Measuring National Output and National Income
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© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
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Prepared by: Fe rnand o Prepared by: Fe rnand o
Q uijano and Yvonn Q uijanoQ uijano and Yvonn Q uijano
Measuring National Output Measuring National Output
and National Incomeand National Income
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Prepared by: Fe rnand o Prepared by: Fe rnand o
Q uijano and Yvonn Q uijanoQ uijano and Yvonn Q uijano
Measuring National Output Measuring National Output
and National Incomeand National Income
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
National IncomeNational Income
and Product Accountsand Product Accounts
•National income and product National income and product
accountsaccounts are data collected and are data collected and
published by the government describing published by the government describing
the various components of national the various components of national
income and output in the economy.income and output in the economy.
•The Department of Commerce is The Department of Commerce is
responsible for producing and responsible for producing and
maintaining the “National Income and maintaining the “National Income and
Product Accounts” that keep track of Product Accounts” that keep track of
GDP.GDP.
National IncomeNational Income
and Product Accountsand Product Accounts
•National income and product National income and product
accountsaccounts are data collected and are data collected and
published by the government describing published by the government describing
the various components of national the various components of national
income and output in the economy.income and output in the economy.
•The Department of Commerce is The Department of Commerce is
responsible for producing and responsible for producing and
maintaining the “National Income and maintaining the “National Income and
Product Accounts” that keep track of Product Accounts” that keep track of
GDP.GDP.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Gross Domestic ProductGross Domestic Product
•Gross domestic product (GDP)Gross domestic product (GDP) is is
the total market value of all final the total market value of all final
goods and services produced within goods and services produced within
a given period by factors of a given period by factors of
production located within a country.production located within a country.
Gross Domestic ProductGross Domestic Product
•Gross domestic product (GDP)Gross domestic product (GDP) is is
the total market value of all final the total market value of all final
goods and services produced within goods and services produced within
a given period by factors of a given period by factors of
production located within a country.production located within a country.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Final Goods and ServicesFinal Goods and Services
•The term The term final goods and servicesfinal goods and services
refers to goods and services refers to goods and services
produced for final use.produced for final use.
•Intermediate goodsIntermediate goods are goods are goods
produced by one firm for use in produced by one firm for use in
further processing by another firm.further processing by another firm.
Final Goods and ServicesFinal Goods and Services
•The term The term final goods and servicesfinal goods and services
refers to goods and services refers to goods and services
produced for final use.produced for final use.
•Intermediate goodsIntermediate goods are goods are goods
produced by one firm for use in produced by one firm for use in
further processing by another firm.further processing by another firm.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Value AddedValue Added
•Value addedValue added is the difference is the difference
between the value of goods as they between the value of goods as they
leave a stage of production and the leave a stage of production and the
cost of the goods as they entered that cost of the goods as they entered that
stage.stage.
•In calculating GDP, we can either sum up In calculating GDP, we can either sum up
the value added at each stage of the value added at each stage of
production, or we can take the value of production, or we can take the value of
final sales. We do not use the value of final sales. We do not use the value of
total sales in an economy to measure total sales in an economy to measure
how much output has been produced.how much output has been produced.
Value AddedValue Added
•Value addedValue added is the difference is the difference
between the value of goods as they between the value of goods as they
leave a stage of production and the leave a stage of production and the
cost of the goods as they entered that cost of the goods as they entered that
stage.stage.
•In calculating GDP, we can either sum up In calculating GDP, we can either sum up
the value added at each stage of the value added at each stage of
production, or we can take the value of production, or we can take the value of
final sales. We do not use the value of final sales. We do not use the value of
total sales in an economy to measure total sales in an economy to measure
how much output has been produced.how much output has been produced.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Value AddedValue Added
1.00$Total value added
.201.00Retail sale(4)
.15.80Shipping(3)
.15.65Refining(2)
.50$.50$Oil drilling(1)
VALUE ADDED VALUE OF SALES STAGE OF PRODUCTION
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
Value AddedValue Added
1.00$Total value added
.201.00Retail sale(4)
.15.80Shipping(3)
.15.65Refining(2)
.50$.50$Oil drilling(1)
VALUE ADDED VALUE OF SALES STAGE OF PRODUCTION
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Exclusions from GDPExclusions from GDP
•GDP ignores all transactions in GDP ignores all transactions in
which money or goods change which money or goods change
hands but in which no new goods hands but in which no new goods
and services are produced.and services are produced.
