Measuring Domestic Output and National Income

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-

Gross Domestic Product
Measure of aggregate output
Monetary measure
Avoid multiple counting
Market value final goods
Ignore intermediate goods
Count value added
LO1
24-

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-

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-

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-

Expenditures Approach
Personal consumption expenditures (C)
Durable consumer goods
Nondurable consumer goods
Consumer expenditures for services
Domestic plus foreign goods produced
LO2
24-

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-

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-

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
U.S. Economy 2009
LO2
24-

Comparative GDP
LO2
24-

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-

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-

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)
LO2
24-

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-

GDP Price Index
Use price index to determine real GDP
LO3
24-

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-