macroeconomics rittenberg chapter 6: “measuring total output and income”

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Dolan, Economics Combined Version 4e, Ch. 19 Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

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Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”. 1. MEASURING TOTAL OUTPUT. Learning Objectives Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model. - PowerPoint PPT Presentation

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Page 1: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

Dolan, Economics Combined Version 4e, Ch. 19

MacroeconomicsRittenbergChapter 6:

“Measuring Total Output and

Income”

Page 2: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

1. MEASURING TOTAL OUTPUT

Learning Objectives1. Define gross domestic product and its

four major spending components and illustrate the various flows using the circular flow model.

2. Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production.

3. Distinguish between gross domestic product and gross national product.

Page 3: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

GDP = C + I +G + XN

• C = Consumption (household spending)• I = Gross Private Domestic Investment

• Fixed Investment (real Capital Purchases)• Inventory Investment (changes in inventory of finished

products, intermediate products, or raw materials)

• G = Government Purchases • excludes transfer payments

• XN = Net Exports (Exports – Imports)

Page 4: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP

• A flow variable is a variable that is measured over a specific period of time.

• A stock variable is a variable that is independent of time.

GDP = C + I + G + Xn

Page 5: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP• Personal consumption is a flow variable that

measures the value of goods and services purchased by households during a time period.

Firms Households

Personal consumption

Consumer goods and services

Factors of production (labor,

capital, and natural resources)

Factor incomes (wages, interest, profit, and rent)

Page 6: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP

• Gross private domestic investment is the value of all goods produced during a period for use in the production of other goods and services.

Firms Households

Personal consumptionPrivate investment

Factor incomes

Page 7: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP

• Government purchases are the sum of purchases of goods and services from firms by government agencies plus the total value of output produced by government agencies themselves during a time period.

• Transfer payments – (excluded in Government Purchases) are payments that do not require the recipient to produce a good or service (in that time period) in order to receive them.

– Examples: Welfare, Unemployment, Student Financial Aid, Military Retirement, Social Security, ETC.

Page 8: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

Which of the following would not count in the G (Government Purchases) component of GDP?A. Money spent to build a new bridgeB. Pensions paid to retired presidentsC. Salaries paid to state college professorsD. Paper supplies purchased by the IRSE. All of these are part of Government

Purchases

Clicker:

Page 9: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP

Firms Households

Personal consumption

Factor incomes

Private investment

Government agencies

Government purchases

Page 10: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP• Exports are the sales of a country’s goods

and services to buyers in the rest of the world during a particular time period.

• Imports are purchases of foreign-produces goods and services by a country’s residents during a period.

• Net Exports are exports minus imports.Exports (X) – imports (M) = net exports (Xn)

• A trade deficit occurs when there are negative net exports.

• A trade surplus occurs when there are positive net exports.

Page 11: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP• Exports are the sales of a country’s goods

and services to buyers in the rest of the world during a particular time period.

• Imports are purchases of foreign-produces goods and services by a country’s residents during a period.

• Net Exports are exports minus imports.Exports (X) – imports (M) = net exports (Xn)

• A trade deficit occurs when there are negative net exports.

• A trade surplus occurs when there are positive net exports.

Page 12: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP

Firms Households

Personal consumption

Factor incomes

Private investment

Government agencies

Government purchases

Net Exports

Rest of the world

Page 13: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.1 The Components of GDP

Page 14: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.2 Final Goods and Value Added

• The Value added is the amount by which the value of a firm’s output exceeds the value of the goods and services the firm purchases from other firms.

