income approach (y = income
TRANSCRIPT
I
Households
Firms
FINANCIALMARKET
Goods & ServicesMARKET
C
S
Income Approach (Y = Income)
Factors M.(Capital Labor)
GovernmentG
BudgetDeficitT
Rest of world
Ex
Im
BOPDeficit
Rent InterestProfit
Wages
Compensation of Employees 10,005Payment for labor services.Net wages and salaries plus fringe benefits paid by
employers such health care insurance, social security contributions, and pension fund contributions.
Net Interest 485The interest households receive on loans they make minus the interest households pay on their own borrowing.
Rental Income of Persons 702Rental income of persons is the payment for the use of land and other rented inputs.
Corporate Profits 2,009A combination of interest on capital and profit for entrepreneurship. Paid out as dividends and undistributed profits are all counted as income.
Proprietors’ Income 1,411Proprietors are people who run their own businesses. A mixture of the previous four items.
___________________________________________Net national product at factor cost 14,612
[ Government expenditures are about 45-50% of this. ]
GDP is the sum of the incomes in the economy during a given period.
The expenditure approach values goods and services at market prices,the income approach values them at factor cost.
+ Indirect taxes (They make market prices exceed factor cost.)– Subsidies (They make factor cost exceed market prices.)
___________________________________________________________
National Income 15,957
National income includes NET profit.
Gross profit is a firm’s profit beforesubtracting the depreciation of capital.
Net profit is a firm’s profit aftersubtracting the depreciation of capital.
Depreciation = The decrease in the value of capital that results from its use and from obsolescence—alsocalled capital consumption.
Because GDP includes GROSS investment,we must add depreciation to total income.
Because GDP is not national but domestic product, we need to add domestic income of foreigners and deduct foreign income of citizens
GDP Y 18,436 100%Compensation of employees 10,556 57%Net Interest, Rents, Profits 2,252 12%Proprietors Income 1,411 8%Indirect taxes - Subsidies 1,345 7%Depreciation 2,676 15%Net US income of foreigners 196 1.06 %
Income Approach
GDP Y 18,436 100%Consumption C 12,695 69%Investment I 2,974 16%Government Purchases G 3,263 18%Net Exports Ex-Im -495 - 3%
Expenditure Approach II.2016
Environment Quality (no costs here)• We do not count the deteriorating planet’s resources as a
negative part of GDP.
• Pollution is not subtracted from GDP; Cleaning adds to it.
Household Production (out of market)
• Real GDP omits household production, it underestimates the value of the production of many people, most of them women.
Underground Production (out of legal market)
• Hidden from government to avoid taxes and regulations or illegal.
• Because underground economic activity is unreported, it is omitted from GDP.
Government Production (valued at costs)
Building a failed solar panels factory adds o GDP as much as any other production
Real GDP per capita : Not all ProductionNot a ConsumptionNot a Standard of Living
Leisure Time (unmeasured consumption)
• Our working time is valued as part of GDP, but our leisuretime is not.
