI – Personal Income Taxes =

[DIDI is what you can spendspend or or savesave ]

[“Replacement capital”][“Replacement capital”]

[[GDP GDP and and its four cousinsits four cousins]]

--

iPod ViPod Videos are ideos are imports imports because they are because they are produced in China.produced in China.

Elaborate Circular Flow Showing NIAElaborate Circular Flow Showing NIA

NDPNDP NINI PIPIDIDIGG

DDPP

5035032,3162,316

+103+103673673

C = C = $_______$_______ Ig = $_______Ig = $_______ G = $_______G = $_______ Xn = $_______Xn = $_______Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capitalNet Domestic ProductNet Domestic Product (NDPNDP)

-NNet For. Factor Inc. Earn. U.S. -IIndirect business taxes

National IncomeNational Income (NINI) --UUndistributed Corporate Profits -C-Corporate income taxes -S-Social Security Contributions

+T+Transfer payments Personal IncomePersonal Income (PIPI)

-Personal Taxes Disposable IncomeDisposable Income (DIDI)

________________________

$$________________

$$________________________

$$___________________________________

$$_________________

$$__________

1616thth Ed. Ed. NIA Practice – “How To Do It”NIA Practice – “How To Do It” Personal taxesPersonal taxes 403 403 -U-Undistributedndistributed corp. profitscorp. profits 4646 ImportsImports 362 362 -Social Security contrib.-Social Security contrib. 169169 +Transfer payments 283+Transfer payments 283 Personal consumption 2,316Personal consumption 2,316 -C-Corporate orporate IIncomencome TTaxes axes 88 88 Gross Gross privateprivate domes invest. domes invest. 503 503 Indirect business taxes Indirect business taxes 231231 Government purchases 673Government purchases 673 ExportsExports 465 465 Depreciation Depreciation [Capital consumption][Capital consumption] 307307

N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. 12 12

$112$112

NFFI = $12NFFI = $12

3,5953,595--307307

3,2883,288--1212

--2312313,0453,045

--4646--8888

--169169++283283

--303303

3,0253,025--403403

2,6222,622

ROWROW$$100100

Report CardReport CardEnglishEnglish C CAccounting CAccounting CAmerican History DAmerican History DEconomics Economics FF

I’m going through an academic recession.

C = C = $_______$_______ Ig = $_______Ig = $_______ G = $_______G = $_______ Xn = $_______Xn = $_______Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capitalNet Domestic ProductNet Domestic Product (NDPNDP)

+NNet For. Factor Inc. Earn. U.S. -Statistical DiscrepancyStatistical Discrepancy

National IncomeNational Income (NINI) --UUndistributed Corporate Profits -C-Corporate income taxes -S-Social Security Contributions

-TTaxes on prod. & imports +T+Transfer payments Personal IncomePersonal Income (PIPI)

-Personal Taxes Disposable IncomeDisposable Income (DIDI)

[17[17thth Edition] Edition] NIA Practice – “How To Do It”NIA Practice – “How To Do It” Personal taxesPersonal taxes 403 403 -Undistributed corp. profits-Undistributed corp. profits 4646 ImportsImports 362 362 -Social Security contrib.-Social Security contrib. 169 169 +Transfer payments 283+Transfer payments 283 Personal consumption 2,316Personal consumption 2,316 -Corporate Income Taxes 88-Corporate Income Taxes 88 Gross private domes invest. 503Gross private domes invest. 503 -Taxes on prod. & imports-Taxes on prod. & imports 231 231 Government purchases 673Government purchases 673 ExportsExports 465 465 Depreciation Depreciation [Capital consumption] [Capital consumption] 307307Statistical Discrepancy 10Statistical Discrepancy 10 N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. -12 -12

$112$112

NFFI = -$12NFFI = -$12

2,3162,316503503673673

+103+103

3,5953,595--307307

3,2883,288--1212

--231231

3,2663,266--4646--8888

--169169

++283283

--534534

3,0153,015--403403

2,6122,612

ROWROW$$100100

EnglishEnglish C CAccounting CAccounting CAmerican History DAmerican History DEconomics Economics FF

--1010

I’m going through an academic recession.

$$________________

$$________________________

$$________________________________________

$$________________

$$__________

C = C = $$ Ig Ig = $= $ G = $G = $ Xn = $Xn = $Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capital

