7. C H A P T E R. Measuring Domestic Output, and National Income. Assessing the Economy’s Performance. National income accounts enable us to: Measure the economy’s overall performance by measuring the flows of income and expenditures over a period of time (Assess the health of the economy)
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C H A P T E R
Measuring Domestic Output,
and National Income
National income accounts enable us to:
Quantities x prices
Value added = market value of the product – the value of inputs (i.e. wages, rent, interest and profits).
1- Purely financial transactions are excluded:
c.The sale of stocks and bonds represent a transfer of existing assets (just swap of papers).
2 - Secondhand sales are excluded; they do not represent current output. (However, any value added between purchase and resale is included, e.g., used car dealers).
GDP is divided into the categories of buyers in the market; household consumers, businesses, government, and foreign buyers.
On durable goods (goods lasting 3 years or more), non-durable goods and services.
2. Gross Private Domestic Investment (Ig):
c.Changesin business inventory.
includes only investment in the form of added capital. Each year as current output is being produced, existing capital equipments are wearing out and buildings are deteriorating; this is called depreciation or consumption of fixed capital.
Net investment = gross investment - (consumption of fixed capital) depreciation
Investment is the creation of new capital assets, that create jobs and income.
3.Government Purchases (G):
They include two components:
Remember, This entry excludes government transfer payments because they generate no production of any sort.
4 - Net Exports (Xn):
All spending on final goods produced in Kuwait must be included in GDP, whether the purchase is made here or abroad.
These include spending on domestic output by foreigners (Exports X). However, expenditures by residents on foreign made goods (Imports M) must be excluded (they appear in the foreign country’s GDP).
Instead of adding exports and subtracting imports we only add “net exports”
Xn = X - M
Now adding all things together
GDP = C + Ig + G + Xn(X-M)
National income is all income that flows to nationals, whether resident in the country or abroad. Adjustments required to balance expenditures and income. To get GDP we have to add three items:
1- indirect business taxes:
These include general sales taxes, excise taxes, business property taxes and customs duties. (the seller treats these taxes as a cost of production, hence, they are part of the market value of output, but not of income).
National income measures the income of Kuwaitis both here and abroad. To make this final adjustment, the income of foreign nationals must be added and Kuwaiti income earned abroad must be subtracted. Sometimes this entry is a negative number.
OTHER NATIONAL ACCOUNTS (USA EXAMPLE)
U.S. GDP, NDP, NI, PI, & DI, 2002
GROSS DOMESTIC PRODUCT
Personal Consumption (C)
Gross Private Domestic Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Gross Domestic Product
Taxes on Production and Imports
Net Foreign Factor Income (-)
Statistical Discrepancy (+)
Consumption of Fixed Capital (+)
Gross Domestic Product
A. Net domestic product (NDP) is equal to GDP minus depreciation allowance (consumption of fixed capital).
D.Disposable income (DI) is personal income less personal taxes.
Adjustment process in one product economy.
Valid comparisons cannot be made with nominal GDP alone, since both prices and quantities are subject to change. Some methods to separate the two effects must be devised.
NOMINAL GDP vs. REAL GDP: GDPOutput of Pizza
Year 1 =
- The market basket is composed of pizzas only
- Year 1 is the base year
- Real GDP can be calculated by multiplying units of output by base year prices
Reports the price of a market basket of some consumer goods and services purchased by a typical urban consumer
GDP doesn’t measure some very useful output because it is unpaid (homemakers’ services, parental child care, volunteer efforts, home improvement projects), e.g., the services of a carpenter who repairs his own home are not included in GDP.
One exception: output that farmers consume themselves is estimated and added.
Over time product quality improves though prices may be the same. Quality affects our welfare. GDP doesn’t measure improvements in product quality
We spend more leisure time. GDP doesn’t measure improved living conditions as a result of more leisure. This affects our welfare, but this is not reflected in GDP.
Nominal GDP simply adds the dollar value of what is produced; it makes no difference if the products are guns or food.
GDP figures do not provide information about how the income is distributed.
Illegal activities are not counted in GDP (estimated to be around 8% of U.S. GDP).
Legal economic activity may also be part of the “underground,” usually in an effort to avoid taxation
The harmful effects of pollution are not deducted from GDP (e.g., oil spills, increased incidence of cancer, destruction of habitat for wildlife, the loss of a clear unobstructed view).
Note that GDP does include payments made for cleaning up oil spills and the cost of health care for cancer victims.