Other Influences on the Standard of LivingFreedom of thoughtFreedom of expressionFreedom of giving
Social mobility, MeritocracyEquity of (after tax monetary) income…
Depreciation (consumed by nature)
GDP Y 18,436 100%Compensation of employees 10,556 57%Net Interest, Rents, Profits 2,252 12%Proprietors Income 1,411 8%Indirect taxes - Subsidies 1,345 7%Depreciation 2,676 15%Net US income of foreigners 196 1.06%
Income Approach
GDP Y 18,436 100%Consumption C 12,695 69%Investment I 2,974 16%Government Purchases G 3,263 18%Net Exports Ex-Im -495 - 3%
Expenditure Approach II.2016
• IS-LM model• IS Curve• LM Curve• IS-LM Examples• Fiscal and Monetary policies• Keynesians vs. Monetarists
IS-LM modelModels short run changes in the GDP
Short run = changes in prices not known
Short-run Production Equilibria (IS curve)Production = Total demand (expenditures)
Short-run Asset Allocation Equilibria (LM curve)Money demanded = Money supplied
Y
Real i LM
IS
Short Run Equilibrium
IS
Y
Real i
IS
Excess demand for goods
Excess supply of goods
Short-run Asset Allocation Equilibria (LM curve)Money demanded = Money supplied
Y
Real i LMExcess supply of money
Excess demand for money
Short-run Production Equilibria (IS curve) Production = Total demand (expenditures)
LM
IS-LM model
YReal GDP
i
RealInterest
Rate
LM
IS
Short Run Equilibrium
• IS-LM model• IS Curve• LM Curve• IS-LM Examples• Fiscal and Monetary policies• Keynesians vs. Monetarists
IS Curve
Y
Real i
IS
Excess demand for goods
Excess supply of goods
Short-run Production Equilibria (IS curve) Production = Total demand (expenditures)
A. When Income (Y) increases both Consumption (C) and Private Savings (S) increase.
B. When real interest rate (i) increases companies’ investments (I) decrease.
C. In equilibrium: Total Demand (ZZ) = Production (Y) = Income (Y)
We will derive IS curve based on these three facts:
I. IS curve FigureII. IS curve Equation
I
Households
Firms
Wages
FINANCIALMARKET
Goods & ServicesMARKET
Rent InterestProfit C
S
Factors M.(Capital Labor)
GovernmentG
BudgetDeficitT
Rest of world
I Ex
Im
BOPDeficit
IS Curve FigureC. In equilibrium: Total Demand (ZZ) = Production(Y) = Income (Y)
Households
Firms
FINANCIALMARKET
Goods & ServicesMARKET
GovernmentG
BudgetDeficitT
IS Curve Figure
Budget Deficit = G – T
FINANCIALMARKET
Goods & ServicesMARKET
Rest of world
Ex
Im
BOPDeficit
IS Curve Figure
BOP Deficit = Im – Ex +/- foreign wages, profits,…
Budget Deficit = G – T
I
HouseholdsFINANCIALMARKET
Goods & ServicesMARKET
S
TWIN DEFICITS:(G – T) = S – I + (Im – Ex)Budget deficit BOP def.
Government
BudgetDeficit
Rest of world
BOPDeficit
IS Curve Figure
S = I + (G – T) + (Ex – Im)
S = I + G – T + NX
BOP Deficit = Im – Ex +/- foreign wages, profits,…
Budget Deficit = G – T
S = I + G – T + NXIn case of (1) closed economy: NX = 0
(2) balanced budget: T = G S = I
Private Saving = InvestmentNote that if G-T or NX changes then so do S and I
Investment I and Real Interest Rate i (exp.)B. When real interest rate (i) increases
companies’ investments (I) decrease.
Private Saving S and Income YA. When Income (Y) increases both
Consumption (C) and Private Savings (S) increase.
I
S
I
(Real) i
Y
S
IS Curve Figure
S = I + G – T + NXIn case of (1) closed economy: NX = 0
(2) balanced budget: T = G S = I
Private Saving = InvestmentNote that if G-T or NX changes then so do S and I
Investment I and Real Interest Rate i (exp.)B. When real interest rate (i) increases
companies’ investments (I) decrease.
Private Saving S and Income YA. When Income (Y) increases both
Consumption (C) and Private Savings (S) increase.
I
S
I
(Real) i
Y
S
IS Curve Figure
G increases, T decreases(fiscal expansion)
X increases, Im decreases(depreciation=weakening of currency)
Expected Profitability of I increases(less regulation, smaller corp. taxes, …)
Willingness to save increases(consumers scarred,…)
S
I
Real i
Y
LY
Li
Real i
Y
LM curve
Ms = Li +LY
IS curveI
S
I
(Real) i
Y
S
IS Curve Figure