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