chapter 15 macroecon

National Income Accounting

• National Income Accounting: The system used to measure the aggregate income and expenditures for a nation.

Gross Domestic Product (GDP)

• GDP Definition: The market value of all final goods and services produced within a nation during a specific period, typically a year.

• Importance of GDP: Indicates how well a country's economy is performing.

Transactions Excluded from GDP

• Secondhand transactions

• Nonproductive financial transactions

Secondhand Transactions

• Examples:

  • Sale of a used car

  • Sale of a previously constructed home

Nonproductive Financial Transactions

• Examples:

  • Private gifts

  • Buying and selling stocks and bonds

  • Making transfer payments

Transfer Payment

• A government payment to individuals for which no goods or services are currently produced in exchange.

Final Goods

• Finished goods and services produced for the ultimate user.

Intermediate Goods

• Goods and services used as inputs in the production of final goods.

• Exclusion from GDP: To avoid double counting and inflating GDP.

  • Including intermediate goods would count items multiple times.

  • National income accountants must exclude intermediate goods to accurately reflect final goods value.

Circular Flow Model

• A diagram illustrating the exchange of money, products, and resources between households and businesses.

Flows and Stocks

• Flow: A rate of change in a quantity over a period (e.g., dollars per year).

  • Examples: Income and consumption.

• Stock: A quantity measured at a specific point in time.

  • Examples: Inventory of goods, amount of money in a checking account.

Approaches to Calculating GDP

• Expenditure approach

• Income approach

Expenditure Approach

• The national income accounting method that measures GDP by adding all spending for final goods during a period of time.

• Four Components of Expenditures:

  • Personal consumption expenditures (C)

  • Gross private domestic investment (I)

  • Government consumption expenditures and gross investment (G)

  • Net exports (X – M)

Personal Consumption Expenditures (C)

• Household spending on:

  • Durable goods (last beyond three years; e.g., automobiles, appliances, furniture)

  • Nondurable goods (consumed in less than three years; e.g., food, clothing, gasoline)

  • Services (intangible transactions; e.g., recreation, medical treatment, education)

Gross Private Domestic Investment (I)

• Private sector spending on capital assets expected to yield future profits.

• Two Components:

  • Fixed investment expenditures for newly produced capital goods

  • Change in business inventories

Government Consumption Expenditures and Gross Investment (G)

• Value of goods and services purchased by government at all levels, measured by their costs.

Net Exports (X – M)

• The difference between exports and imports.

Exports (X)

• Spending by foreigners on U.S. domestically produced goods.

Imports (M)

• The dollar amount of U.S. purchases of goods produced abroad.

Formula for GDP (Expenditure Approach)

• $GDP = C + I + G + (X - M)$$$GDP = C + I + G + (X - M)$$

  • Where:

    • $C$$$C$$ = Personal consumption expenditures

    • $I$$$I$$ = Gross private domestic investment

    • $G$$$G$$ = Government consumption expenditures and gross investment

    • $X$$$X$$ = Exports

    • $M$$$M$$ = Imports

Income Approach

• The national income accounting method that measures GDP by adding all incomes during a period of time.

• Includes compensation of employees, rents, net interest, and profits

Compensation of Employees

• Income earned from wages, salaries, and supplements paid by firms and government to labor suppliers.

Rental Income

• Rent and royalties received by property owners for the use of their assets.

Profits

• Composed of:

  • Proprietors’ income: Income earned by unincorporated businesses (self-employed proprietorships and partnerships).

  • Corporate profits: Income earned by stockholders of corporations.

Net Interest

• The difference between interest income earned and interest payments.

Indirect Business Taxes

• Taxes levied as a percentage of the prices of goods sold (e.g., sales taxes, excise taxes, customs duties).

Depreciation

• Allowance for the portion of capital worn out during GDP production.

Formula for GDP (Income Approach)

• $GDP = \text{Compensation of employees} + \text{Rents} + \text{Profits} + \text{Net interest} + \text{Indirect taxes} + \text{Depreciation}$$$GDP = \text{Compensation of employees} + \text{Rents} + \text{Profits} + \text{Net interest} + \text{Indirect taxes} + \text{Depreciation}$$

GDP as an Imperfect Measure

• Excludes:

  • Nonmarket transactions

  • Distribution, kind, and quality of products

  • Quality of life

  • The underground economy

  • Economic bads

Nonmarket Transactions Exclusion

• Reasons:

  • Imprecise data collection for unpaid services.

  • Difficulty in determining which activities to include.

Quality of Products

• GDP is a quantitative measure, not qualitative.

Quality of Life

• GDP may understate national well-being by not accounting for leisure time, life expectancy, infant mortality, literacy rate, and other quality-of-life variables.

Underground Economy

• If the underground economy is substantial, GDP understates the economy's performance.

Economic Bads

• GDP overstates national well-being because costs of negative by-products are not deducted.

Alternative Measures for GDP

• Measure of Economic Welfare (MEW)

• Genuine Progress Indicator (GPI)

• Human Development Index (HDI)

• Happy Planet Index (HPI)

Other National Income Accounts

• National income (NI)

• Personal income (PI)

• Disposable personal income (DI)

National Income (NI)

• The total income earned by resource owners (wages, rents, interest, and profits).

• Formula:

  • $NI = GDP - \text{Depreciation}$$$NI = GDP - \text{Depreciation}$$

Personal Income (PI)

• The total income received by households available for consumption, saving, and taxes.

Disposable Personal Income (DI)

• Income households have to spend or save after paying personal taxes.

Nominal vs. Real GDP

• Nominal GDP: Value of final goods based on current prices.

• Real GDP: Value of final goods based on prices from a selected base year.

GDP Chain Price Index

• Measures changes in the prices of final goods relative to a base year (also called GDP price index or GDP deflator).

Formula for Real GDP

• $Real \ GDP = \frac{Nominal \ GDP}{GDP \ chain \ price \ index} \times 100$$$Real \ GDP = \frac{Nominal \ GDP}{GDP \ chain \ price \ index} \times 100$$