Net Domestic ProductNet Domestic Product (NDPNDP) +Net For. Factor Inc. Earn. U.S. -Indirect business taxes

National IncomeNational Income (NINI) --UUndistributed Corporate Profits -C-Corporate income taxes -S-Social Security Contributions +T+Transfer payments

Personal IncomePersonal Income (PIPI) -Personal Taxes

Disposable IncomeDisposable Income (DIDI)

Personal Personal taxestaxes 382 382 -U-Undistributedndistributed corp. profitscorp. profits 6565 ImportsImports 348 348 -Social Security contrib.-Social Security contrib. 158158 +Transfer payments 330+Transfer payments 330 Personal consumption 1,820Personal consumption 1,820 -C-Corporate orporate IIncomencome TTaxes axes 98 98 Gross Gross privateprivate domes invest. domes invest. 447 447 Indirect business taxes Indirect business taxes 265265 Government purchases 587Government purchases 587 ExportsExports 377 377 Depreciation Depreciation [capital consumption][capital consumption] 317 317

N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. 10 10

1,8201,820447447587587+29+29

$$2,8832,883-317-317

$2,566$2,566+10+10

-265-265

$$2,3112,311-65-65-98-98

-158-158+330

$$2,3202,320-382-382

$$1,9381,938

$100$100

NFFI NFFI = $= $1010

ROWROW$$110110

C = C = $$ Ig Ig = $= $ G = $G = $ Xn = $Xn = $Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capital

Net Domestic ProductNet Domestic Product (NDPNDP) +Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy

National IncomeNational Income (NINI) --UUndistributed Corporate Profits -C-Corporate income taxes -S-Social Security Contributions

-Taxes on prod. & imports +T+Transfer payments Personal IncomePersonal Income (PIPI)

-Personal Taxes

Disposable IncomeDisposable Income (DIDI)

[17[17thth Edition] Edition] Personal Personal taxestaxes 370 370 -Undistributed corp. profits-Undistributed corp. profits 6565 Statistical Discrepancy 12Statistical Discrepancy 12 -Social Security contrib.-Social Security contrib. 158 158 +Transfer payments 330+Transfer payments 330 Personal consumption 1,820Personal consumption 1,820 -Corporate Income Taxes 98-Corporate Income Taxes 98 Gross private domes invest. 447Gross private domes invest. 447 -Taxes on prod. & imports-Taxes on prod. & imports 265 265 Government purchases 587Government purchases 587 ExportsExports 377 377 Depreciation Depreciation [capital consumption][capital consumption] 317 317 Imports 348Imports 348 N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. 10 10

1,8201,820447447587587+29+29

$$2,8832,883-317-317

$2,566$2,566+10+10-12-12

$$2,5642,564-65-65-98-98

-158-158-265-265++330

$$2,3082,308-370-370

$$1,9381,938

$100$100

NFFI NFFI = $= $1010

ROWROW$$110110

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capitalNet Domestic ProductNet Domestic Product (NDPNDP)

+Net For. Factor Inc. Earn. U.S. -Indirect business taxes

National IncomeNational Income (NINI) --UUndistributed Corporate Profits -C-Corporate income taxes -S-Social Security Contributions

+T+Transfer payments Personal IncomePersonal Income (PIPI)

-Personal Taxes Disposable IncomeDisposable Income (DIDI)

[16[16thth Ed.] Ed.] Personal taxesPersonal taxes 60 60 -U-Undistributedndistributed corp. profitscorp. profits 3737 ImportsImports 75 75 -Social Security contrib.-Social Security contrib. 25 25 +Transfer payments 24+Transfer payments 24 Personal consumption 310Personal consumption 310 -C-Corporate orporate IIncomencome TTaxes axes 55 55 Gross Gross privateprivate domes invest. domes invest. 85 85 Indirect business taxes Indirect business taxes 1515 Government purchases 130Government purchases 130 ExportsExports 95 95 N.F.F.I.E.N.F.F.I.E. -18 -18Depreciation Depreciation [Cap. Con.][Cap. Con.] 25 25