Exclusions from GDPExclusions from GDP
•GDP ignores all transactions in GDP ignores all transactions in
which money or goods change which money or goods change
hands but in which no new goods hands but in which no new goods
and services are produced.and services are produced.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
GDP Versus GNPGDP Versus GNP
•GDP is the value of output produced by GDP is the value of output produced by
factors of production factors of production located within a located within a
countrycountry. Output produced by a . Output produced by a
country’s citizens, regardless of where country’s citizens, regardless of where
the output is produced, is measured by the output is produced, is measured by
gross national product (GNP).gross national product (GNP).
GDP Versus GNPGDP Versus GNP
•GDP is the value of output produced by GDP is the value of output produced by
factors of production factors of production located within a located within a
countrycountry. Output produced by a . Output produced by a
country’s citizens, regardless of where country’s citizens, regardless of where
the output is produced, is measured by the output is produced, is measured by
gross national product (GNP).gross national product (GNP).
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Calculating GDPCalculating GDP
GDP can be computed in two ways:GDP can be computed in two ways:
•The expenditure approachThe expenditure approach: A : A
method of computing GDP that method of computing GDP that
measures the amount spent on all measures the amount spent on all
final goods during a given period.final goods during a given period.
•The income approachThe income approach: A method of : A method of
computing GDP that measures the computing GDP that measures the
income—wages, rents, interest, and income—wages, rents, interest, and
profits—received by all factors of profits—received by all factors of
production in producing final goods.production in producing final goods.
Calculating GDPCalculating GDP
GDP can be computed in two ways:GDP can be computed in two ways:
•The expenditure approachThe expenditure approach: A : A
method of computing GDP that method of computing GDP that
measures the amount spent on all measures the amount spent on all
final goods during a given period.final goods during a given period.
•The income approachThe income approach: A method of : A method of
computing GDP that measures the computing GDP that measures the
income—wages, rents, interest, and income—wages, rents, interest, and
profits—received by all factors of profits—received by all factors of
production in producing final goods.production in producing final goods.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Expenditure ApproachThe Expenditure Approach
Expenditure categories:Expenditure categories:
•Personal consumption expenditures Personal consumption expenditures
(C)(C)—household spending on consumer —household spending on consumer
goods.goods.
•Gross private domestic investment (I)Gross private domestic investment (I)
—spending by firms and households on —spending by firms and households on
new capital: plant, equipment, inventory, new capital: plant, equipment, inventory,
and new residential structures.and new residential structures.
The Expenditure ApproachThe Expenditure Approach
Expenditure categories:Expenditure categories:
•Personal consumption expenditures Personal consumption expenditures
(C)(C)—household spending on consumer —household spending on consumer
goods.goods.
•Gross private domestic investment (I)Gross private domestic investment (I)
—spending by firms and households on —spending by firms and households on
new capital: plant, equipment, inventory, new capital: plant, equipment, inventory,
and new residential structures.and new residential structures.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Expenditure ApproachThe Expenditure Approach
•Government consumption and Government consumption and
gross investment (G)gross investment (G)
Expenditure categories:Expenditure categories:
•Net exports (EX – IM)Net exports (EX – IM)—net —net
spending by the rest of the world, or spending by the rest of the world, or
exports (exports (EXEX) minus imports () minus imports (IMIM))
The Expenditure ApproachThe Expenditure Approach
•Government consumption and Government consumption and
gross investment (G)gross investment (G)
Expenditure categories:Expenditure categories:
•Net exports (EX – IM)Net exports (EX – IM)—net —net
spending by the rest of the world, or spending by the rest of the world, or
exports (exports (EXEX) minus imports () minus imports (IMIM))
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Expenditure ApproachThe Expenditure Approach
•The expenditure approach calculates The expenditure approach calculates
GDP by adding together these four GDP by adding together these four
components of spending. In equation components of spending. In equation
form:form:
G D P C I G X M= + + + -( )
The Expenditure ApproachThe Expenditure Approach
•The expenditure approach calculates The expenditure approach calculates
GDP by adding together these four GDP by adding together these four
components of spending. In equation components of spending. In equation
form:form:
G D P C I G X M= + + + -( )
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Personal Consumption ExpendituresPersonal Consumption Expenditures
•Personal consumption expenditures (C) Personal consumption expenditures (C)
are expenditures by consumers on the are expenditures by consumers on the
following:following:
•Durable goodsDurable goods: Goods that last a relatively : Goods that last a relatively
long time, such as cars and household long time, such as cars and household
appliances.appliances.
