Measuring National Output

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Measuring National Output - PowerPoint PPT Presentation

Measuring National Output. Chapter 5. 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. Output.

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Presentation Transcript

Measuring National Output

Chapter 5

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
Output
• The value of goods and services produced is the single most important measure of the nation’s output.
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
Four Sectors of Output
• Households  Consumption
• Government  Government
• Foreign Sector  Net exports
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
Expenditure Approach
• Method of computing GDP that sums consumption, gross investment, government purchases, and net exports.
• GDP = C + I + G + NX
Consumption
• 70% of GDP
• Durable goods
• Nondurable goods
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
Change in Inventories
• Increase in inventories: part of firms production is not sold, economy slows down
• Decrease in inventories: firm’s production falls short of sales, economy speeds up
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

Investment
Government
• Federal, state and local levels
• 19% of GDP
• Purchases goods and services
• Transfer payments such as social security are not included
Net Exports
• Exports – foreign purchase of domestic products
• Imports – domestic purchases of foreign products
• Net Exports = Exports minus Imports
• -4.6% of GDP
Income Approach
• Method of computing GDP that sums various forms of income

Compensation of employees

+ Proprietor’s income

+ Rental income of persons

+ Corporate profits

+ Net interest

+ Capital consumption allowance

+ Net income of foreigners

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

Contrasting GDP to GNP
Underground economy

Market transactions that go unreported to government

Household production

Environmental issues

Measure of Economic Welfare - Tobin

Shortcomings to GDP
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
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

The size of a nation’s real GDP is probably the best indicator of the size of a country’s economy

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

REAL GDP

Peak

Recession

Expansion

Trough

Time

Expansion

Economic growth

GDP 

Income (Y) ,

C ,

GDP ,

u

Recession

Contraction

Sustained decrease in real GDP

GDP 

Income 

C 

GDP 

U 

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

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

GDP

Less: Depreciation

Net Domestic Production

National income – payments to owners of capital

-corporate profits

-net interest

-social security taxes

Personal income =

-personal taxes

Disposable income = Consumption + Savings