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

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1980 2000

US

Asia

Europe

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 OutputHouseholds ConsumptionBusiness InvestmentGovernment GovernmentForeign 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 ApproachMethod of computing GDP that sums

consumption, gross investment, government purchases, and net exports.

GDP = C + I + G + NX

Consumption Purchasing by

households 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

Investment 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

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

+ Indirect business taxes

+ Net income of foreigners

GDP as value addedValue added – the difference between

the revenue and the cost of purchased inputs.

Contrasting GDP to GNP 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.

Shortcomings to GDP Underground economy

Market transactions that go unreported to government

Household production Environmental issues

Measure of Economic Welfare - Tobin

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

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1st

Qtr

2nd

Qtr

3rd

Qtr

4th

Qtr

Real

Nominal

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

Real GDP across countries Nations of the world compute the value of

real GDP for their economics The size of a nation’s real GDP is probably

the best indicator of the size of a country’s economy

Country Real GDP

US 9196.4

Canada 741.6

Germany 2708

Japan 5725.5

Mexico 375.

Business CycleRefers to the expansions and

contractions in economic activity that take place over time.REAL GDP

Time

Expansion

Peak

Recession

Trough

Business Cycle Expansion

Economic growth GDP Income (Y) , C , GDP , u

Recession Contraction Sustained decrease

in real GDP GDP Income C GDP U

Business Cycle 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

Leading IndicatorsStatistics that are expected to change

direction before the economy of large does, thereby indicating where the economy is headed

Business inventoriesHousing startsDurable goods production

National Income Accounting

GDPLess: DepreciationNet Domestic Production -indirect business taxes-business transfer paymentsNational income – payments to owners of capital-corporate profits-net interest-social security taxesPersonal income = -personal taxesDisposable income = Consumption + Savings