•Nondurable goodsNondurable goods: Goods that are used up : Goods that are used up
fairly quickly, such as food and clothing.fairly quickly, such as food and clothing.
•ServicesServices: The things that we buy that do not : The things that we buy that do not
involve the production of physical things, such involve the production of physical things, such
as legal and medical services and education.as legal and medical services and education.
Personal Consumption ExpendituresPersonal Consumption Expenditures
•Personal consumption expenditures (C) Personal consumption expenditures (C)
are expenditures by consumers on the are expenditures by consumers on the
following:following:
•Durable goodsDurable goods: Goods that last a relatively : Goods that last a relatively
long time, such as cars and household long time, such as cars and household
appliances.appliances.
•Nondurable goodsNondurable goods: Goods that are used up : Goods that are used up
fairly quickly, such as food and clothing.fairly quickly, such as food and clothing.
•ServicesServices: The things that we buy that do not : The things that we buy that do not
involve the production of physical things, such involve the production of physical things, such
as legal and medical services and education.as legal and medical services and education.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Components of GDP, 1999:Components of GDP, 1999:
The Expenditure ApproachThe Expenditure Approach
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
13.41,244.2Imports (IM)
10.6990.2Exports (EX)
- 2.7- 254.0Net exports (EX – IM)
11.51,065.8State and local
6.1568.6Federal
17.61,634.4Government consumption and gross investment (G)
0.543.3Change in business inventories
4.3403.8Residential
12.91,203.1Nonresidential
17.71,650.1Gross private domestic investment (l)
39.43,661.9Services
19.81,845.5Nondurable goods
8.2761.3Durable goods
67.46,268.7Personal consumption expenditures (C)
100.09,299.2Total gross domestic product
PERCENTAGE
OF GDP
BILLIONS OF
DOLLARS
Components of GDP, 1999: The Expenditure Approach
Components of GDP, 1999:Components of GDP, 1999:
The Expenditure ApproachThe Expenditure Approach
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
13.41,244.2Imports (IM)
10.6990.2Exports (EX)
- 2.7- 254.0Net exports (EX – IM)
11.51,065.8State and local
6.1568.6Federal
17.61,634.4Government consumption and gross investment (G)
0.543.3Change in business inventories
4.3403.8Residential
12.91,203.1Nonresidential
17.71,650.1Gross private domestic investment (l)
39.43,661.9Services
19.81,845.5Nondurable goods
8.2761.3Durable goods
67.46,268.7Personal consumption expenditures (C)
100.09,299.2Total gross domestic product
PERCENTAGE
OF GDP
BILLIONS OF
DOLLARS
Components of GDP, 1999: The Expenditure Approach
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Gross Private Domestic InvestmentGross Private Domestic Investment
•InvestmentInvestment refers to the purchase of refers to the purchase of
new capital.new capital.
•Total investment by the private Total investment by the private
sector is called sector is called gross private gross private
domestic investmentdomestic investment. It includes . It includes
the purchase of new housing, plants, the purchase of new housing, plants,
equipment, and inventory by the equipment, and inventory by the
private (or non-government) sector.private (or non-government) sector.
Gross Private Domestic InvestmentGross Private Domestic Investment
•InvestmentInvestment refers to the purchase of refers to the purchase of
new capital.new capital.
•Total investment by the private Total investment by the private
sector is called sector is called gross private gross private
domestic investmentdomestic investment. It includes . It includes
the purchase of new housing, plants, the purchase of new housing, plants,
equipment, and inventory by the equipment, and inventory by the
private (or non-government) sector.private (or non-government) sector.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Gross Private Domestic InvestmentGross Private Domestic Investment
•Nonresidential investmentNonresidential investment includes includes
expenditures by firms for machines, tools, expenditures by firms for machines, tools,
plants, and so on.plants, and so on.
•Residential investmentResidential investment includes includes
expenditures by households and firms on expenditures by households and firms on
new houses and apartment buildings.new houses and apartment buildings.
