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Chapter 7

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  1. Chapter 7 Measuring Domestic Output, National Income & Price Level

  2. Assessing Economic Performance • National Income Accounting is done by the Dept of Commerce (Bureau of Economic Analysis) • Consistent indicators which provide policy makers the information to manage the economy

  3. GDP or Aggregate Output • GDP – total of goods and services produced in a given year • Monetary measure – Allows us to compare/ contrast different years • Only includes final products, cannot count products twice when figuring GDP • Excludes public transfers, private transfers, and stock market transactions

  4. Continuing w/ GDP • What is spent on a product equates to income for the people that helped to produce and sell that product • Income is crucial to the National Accounting Process • Two ways to examine – Expenditures & Income

  5. Expenditures Approach • Personal Consumption Expenditures (C) • Includes all purchases of durable, non-durable, and services by household • Gross Private Domestic Investment (Ig)– includes final purchase of capital equipment, construction, and changes in inventory

  6. Government Purchases (G) • All spending at all levels • All purchases of resources, mainly labor • Excludes transfer payments

  7. Net Exports (Xn) • Determining the amount of goods shipped overseas is also important to figuring GDP. • Xn = Exports (X) minus imports (n)

  8. GDP Summarized GDP = C + Ig + G + Xn

  9. Income Approach • Compensation or Wages • Rents • Interest Accumulated • Proprietors Income or Profits (Unincorporated Businesses) • Corporate Profits (Less taxes & dividends paid to shareholders) • The sum of these = National Income

  10. Modifications to Income Approach • In order to correctly arrive @ GDP we must also figure in Indirect Business Taxes, Net Consumption of Fixed Capital (Depreciation), and Net Foreign Factor Income • National Income (All Americans) vs. Domestic Income (All income paid within the U.S.)

  11. Other National Accounts • Net Domestic Product (NDP) = GDP - depreciation • National Income (NI) = NDP – Net Foreign Factor ($ earned in the USA by non-citizens) – Indirect taxes (fees, etc.)

  12. Figuring Personal Income • PI – Income received by households • National Income needs to be adjusted for taxes not received, and conversely, for income not accounted for by the National Income figure • In simple, subtract all taxes and add all transfer payments to National Income

  13. National Accounts Continued • Disposable Income (DI) = C + S (Savings) • Make sure you understand page and are familiar with the Circular Flow Model (Pg. 126)

  14. Real vs. Nominal GDP • Nominal – not adjusted for inflation • Real – After inflationary adjustments • Rates of inflation are inconsistent and this is why we must make these adjustments

  15. Price Indexes Used in figuring Real GDP by accounting for any inflation Consumer Price Index – 300 goods & services purchased by a typical consumer

  16. GDP and its Shortcomings Non–Market Transactions Leisure Improved Product Quality The Underground Economy GDP & The Environment