Good Produced by Purchased by Price Value AddedLogs Logger Sawmill $12,000 $12,000Lumber Sawmill Construction firm $25,000 $13,000House Construction firm Household $125,000 $100,000

FINAL VALUE $125,000SUM OF VALUES ADDED $125,000

Page 15: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

1.3 GNP: An Alternative Measure of Output

• Gross national product (GNP) is the total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country.EQUATION 1.3GDP + net income received from abroad by

residents of a nation = GNP

Page 16: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

Clicker:

• GDP Accounting:• A ton of oranges grown in Tulare County

CA and purchased by a wholesale firm in Tokyo, Japan would be counted in:

A. ConsumptionB. Net exports as a +C. Net exports as a –D. Investment

Page 17: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

Clicker: 2 points

• GNP/GDP Accounting:• A ton of oranges grown in Tulare County CA by

a us farmer and and ultimately sold by a grocery chain in Kanas would count as:

A. ConsumptionB. Net exports as a +C. Net exports as a –D. Investment

Page 18: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

Clicker:

• GNP/GDP Accounting:• A ton of strawberries grown in Mexico by DOLE,

(a US firm) and brought into the US by a wholesale produce firm.

A. Is part of Mexico’s GDPB. Is part of US GDP C. Is part of Mexico’s consumption D. Is counted as Government purchases in the US

GDP

Page 19: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

Clicker:

• GNP/GDP Accounting:• A ton of strawberries grown in Mexico by DOLE,

(a US firm) and brought into the US by a wholesale produce firm.

A. Is part of Mexico’s GNPB. Is part of US GNP

Page 20: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

2. MEASURING TOTAL INCOME

Learning Objectives1. Define gross domestic income and

explain its relationship to gross domestic product.

2. Discuss the components of gross domestic income.

3. Define disposable personal income and explain how to calculate it from GDP.

Page 21: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

2.1 The Components of GDI

• Gross domestic income (GDI) is the total income generated in an economy by the production of final goods and services during a particular period.

– Employee compensation– Profits– Rental income– Net interest– Depreciation– Indirect taxes

Page 22: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

2.1 The Components of GDI

Gross domestic product $15,176.1 Gross Domestic Income $15,214.8

Personal Consumption Expenditures

10,784.5 Compensation of Employees 8,347.3

Gross Private Domestic Investment

1,906.6 Profits 2,633.0

Government consumption expenditures and gross investment

3,047.3 Rental income of persons 406.3

Net exports of goods and services

–562.3 Net interest 710.3

Taxes on production and imports 1,155.1

Consumption of fixed capital (depreciation) 1,962.8

Statistical discrepancy –38.7

GDP and GDI, 2011

Page 23: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

2.2 Tracing Income from the Economy to Households

GDP + net factor earnings from abroad =gross national product (GNP)GNP – depreciation (consumption of fixed capital)

=net national product (NNP)

NNP – statistical discrepancy =national income (NI)

NI – income earned but not received [e.g., taxes on production and imports, social security payroll taxes, corporate profit taxes, and retained earnings] + transfer payments and other income received but not earned in the production of GNP

=personal income (PI)

PI – personal income taxes =disposable personal income (DPI)

From GDP to Disposable Personal Income

• Disposable personal income is the income households have available to spend on goods and services.

Page 24: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

3. GDP AND ECONOMIC WELL-BEING

Learning Objectives1. Discuss and give examples of

measurement and conceptual problems in using real GDP as a measure of economic performance and of economic well-being.

2. Explain the use of per capita real GNP or GDP to compare economic performance across countries and discuss its limitations.

Page 25: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

3.1 Measurement Problems in Real GDP

• There are two measurement problems, other than those associated with adjusting for price level changes, in using real GDP to assess domestic economic performance.

– Revisions– The Service Sector

Page 26: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

3.2 Conceptual Problems with Real GDP

• A second set of limitation or real GDP stems from problems inherent in the indicator itself.

– Household Production– Underground and Illegal Production– Leisure– The GDP Accounts Ignore “Bads” (e.g.

crime spending, negative externalities, environmental pollution)

• More GDP cannot necessarily be equated with more human happiness.

Page 27: Macroeconomics Rittenberg Chapter 6: “Measuring Total Output and Income”

© 2013, published by Flat World Knowledge

3.3 International Comparisons of Real GDP and GNP

• Per capita real GNP or GDP is a country’s real GNP or GDP divided by its population.

• Comparing one country’s output to another presents additional challenges. That said, when the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences in living standards.