GDP

(1)

C

hapter 20

Gross Domestic

Product Accounting

(2)

Economic Principles

The circular flow of resources, goods, and services

The circular flow of money

(3)

Economic Principles

The income approach to measuring GDP

The relationship between GDP, NDP, and national income

The limitations of GDP as a

(4)

Gross Domestic

Product Accounting

Circular flow of goods, services, and resources

•_{The movement of goods and services}

(5)

(6)

Exhibit 1: The Circular

Flow of Goods,

Services, and

Resources

1. What do households supply to the resource market?

•_{Households supply their resources—labor,} capital, land, entrepreneurship—to the

(7)

Exhibit 1: The Circular

Flow of Goods,

Services, and

Resources

2. What do firms provide to

households in the product market?

(8)

Gross Domestic

Product Accounting

Circular flow of money

•_{The movement of income in the form of} resource payments from firms to

(9)

(10)

Exhibit 2: The

Circular Flow of

Money

What do firms in the resource market pay to households for resources provided?

•_{Firms pay money in the form of wages,} interest, rent and profit to households

(11)

Two Approaches to

Calculating GDP

•_{Economists calculate GDP in two}

ways: the expenditure approach to

GDP and the income approach to

GDP.

•_{Regardless of which method is}

(12)

The Expenditure

Approach

Expenditure approach

•_{A method of calculating GDP that adds} all expenditures made for final goods and services by households, firms and

(13)

The Expenditure

Approach

When using the expenditure

approach to GDP, one must be

certain that only final goods and

(14)

The Expenditure

Approach

Final goods

(15)

The Expenditure

Approach

Intermediate goods

(16)

The Expenditure

Approach

Value added

•_{The difference between the value of a}

(17)

(18)

Exhibit 3: Market Value

and Value Added Goods

Produced

1. What is the total market value of the wool sweater in Exhibit 3?

(19)

Exhibit 3: Market Value

Produced

2. Why shouldn’t the total market value be used when calculating

GDP?

(20)

Exhibit 3: Market Value

Produced

2. Why shouldn’t the total market value be used when calculating

GDP?

•_{For example, the $4 value for wool on the} sheep makes up part of the $13 value for wool fabric and $50 value for a wool

(21)

The Expenditure

Approach

There are four expenditure categories of GDP:

1. Personal consumption

2. Gross private domestic investment

3. Government purchases

(22)

The Expenditure

Approach

1. Personal consumption

expenditures (C)

•_{All goods and services bought by}

(23)

The Expenditure

Approach

1a. Durable goods

(24)

The Expenditure

Approach

1a. Durable goods

•_{During recessions, consumers tend to hang} on to their durable goods, so that sales of

new durable goods are relatively weak.

During times of prosperity, consumers are more likely to discard old durables, and

(25)

The Expenditure

Approach

1b. Nondurable goods

•_{Goods expected to last less than a year.} For example, food, clothing, gasoline and toiletries. Households spend more on

(26)

The Expenditure

Approach

1c. Services

•_{Productive activities that are}

instantaneously consumed. For example, medical care, a lecture, and appliance

repair. Households spend more on services than durable and nondurable goods

(27)

The Expenditure

Approach

2. Gross private domestic

investment (I)

(28)

The Expenditure

Approach

2. Gross private domestic

investment (I)

(29)

The Expenditure

Approach

2a. Inventory investment

•_{Stocks of finished goods and raw}

(30)

The Expenditure

Approach

3. Government purchases (G)

•_{All goods and services bought by}

government. For example, goods such as national defense materials, interstate

(31)

The Expenditure

Approach

4. Net exports (X - M)

(32)

The Expenditure

Approach

All final goods and services that make up GDP, then, can be

expressed in the form:

(33)

(34)

Exhibit 4: Expenditure

Approach to 2003 GDP

($ billions)

1. What was the largest category of GDP expenditure in 2003?

(35)

Exhibit 4: Expenditure

Approach to 2003 GDP

($ billions)

2. Why was the net exports

category of expenditure negative in 2003?

•_{The category was negative (-$504.6}

(36)

The Income Approach

Income approach

•_{A method of calculating GDP that adds all} the incomes earned in the production of

(37)

The Income Approach

National income

(38)

The Income Approach

The income payments are

arranged into five categories: (1) the compensation of employees, (2) interest, (3) corporate profit, (4) rental income, and (5)

(39)

The Income Approach

The compensation of employees is divided into two categories: wages and salaries and supplements.

