Measuring Domestic Output Gross National Product All

Measuring Domestic Output

Gross National Product All goods & services produced by citizens of a country, either home or aboard. [Citizenship mattered, not geography] China Plano, TX Europe Nike in Indonesia Gross Domestic Product All goods & services produced within a country’s borders, in a given year. [Geography matters, not citizenship] Provo, UT BMW in Waco in Chicago Honda in Ohio

Gross Domestic Product is a monetary measure of the economy’s health

Calculating - (CIG-X) Expenditure Approach [C+Ig+G+Xn] Consumption Gross Investment Gov. Purchases Net Exports

GDP = C(66%) + Ig(18%) + G(16%) + Xn Personal Consumption Expenditure ( C ) = all expenditures by households on durable goods & services. • Durable Consumer Goods (cars) account for 12% • Nondurable goods (food) account for 29% • Consumer Expenditures for Services account for 59%

Gross Private Domestic Investment (Ig) = all final purchases of capital goods and construction. 3 Subcategories A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment – construction of new houses & apartments [which can be rented for financial return]. C. Inventory investment – change in business inventories -An net increase in inventories is investment -A net decrease in inventories is negative investment or disinvestment (representing consuming or the sale of more product than was bought or produced in a given year. )

5 Ig & 4 appreciatio 3 n of capital 2 1 0 Pos. Net Investment Initial Capital Deprec- Gross iation Investment Initial Capital 5 Initial capital less deprec. 1/1/04 During 2004 12/31/04 “Music By Ben” creates music CDs. The owner has five machines used to create CD music (his capital stock). If during the course of the year he expands by buying a new machine, and loses no machines, then at the end of the year his capital stock will increase by one, showing a positive net investment. Net investment = initial stock – depreciation + Ig

5 Ig & 4 depreciatio 3 n of capital 2 1 0 Initial Capital Neg. Net Investment Depreciation Gross Investment Initial Capital 5 Initial capital less deprec. 1/1/04 During 2004 12/31/04 However, if the owner buys a new machine but during the same his two oldest machines chase, then at the end of the year his capital stock will decrease by one, showing negative net investment. Depreciation the 1 machinethat was not replaced is during the year. Investment -increases the capital stock. Depreciationdecreases the capital stock. -decreases Net Investment -change in capital stock in one year.

Government Purchases (G) = all government consumption of goods & services, and all investment in social capital (school/highways). [“G” purchases of goods/ produced(not transfer payments) svcs 3 Subcategories A. Federal government 40% B. 50 State governments C. 84, 000 local governments 60% for state and local

Eight Things Do Not Count In 1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers.

2. Second Hand Sales – not current production. A. If a 1957 Chevy is bought in 2005 Chevy The car was counted in the GDP of 1957, so would not be counted this year. However, the salesman’s commission would be counted because you are buying his service.

3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production being made if 100 shares of Dell stock is bought. Wealth is simply transferred from one form of paper to another. I’m going to buy 100 shares of Dell Stock. Exchanging one financial asset for another

4. Transfer Payments – welfare, unemployment, social security There is no contribution to final production. Why didn’t I pay attention in Economics class?

5. Unreported “Legal” business Activity Unreported “legal” business activity does not count. This is two-thirds of the “underground economy. ” What if an eye surgeon doesn’t report $500 of his $3, 400 Intra. LASIK ? bill What if this waitress doesn’t report all tips? What if the dentist doesn’t report $400 for teeth whitening?

6. Illegal business activity are unreported, so they don’t count. This underground economy makes up 1/10 of our GDP. “I’m getting $1, 000 to kill you, Ziggy but at least it , will not count in GDP. ” What about“Jane? ”

7. Non-market Transactions Work in your own household or volunteer work in the community does not count because there was no payment. So, don’t marry your maid, gardener, or fitness instructor you will hurt GDP. , or

8. U. S. Corporations Producing Goods Overseas - Chevy in France Nike in Djibouti If U. S. corporations produce goods overseas, it does not count in the U. S. GDP, but would count in another nations GDP. We are measuring production inside the U. S. Our production outside the U. S. helps other economies.

Do These Count in GDP? - When Outback buys potatoes for baked potatoes - When atattoo business buys ink for tats - When HEB buys spam to sell it to you - Whenthe popsicle maker buys sticks the - Dell buys a computer monitor frame - Ice creamthat sundaes Baskin-Robbins buys for - Mrs. Smithbuys an apple to putin its pies - When Ford buys a windshield wiper for a car

Does Her Work Count? It depends on whether she is the maid or housewife.

And – What About This? It depends. Is he the owner or a hired mechanic?

SHORTCOMINGS OF GDP Non-market Transactions Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition and Distribution of Output Per Capita Output

National Accounts

• C + Ig + G + X n = • GDP – depreciation of fixed capital = • NDP – indirect business taxes – NFFIE = • NI – Social Security tax - Corporate income taxes Undistributed corporate profits + transfer payments = • PI - personal income taxes + credit spending = • DI – credit interest payments = C & S Undistributed corporate profits = corporate profits – corporate income taxes – distributed dividends

N. F. F. I. E. U. S. All income earned in the U. S. by foreign companies. [U. S. A. Profits Overseas] Rest of World $200 bil. Foreign Profits in. U. S. A. $209 bill. N. F. F. I. E. U. S. = $9 billion

N. F. F. I. E U. S. . [U. S. A. Profits Overseas ] Rest of World $220 bil. Foreign Profits in. U. S. A. $209 billion N. F. F. I. E. U. S. = -$11 billion