•Change in inventoriesChange in inventories computes the computes the
amount by which firms’ inventories change amount by which firms’ inventories change
during a given period. Inventories are the during a given period. Inventories are the
goods that firms produce now but intend to goods that firms produce now but intend to
sell later.sell later.
Gross Private Domestic InvestmentGross Private Domestic Investment
•Nonresidential investmentNonresidential investment includes includes
expenditures by firms for machines, tools, expenditures by firms for machines, tools,
plants, and so on.plants, and so on.
•Residential investmentResidential investment includes includes
expenditures by households and firms on expenditures by households and firms on
new houses and apartment buildings.new houses and apartment buildings.
•Change in inventoriesChange in inventories computes the computes the
amount by which firms’ inventories change amount by which firms’ inventories change
during a given period. Inventories are the during a given period. Inventories are the
goods that firms produce now but intend to goods that firms produce now but intend to
sell later.sell later.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Gross Investment versusGross Investment versus
Net InvestmentNet Investment
•Gross investmentGross investment is the total value is the total value
of all newly produced capital goods of all newly produced capital goods
(plant, equipment, housing, and (plant, equipment, housing, and
inventory) produced in a given period.inventory) produced in a given period.
•DepreciationDepreciation is the amount by which is the amount by which
an asset’s value falls in a given an asset’s value falls in a given
period.period.
•Net investmentNet investment equals gross equals gross
investment minus depreciation.investment minus depreciation.
capital
end of period
= capital
beginning of period
+ net investment
Gross Investment versusGross Investment versus
Net InvestmentNet Investment
•Gross investmentGross investment is the total value is the total value
of all newly produced capital goods of all newly produced capital goods
(plant, equipment, housing, and (plant, equipment, housing, and
inventory) produced in a given period.inventory) produced in a given period.
•DepreciationDepreciation is the amount by which is the amount by which
an asset’s value falls in a given an asset’s value falls in a given
period.period.
•Net investmentNet investment equals gross equals gross
investment minus depreciation.investment minus depreciation.
capital
end of period
= capital
beginning of period
+ net investment
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Government Consumption andGovernment Consumption and
Gross InvestmentGross Investment
•Government consumption and Government consumption and
gross investment (Ggross investment (G) counts ) counts
expenditures by federal, state, expenditures by federal, state,
and local governments for final and local governments for final
goods and services.goods and services.
Government Consumption andGovernment Consumption and
Gross InvestmentGross Investment
•Government consumption and Government consumption and
gross investment (Ggross investment (G) counts ) counts
expenditures by federal, state, expenditures by federal, state,
and local governments for final and local governments for final
goods and services.goods and services.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Net ExportsNet Exports
•Net exports (EX – IM)Net exports (EX – IM) is the difference is the difference
between exports (sales to foreigners of between exports (sales to foreigners of
U.S.-produced goods and services) and U.S.-produced goods and services) and
imports (U.S. purchases of goods and imports (U.S. purchases of goods and
services from abroad). The figure can be services from abroad). The figure can be
positive or negative.positive or negative.
Net ExportsNet Exports
•Net exports (EX – IM)Net exports (EX – IM) is the difference is the difference
between exports (sales to foreigners of between exports (sales to foreigners of
U.S.-produced goods and services) and U.S.-produced goods and services) and
imports (U.S. purchases of goods and imports (U.S. purchases of goods and
services from abroad). The figure can be services from abroad). The figure can be
positive or negative.positive or negative.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Income ApproachThe Income Approach
•National income is the total income
earned by the factors of production
owned by a country’s citizens.
•The The income approachincome approach to to GDPGDP breaks breaks
down down GDPGDP into four components: into four components:
GDP = national income + depreciation + (indirect taxes –
subsidies) + net factor payments to the rest of the world
+ other
The Income ApproachThe Income Approach
•National income is the total income
earned by the factors of production
owned by a country’s citizens.
•The The income approachincome approach to to GDPGDP breaks breaks
down down GDPGDP into four components: into four components:
GDP = national income + depreciation + (indirect taxes –
subsidies) + net factor payments to the rest of the world
+ other
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Income ApproachThe Income Approach
7.4689.7Indirect taxes minus subsidies
0.111.0Net factor payments to the rest of the world
9.2856.0Corporate profits
5.5507.1Net interest
1.5143.4Rental income
Source: See Table 17.2.
