Measuring Economic Growth Chapter Outcomes Calculate the income and expenditure approaches to measuring GDP Calculate GDP using the income approach Calculate GDP using the expenditure approach Distinguish between GDP and GNP Economic Growth Need to measure growth of economy Economic Growth percentage change in quantity of goods and services produced from 1 year to the next Sustained expansion of production possibilities through capital accumulation and technological change measured as the increase in real GDP over a given period of time The Importance of The Importance of The Importance of The Importance of Macroeconomic Measurement Macroeconomic Measurement Macroeconomic Measurement Macroeconomic Measurement National Income and Product Accounting Economic Pulse of the Nation Comparisons Over Time Basis For Public Policy What Are These Accounting Measures Gross Domestic Product Gross total amount Net end result after something has been subtracted Gross Domestic Product GDP Gross Domestic Product GDP Defined GDP or gross domestic product is the market value of all final goods and services produced in a country in a given time period This definition has four parts Market value Final goods and services Produced within a country In a given time period GDP Market Value GDP is a market value goods and services are valued at their market prices To add apples and oranges computers and popcorn we add the market values so we have a total value of output in dollars GDP Final Goods Services GDP is the value of the final goods and services produced A final good or service is an item bought by its final user during a specified time period A final good contrasts with an intermediate good which is an item that is produced by one firm bought by another firm and used as a component of a final good or service Excluding intermediate goods and services avoids double counting Gross Domestic Product Intermediate goods and services goods and services firms buy from each other and use as inputs in goods and services that they eventually sell to final users not part of GDP because not a final expenditure Gross Domestic Product Produced within a country GDP measures production within a country domestic production In a given time period GDP measures production during a specific time period normally a year or a quarter of a year Gross Domestic Product GDP Includes all production within boundaries of US including those supplied by foreigners Reported in dollar amounts Key is produced in US by whom is nominal irrelevant Gross Domestic Product GDP is a monetary value avoids double counting because only final output is counted GDP Final goods purchased for final use by ultimate users not for resale or further processing GDP Excludes non production transactions second hand sale excluded because it doesn t represent current output financial transactions like transfer payments and security transactions also excluded Gross National Product GNP Gross National Product Dollar value of total output produced by US citizens anywhere Key is produced by US citizens not where they produce Gross National Product includes all production by Americans either inside or outside the US difference between it and GDP is net foreign factor Difference between what foreign owned business earned in US and what US business earned abroad Gross National Product Best measure of aggregate income of Americans during 1 year Gross Domestic Product Flows and Stocks 1 A flow is the quantities per unit of time 2 A stock is a quantity that exists at a point in time Gross Domestic Product Capital is the key macroeconomic stock Capital The plant equipment buildings and inventories of raw materials and semi finished goods that are used to produce other goods and services Gross Domestic Product Depreciation The decrease in the stock of capital that results from wear and tear and obsolescence Capital consumption allowance Gross Domestic Product Investment purchase of new plant equipment and buildings and additions to new inventories Gross Domestic Product Gross investment is the total amount spent on purchases of new capital and on replacing depreciated capital Net investment is the increase in the value of firm s capital and equals gross investment minus depreciation Gross Domestic Product Investment and depreciation are flows that change the stock of capital Gross Domestic Product Wealth Another macroeconomic stock The value of all the things that people own Related to their earnings a flow Savings adds to wealth Dissavings decreases wealth Flow of National Income GROSS DOMESTIC PRODUCT Expenditures Approach Expenditures Approach Amount spent to purchase Amount spent to purchase this year s total output this year s total output Income Approach Income Approach The money income derived The money income derived from production of this year s from production of this year s output output Gross Domestic Product Expenditure Approach Measures GDP by using data on consumption investment government purchases and net exports GDP result of expenditures Gross Domestic Product Capital consumption allowance consumption of fixed capital needed to maintain NOT increase gross investment depreciation cca net investment Flow of National Income Net National Product Measure of national production that includes only net additions to capital and excludes any purchases for replacement of worn out or obsolete capital NNP GNP cca Rarely used Net Domestic Product GDP adjusted for depreciation Gross Domestic Product Net Domestic Product NDP total output available for consumption to maintain levels of output GDP depreciation cca measures total annual output consumed without hurting capacity to produce in future Flow of National Income Gross Domestic Product National Income NI all income earned by resource suppliers for their contributions to GDP net domestic product indirect business taxes Flow of National Income Gross Domestic Product Indirect Business Taxes ibt taxes passed on to the consumers who pay them in the price of a product Flow of National Income Gross Domestic Product Personal Income PI income received includes transfer payments social security contributions corporate income taxes and undistributed corporate profits not included Flow of National Income Gross Domestic Product Corporate Income Taxes cit taxes levied on net income of corporations profit Undistributed Corporate Profits ucp after tax corporate profits not distributed as dividends to stockholders retained