CHAPTER 14
GROSS DOMESTIC PRODUCT
I. MEASURING
THE NATION’S OUTPUT
A. Gross Domestic Product - def - the dollar value of all goods and services produced within the
country in one year
1. Intermediate products are not counted - all goods must be final
a. Original tires on a car are not counted but replacement tires are counted
b. Sugar and flour sold to be used in baking for resale are not counted
2. Secondhand sales are not counted
a. Example - used car, house
3. Non market activities are not counted
a. Sweat Equity - work of a housewife or one who does home repair to his own house
b. Illegal Activities
A. Underground or Sub-terrainian economy
1. Some say that it could be up to 40% of GDP ( which is about $7 trillion)
4. Only production within national borders is counted
a. Ex- Production
of Toyota
counted
5. Some economists think that the Measure of Economic Welfare(MEW) should also be
calibrated into GDP
a. Hours spent commuting should be negated
b. More leisure time should enhance GDP
c. A healthier life should enhance whereas the costs of rectifying pollution should be negated
B. IMPORTANCE OF GDP ANALYSIS
1. The GDP is the primary way in which economists measure the relative success or failure of the
economy
a. If GDP goes up this is an indication that production is rising, jobs are being created and the
overall Standard of Living is going up
b. If GDP is going down, that indicates that the economy is having problems, unemployment is
rising and as a result people have less to spend and SOL is going down
A. If GDP goes down for 2 consecutive 1/4s we are in a recession
B. A severe recession is labeled as a depression
C. A decline in GDP also affects incumbents because the American voter traditionally
casts his/her vote based upon their pocketbook
2. Problems involved with GDP analysis
a. At best the GDP is based upon estimates that lag at least 3 months behind today’s reality
b. Quality of life issues are not factored in
c. If the government spends a great deal of money on national defense, this will cause GDP to
trend upward but the Mew is not affected because consumer goods are not being produced
and SOL might not go up
II. MEASURING THE NATION’S INCOME
A. Income - def - a payment received for providing a resource for the marketplace
B. 5 MEASURES OF INCOME
GDP + Earnings of
- Earnings
of foreign companies in the
EQUALS
1. GNP - Capital consumption allowances and adjustments
EQUALS
2. N.N.P. - Indirect taxes such as excise, property, licenses, and sales taxes
EQUALS
3. N.I. - Undistributed corporate profits (reinvested dividends)
- Corporate Income Taxes
- F.I.C.A. contributions
+ Government transfer payments to individuals
i.e. - FICA, Pensions, welfare, unemployment comp., Medicare
EQUALS
4. D.P.I. - Personal Income Taxes
EQUALS
5. P.I. (NET INCOME)
III. ECONOMIC SECTORS AND THE CIRCULAR FLOW
A. Four
economic sectors that receive components of N.I.
1. Consumer Sector
a. Based upon a “household” - def - those individuals who live under one roof whether or not
they are related by blood
2. Investment Sector (Business Sector)
a. Includes proprietorships, partnerships, and corporations
b. This is the productive sector of the economy
3. Government Sector
a. Its income is indirect
b. Its spends money primarily oh human resource programs, national defense etc.
4. Foreign Sector
a. Balance of Payments - the difference between imports and exports
A. A balance of trade deficit occurs when imports exceed exports
B. A balance of trade surplus exists when exports exceed imports
1. Obviously this is preferable
b. The
A. The U.S. has gone from the greatest “creditor” nation in the world after W.W. II to the
greatest “debtor” nation in the world, today
B. THE OUTPUT EXPENDITURE MODEL - illustrates how GDP is consumed by the 4 sectors
1. OEM = C + I + G + F
IV. GDP AND CHANGES IN THE PRICE LEVEL
A. A major problem associated with GDP as a measuring devise is the distortion caused by inflation
B. To reduce the distortion caused by inflation economists construct price indexes - def - a statistical
index that is used to measure changes in prices over time
C. Components of a Price Index
1. Base Year - def - a period of time characterized by relative price stability
a. 1982 is the most recent
b. It is used as a benchmark against which future prices are compared
c. Given a value of 100
2. Market Basket - def - goods that are representative of the purchases that are made over time
a. Intended to capture a trend over time
[LRHS1]3. Weighting - placing a % value on a market basket product to assist in understanding why
price increases in certain categories have a greater impact upon an index than price increases in
other categories
a. Gasoline would have a greater weight than bread because we would spend a greater amount
of our monthly income on gasoline than on bread
D. Major Price Indexes
1. CPI - Consumer Price Index –Consumer Price Index Summary
once referred as the retail price index
a. 90,000 items in 364 categories
b. Published by the Bureau of Labor Statistics monthly
c. Separate indexes for 28 selected areas of the country
2. PPI - Producer Price Index - once referred to as the wholesale price index
a. Measures the prices received by domestic producers for their output
b. Broken down into categories that include fuels, chemicals, agricultural products etc.
3. Implied GDP Price Deflator
a. Compiled quarterly - measures thousands of goods and services
b. Base Year - 1987
E. Comparison
of
1. By using the GDP price Deflator, we eliminate distortion from GDP
2. FORMULA
Current GDP / Implied GDP Price Deflator x 100% = GDP in Real or Constant Dollars
3. We always want a measurement in real dollars because the distortion of inflation is eliminated
ADDENDA