- 0.3- 32.2Other
12.51,161.0Depreciation
7.1663.5Proprietors’ income
57.05,299.8Compensation of employees
80.37,469.7National income
100.09,299.2Gross domestic product
PERCENTAGE
OF GDP
BILLIONS OF
DOLLARS
Components of GDP, 1999: The Income Approach
The Income ApproachThe Income Approach
7.4689.7Indirect taxes minus subsidies
0.111.0Net factor payments to the rest of the world
9.2856.0Corporate profits
5.5507.1Net interest
1.5143.4Rental income
Source: See Table 17.2.
- 0.3- 32.2Other
12.51,161.0Depreciation
7.1663.5Proprietors’ income
57.05,299.8Compensation of employees
80.37,469.7National income
100.09,299.2Gross domestic product
PERCENTAGE
OF GDP
BILLIONS OF
DOLLARS
Components of GDP, 1999: The Income Approach
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
From GDP to Disposable IncomeFrom GDP to Disposable Income
Source: See Table 17.2.
6,637.7Equals: disposable personal income
- 1,152.0Less: personal taxes
7,789.6Equals: personal income
+1,011.0Plus: transfer payments to persons
+ 456.6Plus: personal interest income received from the government and consumers
- 662.1Less: social insurance payments
- 485.7Less: corporate profits minus dividends
7,469.7Equals: national income
- 675.5Less: indirect taxes minus subsidies plus other
8,127.1Equals: net national product (NNP)
- 1,161.0Less: depreciation
9,288.2Equals: GNP
- 316.9Less: payments of factor income to the rest of the world
+ 305.9Plus: receipts of factor income from the rest of the world
9,299.2GDP
DOLLARS
(BILLIONS)
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income,
1999
From GDP to Disposable IncomeFrom GDP to Disposable Income
Source: See Table 17.2.
6,637.7Equals: disposable personal income
- 1,152.0Less: personal taxes
7,789.6Equals: personal income
+1,011.0Plus: transfer payments to persons
+ 456.6Plus: personal interest income received from the government and consumers
- 662.1Less: social insurance payments
- 485.7Less: corporate profits minus dividends
7,469.7Equals: national income
- 675.5Less: indirect taxes minus subsidies plus other
8,127.1Equals: net national product (NNP)
- 1,161.0Less: depreciation
9,288.2Equals: GNP
- 316.9Less: payments of factor income to the rest of the world
+ 305.9Plus: receipts of factor income from the rest of the world
9,299.2GDP
DOLLARS
(BILLIONS)
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income,
1999
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
From GDP to Disposable IncomeFrom GDP to Disposable Income
•Net national productNet national product equals gross equals gross
national product minus depreciation; national product minus depreciation;
a nation’s total product minus what is a nation’s total product minus what is
required to maintain the value of its required to maintain the value of its
capital stock.capital stock.
From GDP to Disposable IncomeFrom GDP to Disposable Income
•Net national productNet national product equals gross equals gross
national product minus depreciation; national product minus depreciation;
a nation’s total product minus what is a nation’s total product minus what is
required to maintain the value of its required to maintain the value of its
capital stock.capital stock.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
From GDP to Disposable IncomeFrom GDP to Disposable Income
•Personal incomePersonal income is the total income is the total income
of households. Equals (national of households. Equals (national
income) minus (corporate profits income) minus (corporate profits
minus dividends) minus (social minus dividends) minus (social
insurance payments) plus (interest insurance payments) plus (interest
income received from the government income received from the government
and households).and households).
•Personal income is the income Personal income is the income
received by households after paying received by households after paying
social insurance taxes but before social insurance taxes but before
paying personal income taxes.paying personal income taxes.
From GDP to Disposable IncomeFrom GDP to Disposable Income
•Personal incomePersonal income is the total income is the total income
of households. Equals (national of households. Equals (national
income) minus (corporate profits income) minus (corporate profits
minus dividends) minus (social minus dividends) minus (social
insurance payments) plus (interest insurance payments) plus (interest
income received from the government income received from the government
and households).and households).
•Personal income is the income Personal income is the income
received by households after paying received by households after paying
social insurance taxes but before social insurance taxes but before
paying personal income taxes.paying personal income taxes.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Disposable Personal Income and Disposable Personal Income and
Personal SavingPersonal Saving
- 194.8Interest paid by consumers to business
- 6,268.7Personal consumption expenditures
Source: See Table 17.2.