3103108585

130130+20+20

$$545545-25-25

$520$520-18-18-15-15

$$487487-37-37-55-55-25-25+24+24

$$394394-60-60

$$334334

$118$118

NFFI = -$18NFFI = -$18

ROWROW$100$100

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic ProductGross Domestic Product (GDPGDP)

-Consumption of fixed capitalNet Domestic ProductNet Domestic Product (NDPNDP)

+Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy

National IncomeNational Income (NINI) --UUndistributed Corporate Profits -C-Corporate income taxes -S-Social Security Contributions

-Taxes on prod. & imports +T+Transfer payments Personal IncomePersonal Income (PIPI)

-Personal Taxes Disposable IncomeDisposable Income (DIDI)

[17[17thth Edition] Edition] ExportsExports 95 95 -U-Undistributedndistributed corp. profitscorp. profits 3737 ImportsImports 75 75 -Social Security contrib.-Social Security contrib. 25 25 +Transfer payments 39+Transfer payments 39 Personal consumption 310Personal consumption 310 -C-Corporate orporate IIncomencome TTaxes axes 55 55 Gross Gross privateprivate domes invest. domes invest. 85 85 -Taxes on prod. & imports-Taxes on prod. & imports 1515 Government purchases 130Government purchases 130Personal taxesPersonal taxes 60 60 N.F.F.I.E.N.F.F.I.E. -18 -18Statistical Discrepancy 15Statistical Discrepancy 15 DepreciationDepreciation 25 25

3103108585

130130+20+20

$545$545-25-25

$520$520-18-18-15-15

$487$487-37-37-55-55-25-25-15-15

+39+39

$394$394-60-60

$334$334

$118$118

NFFI = -$18NFFI = -$18

ROWROW$100$100

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic Product (GDP)Gross Domestic Product (GDP)

--Consumption of fixed capitalConsumption of fixed capitalNet Domestic Product (NDP)Net Domestic Product (NDP)

++Net For. Factor Inc. Earn. U.S.Net For. Factor Inc. Earn. U.S. -Indirect business taxes-Indirect business taxes

National Income (NI)National Income (NI) --Undistributed Corporate ProfitsUndistributed Corporate Profits -Corporate income taxes-Corporate income taxes -Social Security Contributions-Social Security Contributions

+Transfer payments+Transfer payments Personal Income (PI)Personal Income (PI)

--Personal TaxesPersonal Taxes Disposable Income (DI)Disposable Income (DI)

Personal taxesPersonal taxes 58 58 -U-Undistributedndistributed corp. profitscorp. profits 2323ExportsExports 109 109 -Social Security contrib.-Social Security contrib. 40 40ImportsImports 89 89 Personal consumption 358Personal consumption 358+Transfer payments+Transfer payments 4141 Gross Gross privateprivate domes invest. domes invest. 130 130-Corporate income -Corporate income taxestaxes 38 38 Government purchases 165Government purchases 165IIndirect business ndirect business taxestaxes 21 21 DepreciationDepreciation [capital consumption] [capital consumption] 45 45

N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. -23 -23

358358130130165165+20+20

$$673673-45-45

$628$628-23-23-21-21

$$584584-23-23-38-38-40-40+41+41

$$524524-58-58

$$466466

$123

NFFI = -$23NFFI = -$23

ROW$100

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic Product (GDP)Gross Domestic Product (GDP)

--Consumption of fixed capitalConsumption of fixed capitalNet Domestic Product (NDP)Net Domestic Product (NDP)

+Net For. Factor Inc. Earn. U.S.+Net For. Factor Inc. Earn. U.S. -Indirect business taxes-Indirect business taxes

National Income (NI)National Income (NI) --Undistributed Corporate ProfitsUndistributed Corporate Profits -Corporate income taxes-Corporate income taxes -Social Security Contributions-Social Security Contributions

-Taxes on prod. and imports-Taxes on prod. and imports +Transfer payments+Transfer payments Personal Income (PI)Personal Income (PI)

--Personal TaxesPersonal Taxes Disposable Income (DI)Disposable Income (DI)

