Measuring Output and Income

Nominal Gross Domestic Product (GDP)

A Measure of GDP in which the quantities produced are valued at current-year prices.

• Nominal GDP measures the current dollar value of production

Nominal GDP “Formula”

Nominal GDP = C + I + G + NX

Intermediate goods

Goods that are used to build or make another product that will be subsequently sold

Final goods and services

Goods and services that are sold to the end user and are not used to produce another product for subsequent sale

Consumption (C)

All expenditures made by households on goods and services, like clothing, food, electronics and recreation, during a given time period

Gross investment (I)

The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period

• Gross investment is classified into three categories : business fixed investment, residential investment and inventory investment

• Sometimes referred to simply as “investment”

Government purchases (G)

All final goods purchased by federal, state and local governments - such as tanks, police, cars, fire engines, and office supplies - during a given time.

• Also includes final services purchased from labor resources - such as airport security, police officers and teachers

Imports (M)

Goods, services, or resources produced abroad and sold domestically

• 15% of nominal GDP

Exports (X)

Goods, services or resources produced domestically and sold abroad

Net exports (NX)

The difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically)

Net exports “formula”

NX = X - M

• Net exports equals exports minus imports

Consumption (C)

All expenditures made by households on goods and services like clothing, food, electronics and recreation, during a given time period

Consumption “Formula”

Consumption = Durable Goods + Nondurable Goods + Services

Consumer durables

Goods that have an average useful life of three years or more

Consumer nondurables

Goods that have an average useful life of less than three years

Services

Outputs, often intangible, of the direct activities of another person

Transfer payment

A payment made by the government that does not require an exchange of economic activity in return

• Transfer payments often take the form of payments to households

Salaries included in nominal GDP

Government employees such as judges are included

• Private sector employees such as lawyers are not

Investment

The formation of new productive capital or the expansion of inventories within an economy

• investment occurs either when firms buy goods and services that will enhance productivity and increase output or when they increase their inventories of the goods they sell

Business fixed investment

Purchases by firms of new capital goods, such as offices, factories, tools, and machinery

Residential investment

Purchases of new homes; also includes home improvements

Inventory investment

Changes in inventories from one year to the next

• Inventory investment is positive if firms produce more than they sell; it is negative if they sell more than they produce

Deprecation

The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year

Net investment (I Net)

The difference between gross investment and deprecation; represents the net change in the capital stock during a year

Net investment “Formula”

Net investment = I - Deprecation

Nominal gross domestic product (GDP)

A measure of GDP in which the quantities produced are valued at current-year prices

• Nominal GDP measures the current dollar value of production

Nominal GDP “Formula”

Nominal GDP = C + I + G + NX

Expenditures approach

An approach to calculating nominal GDP that sums four categories of expenditures on final goods and services in a country in a given time period, typically one year.

• The four categories of expenditures are consumption, gross investment, government purchases, and net exports

National income

Total payments to owners of resources plus profits and losses

• The sum of rent, wages, interest and profits and losses to sole proprietors and firms

National Income “Formula”

National income = Rent + Wages + Interest + Profits and Losses

Rent

Payments made to land resources

Wages

Payments made to labor resources

Interest

A fee for the use of money over time

• The payment made to agents that lend or save money

Profits and losses

Payments accruing to owners of entreprenurial ability

Proprietor’s income

Profits and losses earned by individual proprietors

Corporate profits

Profits and loses of corporations

• as opposed to those of individual proprietors

Indirect business taxes

Taxes paid by business, such as property taxes, sales taxes, excise taxes, license fees, and tariffs

• These taxes are paid by firms and then are passed on to consumers as part of the price of the good or service produced

• Indirect business taxes are differentiated from corporate income taxers on business profits

Net foreign factor income

The difference between payments received from resources owned in foreign countries and income earned by people in foreign countries from resources owned domestically

• income earned on foreign assets must be included in national income

GDP - Income approach “Formula”

GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income

Real gross domestic product ( real GDP, Y)

A measure of the constant dollar value of all final goods and services produced in a country during a fixed period of time

• Sometimes called inflation adjusted GDP

• When an economy is in equilibrium, real GDP equals income, Y

Real GDP per capita

Real GDP per person; calculated as real GDP divided by the size of the population

Real GDP per capita “Formula”

Real GDP per capita = Real GDP / Population

GDP Price index “Formula”

GDP price index = (Nominal GDP / Real GDP) X 100

Home production

Goods and services that are produced by a household and are not exchanged in a market

Underground economy

Economic activity in which goods and services are exchanged for payment but are not counted as part of GDP

• Markets that are part of the underground economy that exchange illegal goods and services or engage in illegal transactions are called black markets