MEASURING THE NATION’S OUTPUT

Chapter 12

GROSS DOMESTIC PRODUCT (GDP)

The total dollar value of all final goods and services

produced by resources located in the United States

(regardless of who owns them) during one year’s

time.

The single most important measurement of the economy’s

overall performance.

National Income Accounting – is a system of statistics and

accounts that keep track of production,

consumption, savings and investment

to keep track overall economic

performance.

COMPUTING GDP

Conceptually, you

simply multiply all

the final goods &

services produced

in a year by their

prices.

Goods

Services

Structures

CONSUMER GOODS

Goods

Products purchased for final consumption

Services

Items consumed instantaneously

Structures (Investment Goods)

Single Family

Multifamily

Commercial

THINGS THAT ARE EXCLUDED

Intermediate Products – pieces of an item i.e. a bottle-

label-cap-juice-box, etc.

Nonmarket Transactions – items that are not paid for

such as barter or unpaid household duties.

Secondhand Sales - items that have already been

counted.

Underground Economy – economic activities that are

not reported for legal or tax purposes.

COMPOSITION OF GDP

Consumer Goods - items made for final consumption

Investment Goods - increase in productive (physical) capital

The Government Sector - purchases by government

Foreign Sector – imports minus exports

GDP = Personal Consumption + Investments + Government Purchases - Foreign Transactions

GROSS NATIONAL PRODUCT – GNP

THE MEASURE OF NATIONAL INCOME

The dollar value of all final goods, services, and

structures produced in one year with labor,

and property supplied by a country’s residents.

This can best be summarized

as the nations income.

THE FIVE INCOME MEASURERS

GNP – dollar value produced by US citizens &

corporations

NNP – which is GNP less depreciation

Depreciation represents the capital equipment that

has worn out or become obsolete over the year.

National Income – income left over after all

taxed have been taken out.

THE FIVE INCOME MEASURERS (CONTINUED)

Personal Income – the total amount of the

nation’s income going to consumers before

individual income taxes are subtracted.

Disposal Personal Income – the total income

the consumer sector has at its disposal after

personal income taxes.

Disposable Income is the

amount of money that

consumers have to spend.

C+G+I+(X - M) = GDP CONSUMER SECTOR

The Consumer Sector or households account

for nearly 2/3 of the economy. The Consumer

Sector receives its income from disposal

personal income (after taxes).

Households are particularly useful because they

can de a determinant of the purchase of durable

goods.

CONSUMER GOODS

- ITEMS MADE FOR FINAL CONSUMPTION

Durable Goods - last for 3yrs or more

Nondurable Goods - short term goods

Services - consumed instantly

C+G+I+(X - M) = GDP THE GOVERNMENT SECTOR

- PURCHASES BY GOVERNMENT

Federal Government

State Government

Local Government

The Government sector receives its income

from taxes.

The Government Sector accounts for

approximately 33% or 1/3 of GDP

C+G+I+(X - M) = GDP THE INVESTMENT SECTOR

Proprietorships, partnerships, and corporations

are responsible for bringing the factors of

production together to produce output.

New Plants and Equipment - can be used for further

production

Private Housing - can be used for an

Indefinite period of time

Inventories - the difference between

consumption and production

INVENTORY MODEL

Completed but not yet consumed moves into

inventory.

Inventory is an Investment good

Once sold it becomes a consumer good and

must be removed from Inventory

Consumption (+/-) Inventory = GDP

THE FOREIGN SECTOR OR

THE BALANCE OF TRADE

This sector represents the difference

between the dollar value of goods sent

abroad and the dollar value of goods

purchased from abroad.

C+G+I+(X - M) = GDP

SECTION II

POPULATION & ECONOMIC GROWTH

Every ten years the U.S. counts its population which is

known as the census. The population is counted in a

way that gives more than a count; Income data, place

of residence, education levels and more

Urban vs. rural population, age & gender, race and

ethnicity ate all used to project economic and

population growth.

GDP & POPULATION

As population expands so must GDP. The three

factors that influence population growth are:

Fertility Rate – the number of births per female

(approximately 2.11)

Life Expectancy – the average remaining life span

who reach a certain age (approximately 75.9 yrs)

Net Immigration – the difference between those

entering and leaving the country

(approximately .9%)

CHANGES IN DEMOGRAPHICS

1990

White – 75.7%

Hispanic – 11.8%

African American – 11.8%

Asian – 2.8%

Native American - 0.7%

2050 (Estimate)

White – 52.7%

Hispanic – 21.1%

African American – 15%

Asian – 10.1%

Native American – 1.1%

ECONOMIC GROWTH

Measuring Growth – Because population grows you

need to account for a growing population. Real GDP

divided by the population will give you real GDP per

capita which is the best way to compare GDP to

previous years as well as other countries.

SECTION III

PROVERTY & THE DISTRIBUTION OF INCOME

People are classified as living in

poverty if their incomes fall below a

predetermined level, or threshold.

In 2009, for example, a family of

four earning 22,050 or less was

determined to live in poverty.

Living in poverty triggers

governmental support for welfare

programs like food stamps, Head

Start, and other public assistance

programs.

POVERTY

Families and individuals are defined as living in

poverty if their incomes fall below certain

levels.

OTHER ANTI-POVERTY PROGRAMS

Over the years, the federal government

has instituted a number of programs to

help the needy. Most come under the

general heading of welfare.

Income Assistance – (TANF) Temporary

Assistance for Needy Families (1997),

(SSI), Supplemental Security Income

General Assistance – Food Stamps, WIC

Tax Credits – Earned Income Tax Credit

(1975)

DISTRIBUTION OF INCOME

UNDERSTANDING THE LORENZ CURVE

The Lorenz Curve

shows how much the

actual income varies

from and equal

distribution of income

based on households

REASONS FOR INCOME INEQUALITY

Income is never distributed equally

among households. There are a number

of reasons that can be used to explain

why.

Education – normally those with higher

education have higher incomes

Wealth – normally accumulated by past

family generations can be used to create

more wealth. This allows wealth to stay in

the hands of a small percentage of the

population.

INCOME DISTRIBUTION (CONTINUED)

Discrimination – many times women and minorities are

not promoted or kept out of certain professions.

Ability – some individuals have unique talents that

allow them to earn more income. (i.e. professional

athletes)

Monopoly Power – professional groups

like the AMA or Pilots Associations can

demand and receive higher incomes.

Loss of Manufacturing - service jobs now

dominate job creation and service jobs

normally pay less than manufacturing jobs.

INCOME DISTRIBUTION (CONTINUED)

Changing Family Structure – the dramatic shift from

two parent families to a one parent family changes the

family income structure.

Wealth itself – the ability of wealthy families to send

their children to colleges and universities (better

educate)helps the wealthy stay wealthy.