[17th Edition] Personal taxesPersonal taxes 5050 -Undistributed corp. profits-Undistributed corp. profits 2323ExportsExports 109 109 -Social Security contrib.-Social Security contrib. 40 40ImportsImports 8989 Personal consumption 358Personal consumption 358+Transfer payments+Transfer payments 4141 Gross private domes invest. 130Gross private domes invest. 130-Corporate income taxes-Corporate income taxes 3838 Government purchases 165Government purchases 165-Taxes on prod. & imports-Taxes on prod. & imports 21 21 Depreciation Depreciation [capital consumption][capital consumption] 45 45Statistical DiscrepancyStatistical Discrepancy 8 8 N.F.F.I.E. in the U.S.N.F.F.I.E. in the U.S. -23 -23

358358130130165165+20+20

$$673673-45-45

$628$628-23-23

-8-8

$$597597-23-23-38-38-40-40-21-21+41+41

$$516516-50-50

$$466466

$123

NFFI = -$23NFFI = -$23

ROW$100

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic Product (GDP)Gross Domestic Product (GDP)

--Consumption of fixed capitalConsumption of fixed capitalNet Domestic Product (NDP)Net Domestic Product (NDP)

++Net For. Factor Inc. Earn. U.S.Net For. Factor Inc. Earn. U.S. -Indirect business taxes-Indirect business taxes

National Income (NI)National Income (NI) --Undistributed Corporate ProfitsUndistributed Corporate Profits -Corporate income taxes-Corporate income taxes -Social Security Contributions-Social Security Contributions

+Transfer payments+Transfer payments Personal Income (PI)Personal Income (PI)

--Personal TaxesPersonal Taxes Disposable Income (DI)Disposable Income (DI)

Personal taxesPersonal taxes 60 60 -U-Undistributedndistributed corp. profitscorp. profits 1616ExportsExports 37 37 -Social Security contrib.-Social Security contrib. 32 32ImportsImports 23 23 Personal consumption 312Personal consumption 312+Transfer payments+Transfer payments 2626 IgIg 104 104-Corporate income -Corporate income taxestaxes 42 42 Government purchases 110Government purchases 110IIndirect business ndirect business taxestaxes 24 24 N.F.F.I.E. in the U.S. -30N.F.F.I.E. in the U.S. -30 Depreciation Depreciation 2424

312312104104110110+14+14

$$540540-24-24

$516$516-30-30-24-24

$$462462-16-16-42-42-32-32+26+26

$$398398-60

$$338338

$130

NFFI = -$30NFFI = -$30

ROW$100

C = C = $$ Ig = $Ig = $ G = $G = $ Xn = $Xn = $Gross Domestic Product (GDP)Gross Domestic Product (GDP)

--Consumption of fixed capitalConsumption of fixed capitalNet Domestic Product (NDP)Net Domestic Product (NDP)

++Net For. Factor Inc. Earn. U.S.Net For. Factor Inc. Earn. U.S. -Statistical Discrepancy-Statistical Discrepancy

National Income (NI)National Income (NI) --Undistributed Corporate ProfitsUndistributed Corporate Profits -Corporate income taxes-Corporate income taxes -Social Security Contributions-Social Security Contributions

-Taxes on prod. and imports -Taxes on prod. and imports +Transfer payments+Transfer payments Personal Income (PI)Personal Income (PI)

--Personal TaxesPersonal Taxes Disposable Income (DI)Disposable Income (DI)

[17th Edition] Personal taxesPersonal taxes 60 60 -Undistributed corp. profits-Undistributed corp. profits 1616ExportsExports 37 37 -Social Security contrib.-Social Security contrib. 32 32ImportsImports 23 23 Personal consumption 312Personal consumption 312+Transfer payments+Transfer payments 5050 Gross InvestmentGross Investment 104 104-Corporate income taxes 42-Corporate income taxes 42 Government purchases 110Government purchases 110-Taxes -Taxes on prod. & importson prod. & imports 34 34 N.F.F.I.E. in the U.S. -30N.F.F.I.E. in the U.S. -30DepreciationDepreciation [cap. Consumption][cap. Consumption] 24 24 Statistical Discrepancy 14 Statistical Discrepancy 14

312312104104110110+14+14

$$540540-24-24

$516$516-30-30-14-14

$$472472-16-16-42-42-32-32-34-34+50+50

$$398398-60

$$338338

$130$130

NFFI = -$30NFFI = -$30

ROWROW$100$100

A “streaker”A “streaker”

• GDP can be measured either by total total spending on U.S. productionspending on U.S. production or by total total income received from that production.income received from that production.