2.2%Personal savings as a percentage of disposable personal income:
147.6Equals: personal saving
- 26.6Personal transfer payments to foreigners
Less:
6,637.7Disposable personal income
DOLLARS
(BILLIONS)
Disposable Personal Income and Personal Saving, 1999
Disposable Personal Income and Disposable Personal Income and
Personal SavingPersonal Saving
- 194.8Interest paid by consumers to business
- 6,268.7Personal consumption expenditures
Source: See Table 17.2.
2.2%Personal savings as a percentage of disposable personal income:
147.6Equals: personal saving
- 26.6Personal transfer payments to foreigners
Less:
6,637.7Disposable personal income
DOLLARS
(BILLIONS)
Disposable Personal Income and Personal Saving, 1999
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Disposable Personal Income and Disposable Personal Income and
Personal SavingPersonal Saving
•The The personal saving ratepersonal saving rate is the is the
percentage of disposable personal percentage of disposable personal
income that is saved. If the personal income that is saved. If the personal
saving rate is low, households are saving rate is low, households are
spending a large amount relative to spending a large amount relative to
their incomes; if it is high, their incomes; if it is high,
households are spending cautiously.households are spending cautiously.
Disposable Personal Income and Disposable Personal Income and
Personal SavingPersonal Saving
•The The personal saving ratepersonal saving rate is the is the
percentage of disposable personal percentage of disposable personal
income that is saved. If the personal income that is saved. If the personal
saving rate is low, households are saving rate is low, households are
spending a large amount relative to spending a large amount relative to
their incomes; if it is high, their incomes; if it is high,
households are spending cautiously.households are spending cautiously.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Nominal versus Real GDPNominal versus Real GDP
•Nominal GDP is GDP measured in Nominal GDP is GDP measured in
current dollarscurrent dollars, or the current prices , or the current prices
we pay for things. Nominal GDP we pay for things. Nominal GDP
includes all the components of GDP includes all the components of GDP
valued at their current prices.valued at their current prices.
•When a variable is measured in When a variable is measured in
current dollars, it is described in current dollars, it is described in
nominal termsnominal terms..
Nominal versus Real GDPNominal versus Real GDP
•Nominal GDP is GDP measured in Nominal GDP is GDP measured in
current dollarscurrent dollars, or the current prices , or the current prices
we pay for things. Nominal GDP we pay for things. Nominal GDP
includes all the components of GDP includes all the components of GDP
valued at their current prices.valued at their current prices.
•When a variable is measured in When a variable is measured in
current dollars, it is described in current dollars, it is described in
nominal termsnominal terms..
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Calculating Real GDPCalculating Real GDP
•A A weightweight is the importance attached is the importance attached
to an item within a group of items.to an item within a group of items.
•A A base yearbase year is the year chosen for is the year chosen for
the weights in a fixed-weight the weights in a fixed-weight
procedure.procedure.
•A A fixed-weight procedurefixed-weight procedure uses uses
weights from a given base year.weights from a given base year.
Calculating Real GDPCalculating Real GDP
•A A weightweight is the importance attached is the importance attached
to an item within a group of items.to an item within a group of items.
•A A base yearbase year is the year chosen for is the year chosen for
the weights in a fixed-weight the weights in a fixed-weight
procedure.procedure.
