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Copyright 2008 The McGraw-Hill Companies6-1
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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6Measuring Domestic Output and National Income
Copyright 2008 The McGraw-Hill Companies6-2
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Chapter Objectives• How GDP is Defined and
Measured• Relationships Between GDP,
Net Domestic Product, National Income, Personal Income, and Disposable Income
• The Nature and Function of a GDP Price Index
• The Difference Between Nominal GDP and Real GDP
• Some Limitations of the GDP Measure
Copyright 2008 The McGraw-Hill Companies6-3
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Assessing Economy’s Performance
• National Income Accounting• Bureau of Economic Analysis• Gross Domestic Product (GDP)
– A Monetary Measure– Avoid Multiple Counting
• Intermediate Goods• Final Goods• Value Added
– Exclude Nonproduction Transactions
Copyright 2008 The McGraw-Hill Companies6-4
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
End Show
Assessing Economy’s Performance
• Financial Transactions Excluded–Public Transfer Payments–Private Transfer
Payments–Stock (and Bond) Market
Transactions• Second Hand Sales
Copyright 2008 The McGraw-Hill Companies6-5
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
End Show
Two Approaches to GDP• Income Approach
–Wages–Rental Incomes–Interest Incomes–Profits
• Expenditure Approach–Final-Product or Value-
Added–The Sum of the Money
Spent to Buy the Output
Copyright 2008 The McGraw-Hill Companies6-6
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
End Show
Two Approaches to GDPExpenditure
ApproachIncome
Approach
GDP
= =
+Consumption by
Households
Investment byBusinesses
GovernmentPurchases
ExpendituresBy Foreigners
+
+
+++
Wages
Rents
Interest
Profits
StatisticalAdjustments
+
Copyright 2008 The McGraw-Hill Companies6-7
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Expenditure ApproachPersonal Consumption Expenditures• Durable Consumer Goods• Nondurable Consumer Goods• Consumer Expenditures for
ServicesGross Private Domestic Investment • Machinery, Equipment, and Tools• All Construction• Changes in Inventories• Noninvestment Transactions
C
Ig
Copyright 2008 The McGraw-Hill Companies6-8
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Expenditure Approach
January 1 Year’s GDP December 31
Consumption& Government
Spending
Depreciation
NetInvestment
GrossInvestment
Stock ofCapital
Increased
Stock ofCapital
Gross InvestmentDepreciation
Net Investment-=
Copyright 2008 The McGraw-Hill Companies6-9
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Expenditure ApproachGovernment Purchases• Expenditures for Goods and
Services• Expenditures for Social
CapitalNet Exports
Xn = Exports (X) – Imports (M)
Putting It All Together: GDP = C + I + G + Xn
GDP= $8,746 + 2,105 + 2,363 - 727 = $12,487 in 2005
G
Xn
Copyright 2008 The McGraw-Hill Companies6-10
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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GDP Approaches Compared
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
$ 7125
73
498
939
1352
917
$10,904
-34
43
1574
$ 12,487
Personal Consumption (C)
Gross Private Domestic
Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Gross Domestic Product
Accounting Statement for the U.S. Economy, 2005in Billions
ReceiptsExpenditures Approach
AllocationsIncome Approach
$ 8746
2105
2363
-727
$ 12,487
Copyright 2008 The McGraw-Hill Companies6-11
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Comparative GDPs
Source: World Bank
Select Nations GDPs - 2005
United StatesJapan
GermanyChina
United KingdomFrance
ItalySpain
CanadaBrazil
Korea, Rep.India
MexicoRussian Fed.
Australia
0 1 2 3 4 5 6 7 8 9 10 12
$12.4$4.5
$2.8$2.2$2.2$2.1
$1.7$1.1$1.1
$.79$.79$.78$.77$.76$.70
GDP in Trillions of Dollars
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies6-12
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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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
Copyright 2008 The McGraw-Hill Companies6-13
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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The Income Approach• From National Income to GDP
– 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)
DI = C + SW 6.1
Copyright 2008 The McGraw-Hill Companies6-14
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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The Income Approach
Gross Domestic Product (GDP) Consumption of Fixed CapitalNet Domestic Profit (NDP)Statistical Discrepancy Net Foreign Factor IncomeNational Income (NI) Taxes on Production and Imports Social Security Contributions Corporate Income Taxes Undistributed Corporate Profits Transfer PaymentsPersonal Income (PI) Personal TaxesDisposable Income (DI)
$ 12,487-1,574
$ 10,913-4334
$ 10,904-917-871-378-460
+1,970$ 10,248
-1,210$ 9,038
Income Relationships – United States, 2005
Copyright 2008 The McGraw-Hill Companies6-15
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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Circular Flow RevisitedU.S. Domestic Output and the Flows of Expenditure and Income
Copyright 2008 The McGraw-Hill Companies6-16
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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Nominal Versus Real GDP• Nominal GDP• Real GDP• Price Index• GDP Price IndexPriceIndexIn GivenYear
= x100Price of Market Basket
In Specific Year
Price of Same BasketIn Base Year
RealGDP =
Nominal GDP
Price Index (in hundredths)
O 6.1
W 6.2
Copyright 2008 The McGraw-Hill Companies6-17
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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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
Copyright 2008 The McGraw-Hill Companies6-18
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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Shortcomings of GDP
Source: Journal of Economic Literature
Underground Economy as a Percentage of GDP - Select Nations
GreeceItaly
SpainPortugalBelgiumSweden
GermanyFrance
HollandUnited Kingdom
JapanUnited States
Switzerland
0 5 10 15 20 25 30 Percentage of GDP
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies6-19
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
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Magical Mystery Tour
• Consumption– Census Bureau’s Retail Trade Survey– Census Bureau’s Survey of Manufacturers– Census Bureau’s Service Survey
• Investment– All Consumption Data Sources– Survey of Manufacturers– Service Survey– Industry Sources– Census Bureau’s Housing Starts Survey
and Housing Sales Survey– Retail Trade Survey– Wholesale Trade Survey– Survey of Manufacturing
Last
Word BEA Sources of Data for Analysis
Copyright 2008 The McGraw-Hill Companies6-20
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Magical Mystery Tour
• 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
Last
Word
Copyright 2008 The McGraw-Hill Companies6-21
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Key Terms• national income accou
nting• gross domestic produ
ct• intermediate goods• final goods• multiple counting• value added• expenditures approach• income approach• personal consumption
expenditures (C)
• gross private domestic investment (Ig)
• net private domestic investment
• government purchases• net exports (Xn)
• taxes on production and imports
• national income• consumption of fixed c
apital• net domestic product
(NDP)• personal income (PI)• disposable income (DI)• nominal GDP• real GDP• price index
Copyright 2008 The McGraw-Hill Companies6-22
Assessing the Economy’s PerformanceTwo Approaches to GDPExpenditure ApproachGDP Approaches ComparedIncome ApproachNominal vs. Real GDPShortcomings of GDPLast Word
Key Terms
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Introduction to Economic Growth,Unemployment,and Inflation