• Expenditure approachExpenditure approach [C+Ig+G+Xn][C+Ig+G+Xn]– Adds up the aggregate expenditure on all final

goods and services produced during that year Gross Domestic ProductionGross Domestic Production

• Income approach Income approach [R+I+P+SA+W [R+I+P+SA+W (RIP SAW)(RIP SAW)]]– Adds up the aggregate income earned during the

year by those who produce that output Gross Gross Domestic Income[sales]Domestic Income[sales]

Expenditure ApproachGross Domestic Production

Income ApproachGross Domestic Sales

GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

+

+

+++

Rents

Interest

Profits

Statistical Adjustments[corporate income taxes, Dividends, undistributed

Corporate profits]

Wages+

The Circular-Flow The Circular-Flow DiagramDiagram

HouseholdsHouseholds

Product MarketProduct Market

$$

Resource MarketResource Market

11

2

3

44

A.A. Goods/services?Goods/services?B.B. Consumer expenditures?Consumer expenditures?C.C. Land, labor, capital andLand, labor, capital and entrepreneurial ability?entrepreneurial ability?D.D. Rent, wages, interest, Rent, wages, interest, and profits?and profits?

$$

BusinessesBusinesses

BusinessesBusinessesBusinesses

Compensation of EmployeesCompensation of Employees RRents IInterest PProfits [Proprietors’ Income]

SASA [statistical adjustments] [statistical adjustments]Corporate Income TaxesCorporate Income Taxes

DividendsDividendsUndistributed Corporate ProfitsUndistributed Corporate Profits

WWagesages

THE INCOME APPROACH THE INCOME APPROACH [RIP SAW][RIP SAW]

Receipts: Expenditures ApproachReceipts: Expenditures ApproachC $8746Ig 2105G 2363Xn -727

GDP $12,487$12,487

Allocations: Income ApproachAllocations: Income Approach________

Compensation of Compensation of employees $7125Rents 73Interest 498Proprietor’s income 939Corporate Profits 1352Taxes on production & imports 917National Income $10,904Net Foreign Factor Inc -34Statistical Discrepancy 43Consumption of fixed capital 1574GDP $12,487 $12,487

3. [8 pts][8 pts] Indicate whether each of the following is counted in counted in

the U.S. GDPthe U.S. GDP for the year 2006. Explain each of your answers.

(a) The value of used textbookused textbook sold through online auction in 2006.Answer: No, it was counted the year it was produced. Because it was Answer: No, it was counted the year it was produced. Because it was not produced againnot produced again, , it would not beit would not be counted. counted. That would be double counting.That would be double counting.[2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006][2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006]

b. RentRent paid in 2006 by residents in an apartment building built in 2000

Answer: Yes, payment is being made for productive services of the Answer: Yes, payment is being made for productive services of the broker. So the purchase of stocks would not count but his work would.broker. So the purchase of stocks would not count but his work would.[2 pts: 1 pt for “yes” [2 pts: 1 pt for “yes” and and 1 pt for saying 1 pt for saying this is the payment forthis is the payment for services] services]

c. CommissionsCommissions earned in 2006 by a stockbroker

Answer: Yes, rents consist of the income received by the households andAnswer: Yes, rents consist of the income received by the households andbusinessesbusinesses that that supply property resources. supply property resources. The properties have to be maintainedThe properties have to be maintained

or “serviced” each year. or “serviced” each year. It is included in the income approachIt is included in the income approach to GDP. to GDP. [2 pts: 1 pt for “yes”[2 pts: 1 pt for “yes” and and 1 pt1 pt for saying this is the payment for services] for saying this is the payment for services]

d. The value of autos produced in 2006 entirely in South Koreaautos produced in 2006 entirely in South Korea by a firm fully owned by U.S. citizensAnswer: No, GDP measures production inside the U.S. regardless of Answer: No, GDP measures production inside the U.S. regardless of ownership. These autos were produced in South Korea.ownership. These autos were produced in South Korea.[2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea][2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]

Nominal GDPNominal GDP

[prices of output in the current year][prices of output in the current year][measures “output and prices”][measures “output and prices”]

andand

Real GDPReal GDP

[base year prices of the year being measured][base year prices of the year being measured][measures “only output”][measures “only output”]