•A A fixed-weight procedurefixed-weight procedure uses uses
weights from a given base year.weights from a given base year.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Calculating Real GDPCalculating Real GDP
GDP IN GDP IN GDP IN GDP IN
YEAR 2 YEAR 1 YEAR 2 YEAR 1
Nominal GDP
in year 2
Nominal GDP
in year 1
$19.20$18.40$15.10$12.10Total
10.809.008.407.00.90.701210Good C
4.007.001.202.101.00.3047Good B
$4.40$2.40$5.50$3.00$ .40$.50116Good A
P
2
X Q
2
P
2
x Q
1
P
1
x Q
2
P
1
x Q
1
P
2
P
1
Q
2
Q
1
PRICES PRICES PRICES PRICES YEAR 2 YEAR 1 YEAR 2 YEAR 1
YEAR 2 YEAR 2 YEAR 1 YEAR 1 PRICE PER UNIT PRODUCTION
IN IN IN IN
(8) (7) (6) (5) (4) (3) (2) (1)
A Three-Good Economy
Calculating Real GDPCalculating Real GDP
GDP IN GDP IN GDP IN GDP IN
YEAR 2 YEAR 1 YEAR 2 YEAR 1
Nominal GDP
in year 2
Nominal GDP
in year 1
$19.20$18.40$15.10$12.10Total
10.809.008.407.00.90.701210Good C
4.007.001.202.101.00.3047Good B
$4.40$2.40$5.50$3.00$ .40$.50116Good A
P
2
X Q
2
P
2
x Q
1
P
1
x Q
2
P
1
x Q
1
P
2
P
1
Q
2
Q
1
PRICES PRICES PRICES PRICES YEAR 2 YEAR 1 YEAR 2 YEAR 1
YEAR 2 YEAR 2 YEAR 1 YEAR 1 PRICE PER UNIT PRODUCTION
IN IN IN IN
(8) (7) (6) (5) (4) (3) (2) (1)
A Three-Good Economy
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Calculating the GDP Price IndexCalculating the GDP Price Index
•The GDP price index is one measure of the The GDP price index is one measure of the
overall price level.overall price level.
•The old procedure used by the Bureau of The old procedure used by the Bureau of
Economic Analysis (BEA) to estimate Economic Analysis (BEA) to estimate
changes in the overall price changes in the overall price levellevel used the used the
quantities produced in a chosen year (the quantities produced in a chosen year (the
base year) as weights. But overall price base year) as weights. But overall price
increases are sensitive to the choice of the increases are sensitive to the choice of the
base year. The new procedure, known as base year. The new procedure, known as
the chained price index, avoids the the chained price index, avoids the
problems associated with the use of fixed problems associated with the use of fixed
weights.weights.
Calculating the GDP Price IndexCalculating the GDP Price Index
•The GDP price index is one measure of the The GDP price index is one measure of the
overall price level.overall price level.
•The old procedure used by the Bureau of The old procedure used by the Bureau of
Economic Analysis (BEA) to estimate Economic Analysis (BEA) to estimate
changes in the overall price changes in the overall price levellevel used the used the
quantities produced in a chosen year (the quantities produced in a chosen year (the
base year) as weights. But overall price base year) as weights. But overall price
increases are sensitive to the choice of the increases are sensitive to the choice of the
base year. The new procedure, known as base year. The new procedure, known as
the chained price index, avoids the the chained price index, avoids the
problems associated with the use of fixed problems associated with the use of fixed
weights.weights.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Problems of Fixed WeightsThe Problems of Fixed Weights
1.1.Structural changes in the economy.Structural changes in the economy.
2.2.Supply shifts, which cause large Supply shifts, which cause large
decreases in price and large increases in decreases in price and large increases in
quantity supplied.quantity supplied.
3.3.The substitution effect of price increases.The substitution effect of price increases.
The use of fixed price weights to The use of fixed price weights to
estimate real GDP leads to problems estimate real GDP leads to problems
because it ignores:because it ignores:
The Problems of Fixed WeightsThe Problems of Fixed Weights
1.1.Structural changes in the economy.Structural changes in the economy.
2.2.Supply shifts, which cause large Supply shifts, which cause large
decreases in price and large increases in decreases in price and large increases in
quantity supplied.quantity supplied.
3.3.The substitution effect of price increases.The substitution effect of price increases.
The use of fixed price weights to The use of fixed price weights to
estimate real GDP leads to problems estimate real GDP leads to problems
because it ignores:because it ignores:
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Limitations of the GDP ConceptLimitations of the GDP Concept
•Society is better off when crime Society is better off when crime
decreases, but a decrease in crime decreases, but a decrease in crime
is not reflected in GDP.is not reflected in GDP.
•An increase in leisure is an increase An increase in leisure is an increase
in social welfare, not counted in in social welfare, not counted in
GDP.GDP.
•Nonmarket and domestic activities Nonmarket and domestic activities
are not counted even though they are not counted even though they
amount to real production.amount to real production.
Limitations of the GDP ConceptLimitations of the GDP Concept
•Society is better off when crime Society is better off when crime
decreases, but a decrease in crime decreases, but a decrease in crime
is not reflected in GDP.is not reflected in GDP.
•An increase in leisure is an increase An increase in leisure is an increase
in social welfare, not counted in in social welfare, not counted in
GDP.GDP.
