Measuring National Output

1
Measuring National Output

• Chapter 5

2
Economic goals

• Economic growth
• Full employment
• Low inflation
• An economy grows because of increases in
  available resources and improvements in
  technology.
• Economic growth is not smooth

3
Output

• The value of goods and services produced is the
  single most important measure of the nations
  output.

4
Output

• Output of goods and services is diverse, running
  the gamut
• One way to measure output is to classify the
  goods and services produced according to who is
  purchasing output

5
Four Sectors of Output

• Households ? Consumption
• Business ? Investment
• Government ? Government
• Foreign Sector ? Net exports

6
Gross Domestic Output (GDP)

• The market value of the final goods and services
  produced in the economy within some time period,
  usually one quarter or one year
• Key terms
• Market value price paid
• Final goods goods to ultimate consumer
• Intermediate goods goods used to make other
  goods

7
Expenditure Approach

• Method of computing GDP that sums consumption,
  gross investment, government purchases, and net
  exports.
• GDP C I G NX

8
Consumption

• Purchasing by households
• 70 of GDP
• Durable goods
• Nondurable goods

9
Investment

• Spending now in order to increase output or
  productivity later includes spending on capital,
  new housing, and changes in business inventories
• 16 of GDP
• Purchases by firms on capital such as new
  factories and machines
• Consumers purchases of new housing, a form of
  consumer capital
• The market value of change in business
  inventories

10
Change in Inventories

• Increase in inventories part of firms production
  is not sold, economy slows down
• Decrease in inventories firms production falls
  short of sales, economy speeds up

11
Investment

• Gross investment
• The total amount of investment
• Net investment
• Gross investment minus depreciation
• Depreciation
• Reduction in value of an asset due to its use

• Net investment is positive then economy growing
• Net investment is negative then economy falling

12
Government

• Federal, state and local levels
• 19 of GDP
• Purchases goods and services
• Transfer payments such as social security are not
  included

13
Net Exports

• Exports foreign purchase of domestic products
• Imports domestic purchases of foreign products
• Net Exports Exports minus Imports
• -4.6 of GDP

14
Income Approach

• Method of computing GDP that sums various forms
  of income
• Compensation of employees
• Proprietors income
• Rental income of persons
• Corporate profits
• Net interest
• Capital consumption allowance
• Indirect business taxes
• Net income of foreigners

15
GDP as value added

• Value added the difference between the revenue
  and the cost of purchased inputs.

16
Contrasting GDP to GNP

• Gross National Product
• Differs in that the value added to production by
  resources located outside the US but owned by US
  citizens is counted in GNP

• GNP excludes value added within the US by foreign
  owned resources.

17
Shortcomings to GDP

• Underground economy
• Market transactions that go unreported to
  government
• Household production
• Environmental issues
• Measure of Economic Welfare - Tobin

18
Nominal Vs. Real GDP

• GDP P X Q
• Nominal GDP GDP that is stated without
  adjusting for inflation
• Real GDP the value of GDP after nominal GDP is
  adjusted for inflation

19
GDP Price Index

• Is an index of prices that measures price
  changes over time, linking each year with the
  next.
• Real GDP Nominal GDP X 100
• GDP price index

20
Real GDP across countries

• Nations of the world compute the value of real
  GDP for their economics
• The size of a nations real GDP is probably the
  best indicator of the size of a countrys economy

Country Real GDP
US 9196.4
Canada 741.6
Germany 2708
Japan 5725.5
Mexico 375.
21
Business Cycle

• Refers to the expansions and contractions in
  economic activity that take place over time.

REAL GDP
Peak
Recession
Expansion
Trough
Time
22
Business Cycle

• Expansion
• Economic growth
• GDP ?
• Income (Y) ?,
• C ?,
• GDP ?,
• u?

• Recession
• Contraction
• Sustained decrease in real GDP
• GDP ?
• Income ?
• C ?
• GDP ?
• U ?

23
Business Cycle

• Peak highest level of economic activity
• Full employment
• Potential GDP is reached

• Trough lowest level of economic activity
• Highest level of unemployment
• Overall economic trend is to grow

24
Leading Indicators

• Statistics that are expected to change direction
  before the economy of large does, thereby
  indicating where the economy is headed
• Business inventories
• Housing starts
• Durable goods production

25
National Income Accounting
GDP Less Depreciation Net Domestic Production
-indirect business taxes -business transfer
payments National income payments to owners of
capital -corporate profits -net interest -social
security taxes Personal income -personal
taxes Disposable income Consumption Savings