Supplements (or fringe benefits) include such things as bonuses,

(40)

The Income Approach

Corporate profit represents the return to owners of incorporated firms. Corporate profit is divided into three categories—dividends, corporate reinvestment, and

corporate taxes. All three are

(41)

The Income Approach

Rent is the payment for use of

property. Although most people

(42)

The Income Approach

Proprietors’ income is the income earned by unincorporated firms for the goods and services they produce. Proprietors’ income is the net income after paying such expenses as rent, utilities, and

(43)

EXHIBIT 5 2003 NATIONAL INCOME ($ BILLIONS)

(44)

Exhibit 5: 2003

National Income ($

billions)

What was the largest category of income in the U.S. in 2003

according to Exhibit 5?

•_{Compensation of employees was by far} the largest category of income at $6,094.5 billion, or 70.7 percent of the national

(45)

Bringing GDP and

National Income into

Accord

GDP, according to Exhibit 4, was $10,802.7 billion in 2003. Yet

national income, according to

(46)

Bringing GDP and

Accord

In order to bring the two into

accord, first gross domestic product is converted to gross national

product. Then depreciation of

(47)

Bringing GDP and

Accord

Gross National Product (GNP)

•_{The market value of all final goods and} services in an economy produced by

resources owned by people of that economy, regardless of where the resources are

(48)

Bringing GDP and

Accord

While GDP measures location, GNP measures ownership. For example, the value of goods

(49)

Bringing GDP and

Accord

Capital depreciation

(50)

Bringing GDP and

Accord

Net Domestic Product (NDP)

(51)

EXHIBIT 6 INFLUENCE OF CAPITAL DEPRECIATION ON THE GROWTH RATE OF NDP

(52)

Exhibit 6: Influence of

Capital Depreciation on

the Growth Rate of NDP

($ billions)

How does the rate of NDP growth compare to the rate of GDP

growth as capital depreciation increases in Exhibit 6?

•_{Regardless of the value of capital}

(53)

Exhibit 6: Influence of

Capital Depreciation on

the Growth Rate of NDP

($ billions)

How does the rate of NDP growth compare to the rate of GDP

growth as capital depreciation increases in Exhibit 6?

(54)

Bringing GDP and

Accord

Indirect business taxes include general sales taxes, excise taxes, customs duties and license fees.

They are indirect because they are taxes levied not on the firms

(55)

EXHIBIT 7 THE RELATIONSHIP BETWEEN GROSS DOMESTIC PRODUCT, GROSS NATIONAL PRODUCT, NET NATIONAL PRODUCT, AND NATIONAL INCOME: 2003 ($ BILLIONS)

Note: Net domestic product = $8,767.7 billion. The use of NNP instead of NDP to derive national incomes conforms to the derivation of national income used by government sources. Note also that because GDP and GNP are almost identical, NDP and NNP are almost identical.

(56)

Exhibit 7: The Relationship

Between GDP, GNP, Net

National Product, and

National Income: 2003

How is national income derived from gross domestic product?

•_{First, GDP is converted to GNP. This is} done by subtracting factor payments to the rest of the world and adding factor

(57)

Exhibit 7: The Relationship

How is national income derived from gross domestic product?

•_{Second, capital depreciation is subtracted} from GNP. The result is net national

(58)

Exhibit 7: The Relationship

How is national income derived from gross domestic product?

•_{Third, indirect business taxes are}

(59)

Personal Income and

Personal Disposable

Income

Personal income

(60)

Personal Income and

Personal Disposable

Income

Transfer payments

•_{Income received but not earned. For}

example, government-supplied income from retirement benefits, veteran benefits,

(61)

Personal Income and

Personal Disposable

Income

Transfer payments

(62)

Personal Income and

Personal Disposable

Income

Disposable personal income

(63)

How Comprehensive Is

GDP?

GDP tries to measure everything that appears on the market. Yet, not everything produced in the economy gets onto the market,

and some things that contribute to our economic well-being aren’t

(64)

How Comprehensive Is

GDP?

The value of housework is one

example of an important service that is usually not included in

GDP. The work is only included if it is performed by someone

(65)

How Comprehensive Is

GDP?

Underground economy

(66)

How Comprehensive Is

GDP?

Illegal unreported activities may include drug trafficking, money laundering, bribery, prostitution, illegal gambling, fraud and

(67)

How Comprehensive Is

GDP?

Tax avoidance is the main reason why legal activities may go

(68)

How Comprehensive Is

GDP?

Finally, legal and illegal

(69)

How Comprehensive Is

GDP?

The quality of goods and services produced may not be included in GDP. For example, a good may be of higher quality, but cost less,

(70)

How Comprehensive Is

GDP?

The costs of environmental

(71)

How Comprehensive Is

GDP?

While the expense associated with cleaning up the pollution we

(72)

How Comprehensive Is

GDP?