How to calculate NIA Personal taxes 403 Imports 362 +Transfer payments 283 -Corporate. Income Taxes 88 Indirect business taxes 231 Exports 465 C= $ Ig = $ G+ $ Xn = $ Gross Domestic Product ( ) GDP -Consumption of fixed capital Net Domestic Product ( ) NDP -Net For. Factor Inc. Earn. U. S. -Indirect business taxes National Income. NI) ( NI -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments -Undistributed corp. profits 46 -Social Security contrib. 169 Personal consumption 2, 316 Gross privatedomes invest. 503 Government purchases 673 Depreciation 307 N. F. F. I. E. in the U. S. 12 2, 316 ______ 503 ______ 673 ______ 103 ______ $______ 3, 595 ______ -307 3, 288 $_______ -12 ______ -231 3, 045 $______ -46 ______ -88 ______ -169 _______ +283 Personal Income. PI) ( PI 3, 025 $_______ Disposable Income. DI) ( DI $_______ 2, 622 -Personal Taxes ____ -403 -303

NIA Practice #1 Personal taxes 382 Imports 348 +Transfer payments 330 -Corporate. Income Taxes 98 Indirect business taxes 265 Exports 377 C= $ Ig = $ G+ $ Xn = $ Gross Domestic Product ( ) GDP -Consumption of fixed capital Net Domestic Product ( ) NDP -Net For. Factor Inc. Earn. U. S. -Indirect business taxes National Income. NI) ( NI -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income. PI) ( PI -Personal Taxes Disposable Income. DI) ( DI -Undistributed corp. profits 65 -Social Security contrib. 158 Personal consumption 1, 820 Gross privatedomes invest. 447 Government purchases 587 Depreciation 317 N. F. F. I. E. in the U. S. -10 1, 820 447 587 +29 $2, 883 -317 ROW $110 $2, 566 +10 -265 $2, 311 -65 -98 -158 +330 $2, 320 -382 $1, 938 $100 NFFI = -$10

NIA Practice #2 Personal taxes Imports +Transfer payments -Corporate. Income Taxes Inventory consumption 60 60 -Undistributed corp. profits 37 75 -Social Security contrib. 24 Personal consumption 310 55 Gross privatedomes invest. 85 Indirect business taxes 15 Government purchases 130 Exports 95 N. F. F. I. E. 60 25 85 [Depreciation = – In] Ig [Ig______ - In _______ = _______] C= $ Ig = $ G+ $ Xn = $ Gross Domestic Product ( ) GDP -Consumption of fixed capital Net Domestic Product ( ) NDP -Net For. Factor Inc. Earn. U. S. -Indirect business taxes National Income. NI) ( NI -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income. PI) ( PI -Personal Taxes Disposable Income. DI) ( DI 310 85 130 +20 $545 -25 25 18 ROW $100 $520 -18 -15 $487 -37 -55 -25 +24 $394 -60 $334 $118 NFFI = $18

Personal taxes Exports Imports 89 +Transfer payments 58 109 Corporate income taxes Indirect business taxes NIA Practice #3 41 38 21 C= $ Ig = $ G+ $ Xn = $ -Undistributed corp. profits 23 -Social Security contrib. Personal consumption 358 Gross privatedomes invest. Government purchases Depreciation N. F. F. I. E. in the U. S. Gross Domestic Product ( ) GDP -Consumption of fixed capital Net Domestic Product ( ) NDP -Net For. Factor Inc. Earn. U. S. -Indirect business taxes National Income. NI) ( NI -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income. PI) ( PI -Personal Taxes Disposable Income. DI) ( DI 358 130 165 +20 $673 -45 40 130 165 45 23 ROW $100 $628 -23 -21 $548 -23 -38 -40 +41 $524 -58 $466 $123 NFFI = $23

NIA Practice #4 Personal taxes Exports Imports +Transfer payments Corporate income taxes Indirect business taxes [Depreciation = Ig – In] C= $ Ig = $ G+ $ Xn = $ 60 -Undistributed corp. profits 37 -Social Security contrib. 23 Personal consumption 26 Ig 42 Government purchases 24 N. F. F. I. E. in the U. S. 104 [Ig ______ - In ______ = ____] 80 24 Gross Domestic Product ( ) GDP -Consumption of fixed capital Net Domestic Product ( ) NDP -Net For. Factor Inc. Earn. U. S. -Indirect business taxes National Income. NI) ( NI -Undistributed Corporate Profits -Corporate income taxes -Social Security Contributions +Transfer payments Personal Income. PI) ( PI -Personal Taxes Inventory consumption Disposable Income. DI) ( DI 312 104 110 +14 $540 -24 $516 -30 -24 $462 -16 -42 -32 +26 $398 -60 $338 80 16 32 312 104 110 30 ROW $100 $130 NFFI = $30

Nominal. GDP (money)v. Real GDP (buying power) Nominal GDP is unadjusted for effect of inflation. Real GDP (GDP deflator) is adjusted for effect of inflation. Real GDP = Nominal GDP/price index x 100 Real GDP measures in terms of the value of G/S Nominal GDP measures in terms of money

Nominal GDP = units of output x price per unit. Calculating Real GDP; Year Units of Output 1 5 2 7 3 8 4 10 5 11 Price Per unit $10 $25 $30 $28 Nominal GDP $ 50 $140 $200 $308 Real Price GDP Index $50 100 $70 200 $80 250 $100 300 $110 280 Price Index = Nominal GDP/Real GDP x 100 Real GDP = nominal GDP/price index (in hundredths)

Importance of Real GDP in Determining a Recession Apple GDP Example A country produces 10 apples x $1; GDP = $10 [base year =100] A country produces 10 apples x $1. 25; GDP = $12. 50 (GDPr is the same but we are worse off; because $10 is no long what it use to. ) A country produces 9 apples x $1. 25 ; GDP=$11. 25 (GDPr is down/recession, but nominal GDP is up)

If this is Pat then this is “The End”.