Importance of Real GDP in Determining aImportance of Real GDP in Determining a RecessionRecession

Apple GDP ExampleApple GDP ExampleA A country producescountry produces 10 apples 10 apples in base year in base year x $1; x $1; Nominal and Real GDP both = $10Nominal and Real GDP both = $10

Year 2: AYear 2: A country country produces produces 10 apples x $1.25;10 apples x $1.25;Nominal GDP=$12.50 Nominal GDP=$12.50 (no recession but worse off)(no recession but worse off)[Real GDP would = $10 (10 apples x $1)][Real GDP would = $10 (10 apples x $1)]

Or Year 2: AOr Year 2: A country producescountry produces 9 apples 9 apples x $x $1.25;1.25;Nominal GDP=$Nominal GDP=$11.25 11.25 but real isbut real is $9 $9 (9 apples x $1)(9 apples x $1)

((recessionrecession although nominal GDP is up)although nominal GDP is up)

Real GDPReal GDP measures current output at base-year prices. measures current output at base-year prices.

NominalNominal [money][money] GDPGDP v. v. Real GDPReal GDPAn increase in pricesincrease in prices and/or outputoutput will increasenominal GDP.

Only an increase in outputincrease in output will increase will increase real GDPreal GDP.Nominal GDP could increase even if output falls.

Real GDP = Nominal Y/GDP deflator x 100

So, nominal GDP measures output & pricesnominal GDP measures output & prices.

Real measures only output [actual production]Real measures only output [actual production]

Constant (real) GDPConstant (real) GDP v. current (money) GDPcurrent (money) GDP

NominalNominal GDP GDP v. v. RealReal GDP GDP

Nominal [Current) GDPNominal [Current) GDPv.v.

Real (constant) GDPReal (constant) GDP

Price of Market Basket(2001Price of Market Basket(2001) [nominal GDP][nominal GDP] $64$64GDP Price IndexGDP Price Index = Price = Price of sameof same Market Basket(1998)x100; Market Basket(1998)x100; [Real GDP] $50x100=128[Real GDP] $50x100=128[GDP Deflator][GDP Deflator] in the base year (1998) in the base year (1998) [$64/128 x 100 = $50][$64/128 x 100 = $50]

BBase yearase year[$50/$50=1x100=100][$50/$50=1x100=100] $46/$50x100=92 $46/$50x100=92 [deflation of 8%][deflation of 8%]

The “GDP” BalloonThe “GDP” Balloon

takes Nominal – measured in terms of money.

Real–measured in terms of goods/services.

$6,736.9/126.1 x 100 = $5,342.5

[Real GDP must decline for 6 months][Real GDP must decline for 6 months]

RecessionRecession[[RealReal, not , not nominalnominal GDPGDP has has declineddeclined]]

1990-911990-91

Real GDPReal GDP

InflationInflationcomponentcomponent

19301930 19401940 19501950 19601960 19701970 19801980 19901990 20002000

Annual Annual growthgrowth

GR

OW

TH

RA

TE

(pe

rcen

t pe

r ye

ar)

Long-term average Long-term average growth (3%)growth (3%)

RecessionsRecessions

Zero growth

0

35

10

15

20

-10

-5

The Business Cycle in U.S. HistoryThe Business Cycle in U.S. History[11 Recessions since WWII, from 6 months to 16 months][11 Recessions since WWII, from 6 months to 16 months]

20052005

Positive Net InvestmentPositive Net Investment [[Ig>Ig>DD]]

Net InvestmentNet Investment

Gross InvestmentDepreciationDepreciation--

==

Stock ofCapital

Consumptionand

GovernmentSpending

Stock ofCapital

Depreciation

NetInvestment

January 1 Year’s GDP December 31

Increased

GrossGrossInvestmentInvestment

[increasing product. capac.]