•Nonmarket and domestic activities Nonmarket and domestic activities
are not counted even though they are not counted even though they
amount to real production.amount to real production.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Limitations of the GDP ConceptLimitations of the GDP Concept
•GDP accounting rules do not adjust GDP accounting rules do not adjust
for production that pollutes the for production that pollutes the
environment.environment.
•GDP has nothing to say about the GDP has nothing to say about the
distribution of output. Redistributive distribution of output. Redistributive
income policies have no direct income policies have no direct
impact on GDP.impact on GDP.
•GDP is neutral to the kinds of goods GDP is neutral to the kinds of goods
an economy produces.an economy produces.
Limitations of the GDP ConceptLimitations of the GDP Concept
•GDP accounting rules do not adjust GDP accounting rules do not adjust
for production that pollutes the for production that pollutes the
environment.environment.
•GDP has nothing to say about the GDP has nothing to say about the
distribution of output. Redistributive distribution of output. Redistributive
income policies have no direct income policies have no direct
impact on GDP.impact on GDP.
•GDP is neutral to the kinds of goods GDP is neutral to the kinds of goods
an economy produces.an economy produces.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
The Underground EconomyThe Underground Economy
•The The underground economyunderground economy is the is the
part of an economy in which part of an economy in which
transactions take place and in which transactions take place and in which
income is generated that is income is generated that is
unreported and therefore not unreported and therefore not
counted in GDP.counted in GDP.
The Underground EconomyThe Underground Economy
•The The underground economyunderground economy is the is the
part of an economy in which part of an economy in which
transactions take place and in which transactions take place and in which
income is generated that is income is generated that is
unreported and therefore not unreported and therefore not
counted in GDP.counted in GDP.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Per Capita GDP/GNPPer Capita GDP/GNP
•Per capita GDPPer capita GDP or or GNPGNP measures a measures a
country’s GDP or GNP divided by its country’s GDP or GNP divided by its
population.population.
•Per capita GDP is a better measure Per capita GDP is a better measure
of well-being for the average person of well-being for the average person
that its total GDP or GNP.that its total GDP or GNP.
Per Capita GDP/GNPPer Capita GDP/GNP
•Per capita GDPPer capita GDP or or GNPGNP measures a measures a
country’s GDP or GNP divided by its country’s GDP or GNP divided by its
population.population.
•Per capita GDP is a better measure Per capita GDP is a better measure
of well-being for the average person of well-being for the average person
that its total GDP or GNP.that its total GDP or GNP.
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair
Per Capita GDP/GNPPer Capita GDP/GNP
Source: The World Bank Atlas, 2000.
11,650Greece
100Ethiopia14,080Spain
210Nepal15,940Israel
230Rwanda18,340Ireland
430India20,020Canada
480Pakistan20,250Italy
680Indonesia20,300Australia
750China21,400United Kingdom
1,050Philippines24,110Finland
1,390Romania24,760Netherlands
1,520Jordan24,940France
2,600Colombia25,380Belgium
2,880South Africa25,620Sweden
3,160Turkey25,850Germany
3,970Mexico26,850Austria
4,570Brazil29,340United States
5,040Czech Republic32,380Japan
7,970South Korea33,260Denmark
8,970Argentina34,330Norway
10,690Portugal40,080Switzerland
U.S. DOLLARS COUNTRY U.S. DOLLARS COUNTRY
Per Capita GNP for Selected Countries, 1998
Per Capita GDP/GNPPer Capita GDP/GNP
Source: The World Bank Atlas, 2000.
11,650Greece
100Ethiopia14,080Spain
210Nepal15,940Israel
230Rwanda18,340Ireland
430India20,020Canada
480Pakistan20,250Italy
680Indonesia20,300Australia
750China21,400United Kingdom
1,050Philippines24,110Finland
1,390Romania24,760Netherlands
1,520Jordan24,940France
2,600Colombia25,380Belgium
2,880South Africa25,620Sweden
3,160Turkey25,850Germany
3,970Mexico26,850Austria
4,570Brazil29,340United States
5,040Czech Republic32,380Japan
7,970South Korea33,260Denmark
8,970Argentina34,330Norway
10,690Portugal40,080Switzerland
U.S. DOLLARS COUNTRY U.S. DOLLARS COUNTRY
Per Capita GNP for Selected Countries, 1998
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