Understanding National Income and Gross Domestic Product: Measuring Economy's Performance, Exams of Economics

Download Understanding National Income and Gross Domestic Product: Measuring Economy's Performance and more Exams Economics in PDF only on Docsity! National income determination and equilibrium GDP Lecture 1 Assessing Economy’s Performance • National Income Accounting - measures the economy’s performance by measuring the flows of income and expenditures over a period of time. • provide a basis for appropriate public policies to improve economic performance. • GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year. • Final goods are consumption goods, capital goods & services that are bought by their final users, rather than for resale or further processing or manufacturing • GDP includes only final products (G) and services (S); it avoids double/multiple counting, by eliminating any intermediate goods used in production of these final G & S. • Intermediate goods are goods & services that are bought for resale or for further processing or manufacturing. • Multiple counting could also be avoided by cumulating only the value added at each stage • Value added is the market value of a firm’s product minus the value of the inputs the firm has bought from others • GDP is the value of what has been produced in the economy over the year, not what was actually sold. (use example on table 24.2 page 481) • Exclude Nonproduction Transactions Two Approaches to GDP • Consumption by • Households • + • Investment by • Businesses • + • Government • Purchases • + • Expenditures • By Foreigners Income Approach • Wages • + • Rents • + • Interest • + • Profits • + • Statistical • Adjustments Expenditure Approach Expenditure Approach • GDP is divided into the categories of buyers in the market; household consumers, businesses, government, and foreign buyers • Personal Consumption Expenditures (C ) – Durable Consumer Goods – Nondurable Consumer Goods – Consumer Expenditures for Services • Gross Private Domestic Investment (Ig) – Machinery, Equipment, and Tools – All Construction – Changes in Inventories – Noninvestment Transactions transfers of (stocks & bonds) or real assets such as housing Expenditure Approach Government Purchases (G) • Expenditures for Goods and Services • Expenditures for Social Capital (schools, roads Net 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 The Income Approach • From National Income to GDP – Net Foreign Factor Income – Income earned by nationals abroad less income earned by foreigners locally (can be positive or negative) – Statistical Discrepancy – Added to national income to equalize the two approaches – Consumption of Fixed Capital – Depreciation allowance (set aside to replace machinery & equipment used up) • Other National Accounts – Net Domestic Product (NDP) – GDP – depreciation allowance (consumption of fixed capital) – National Income (NI) : NDP +(-) net foreign factor income – Income earned by nationals domestically & abroad. – Personal Income (PI): NI + transfer payments – (payroll taxes, corporate profit taxes, undistributed corporate profits) – Income received by households – Disposable Income (DI) : PI – personal taxes DI = C + S The Income Approach Gross Domestic Product (GDP) Consumption of Fixed Capital Net Domestic Profit (NDP) Statistical Discrepancy Net Foreign Factor Income National Income (NI) Taxes on Production and Imports Social Security Contributions Corporate Income Taxes Undistributed Corporate Profits Transfer Payments Personal Income (PI) Personal Taxes Disposable Income (DI) $ 12,487 -1,574 $ 10,913 -43 34 $ 10,904 -917 -871 -378 -460 +1,970 $ 10,248 -1,210 $ 9,038 Circular Flow Revisited Net foreign factor income Compensation of employees Dispos- ile Interest ome Dados Ne ty National Personal Gross domestic income income domestic | Proprietors’ income © —————product +» product. Rents Corporate income taxes (= Undistributed corporate profits Taxes on production and imports 2 Consumption of fixed capital é of if J EE ip 2 é \ C Taster payment J | | Personal saving Calculating Real GDP (Base Year = Year 1) Year Units of output Price of pizza (P) Price Index (Year 1 = 100) Unadjuste d or Nominal GDP (P) Adjusted or real GDP (P) Real GDP (column 1 x P10) 1 5 10 100 50 50 50 2 7 20 200 140 70 70 3 8 25 250 200 80 80 4 10 30 300 300 100 100 5 11 28 280 308 110 110 6 13 32 320 416 130 130 Real GDP alternative method • Gather data on physical outputs & their prices • Determine market value of output in successive yrs as if base yr price had prevailed (see column 6) previous slide • To get Price index for a given year devide nominal GDP by the real GDP for that year • Price Index (in hundredths)= Nominal GDP/ Real GDP Circular flow of income – open economy (links to be discussed in class) Domestic households Abroad Financial system Government Domestic producers