DepreciationDepreciation19331933

$7.6 billion$7.6 billion[in current dollars][in current dollars]

DepreciationDepreciation, , IInvestmentnvestment && DisinvestmentDisinvestment

Positive Net InvestmentPositive Net InvestmentIgIg exceedsexceeds DepreciationDepreciation

Negative Net InvestmentNegative Net InvestmentDepreciationDepreciation exceedsexceeds IgIg

IIgg

$1.6 billion$1.6 billion

DDisinvestmentisinvestment

of $6 billionof $6 billionDeclining Declining

productive productive capacitycapacity

IIg($1.6)g($1.6) -- D($7.6)D($7.6) == (Disinv. of $6)(Disinv. of $6)(Disinvest. of $6)(Disinvest. of $6) ++ D($7.6)D($7.6)==($1.6)($1.6)IIg($1.6)g($1.6)––DDisinvisinv.($6).($6)==((Depr.Depr. of $7.6) of $7.6)

IIg($2,105)g($2,105) -- D($1,574)D($1,574) == (In of $531)(In of $531)IIn($531)n($531) ++ D($1,574)D($1,574) = = ((IIg of $2,105)g of $2,105)IIg($2,105)g($2,105)--IIn($531)n($531)=(=(Depr. ofDepr. of $$1,574)1,574)

DepreciationDepreciation

20052005$1,574$1,574 Trillion Trillion

IIgg

$2,105 $2,105 TrillionTrillion

IInvestmentnvestment

ofof $$531 bil.531 bil.Expanding Expanding productive productive capacitycapacity

ExpandingExpanding//StaticStatic//DecliningDeclining Productive Productive CapacityCapacity

MaintainingMaintainingour productionour productionpossibilitiespossibilities

Expanding Productive CapacityExpanding Productive Capacity

Static Productive CapacityStatic Productive Capacity

Declining Productive CapacityDeclining Productive Capacity

Non-market Transactions don’t countEarthquakes, divorces, etc. increase GDPLeisure isn’t factored inImproved Product QualityThe Underground EconomyGDP’s impact on the EnvironmentPer Capita OutputCountries with low GDP per capitalow GDP per capita have more infants withmore infants with low birth weightlow birth weight, higher rates of infant mortalityhigher rates of infant mortality, higher higher ratesrates of of maternal mortalitymaternal mortality, higher rateshigher rates of of child malnutritionchild malnutrition, and less common access to safe drinking watersafe drinking water. Also, fewer fewer gogo to schoolto school and they have fewer teachersfewer teachers. They have fewer fewer TVsTVs and telephonestelephones, fewer paved roadsfewer paved roads. They also win fewer fewer Olympic medalsOlympic medals.

SHORTCOMINGS OF GDPSHORTCOMINGS OF GDP

1. GDPGDP is the monetary value of all final domestic goods/services produced (by/within) a nation in one year.2. If N.F.F.I. isN.F.F.I. is positivepositive, which means U.S. profitsU.S. profits are greater in the are greater in the ROWROW than foreign profits in the U.S., then (GDP/GNP) is larger. 3. Double or multiple countingDouble or multiple counting can be avoided by counting only (intermediate/final) goods. 4. (Final/Intermediate) goods and services refer to products purchased by the ultimate userspurchased by the ultimate users.5. Transfer paymentsTransfer payments [when you take tax money from those who are working & give it to those who are not working] (do/do not) count in GDP because they (do/do not) reflect current production.6. (The purchase of 100 shares of Playboy stock/ The purchase of a drill press) is not considerednot considered real investmentreal investment.7. If depreciation exceeds gross private domestic investmentdepreciation exceeds gross private domestic investment, it can be concluded that In is (positive/negative) & we have declining productive capacitydeclining productive capacity. 8. DepreciationDepreciation can be determined by (adding/subtracting) In from Ig.9. The largest component of GDPlargest component of GDP ((spendingspending)) is (C/Ig/G/Xn) and the smallest is (C/Ig/G/Xn).10. NDPNDP is (GDP-indirect business taxes/GDP-Depreciation).

NIA NS 1-10NIA NS 1-10

14. Which economy has expanding productive capacity(positive Ig)expanding productive capacity(positive Ig)? (A/B/C). Which has declining productive capacity[negative Igdeclining productive capacity[negative Ig? (A/B/C). Which has static productive capacitystatic productive capacity? (A/B/C).

GDP NS 11 and 14-15GDP NS 11 and 14-1511. Real GDPReal GDP and nominal GDPnominal GDP differ because real GDPreal GDP has been adjusted for changes in (depreciation/prices).

If this is Pat then this is If this is Pat then this is “The End”.“The End”.