Principles Of Macroeconomics

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Principles Of Macroeconomics

National Income Accounting


GDP


The Expenditure Approach


The Income Approach

An Economic Barometer


What exactly is GDP?



How do we use it to tell us whether our economy is in a
recession or how rapidly our economy is expanding?



How do we take the effects of inflation out of GDP to compare
economic well
-
being over time?



And how do we compare economic well
-
being across countries?

Gross Domestic Product


Gross Domestic Product (GDP) 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

Gross Domestic Product


Gross Domestic Product (GDP) Is…

….
the
market value
of all final goods and services
produced in a country in a given time period.

Market

value


GDP is a market value

goods and services are valued at their market
prices.


“You can’t compare apples to oranges.”


Market prices measure the amount people are willing to pay for
different goods, they reflect the value of goods.


If apples are double the price of oranges, apples contributes
twice as much to GDP.


Things that don’t have a market value are excluded, e.g.,
housework you do for yourself.


Gross Domestic Product


Gross Domestic Product (GDP) Is…

….the market value of all
final goods and services
produced in a country in a given time period.


Final goods and 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.


GDP only includes final goods, as they already embody the value
of intermediate goods used in their production.


Excluding intermediate goods and services avoids double counting.


Calculating GDP

American Ore Inc

American Steel

American
Motors

Total factor income

Value of Sales

4,200 (ore)

9,000 (steel)

21,500 (Car)

Intermediate goods

4,200 (iron ore)

9,000 (steel)

Wages

2,000

3,700

10,000

15,700

Interest Payment

1,000

600

1,000

2,600

Rent

200

300

500

1,000

Profit

1,000

200

1,000

2,200

Total Expenditure
by firm

4,200

9,000

21,500

Value Added

4,200

4,800

12,500

Aggregate Expenditure

Total Payment to Factors
-

21,500

Sum of Value Added
-

21,500

Gross Domestic Product

Gross Domestic Product (GDP) Is…

….the market value of all final goods and services
produced

in a
country
in a given time period.


Produced within a country


GDP measures the value of production that occurs within
a country’s borders, whether done by its own citizens or
by foreigners located there.





Gross Domestic Product


GDP and the Circular Flow of Expenditure
and Income


GDP measures the value of production, which also
equals total expenditure on final goods and total
income.


We can determine how much a consumer pays for it;
that will tell us the value of the final product. Or we can
add up all the income created in producing it.


What is spent on a product is received as income by
those who helped produce it.


Gross Domestic Product


Firms hire factors of production from households. The blue flow,
Y
,
shows total income paid by firms to households.

Gross Domestic Product

Households buy consumer goods and services. The red flow,
C
,
shows consumption expenditures.

Gross Domestic Product


Households save,
S
, and pay taxes,
T
. Firms borrow some of what
households save to finance their investment.

Gross Domestic Product


Firms buy capital goods from other firms. The red flow represents
this investment expenditure by firms.

Gross Domestic Product


Governments buy goods and services,
G
, and borrow or repay debt
if spending exceeds or is less than taxes.

Gross Domestic Product


The rest of the world buys goods and services from us,
X,

and sells
us goods and services,
M

net exports are

X
-

M

Gross Domestic Product


And the rest of the world borrows from us or lends to us depending
on whether net exports are positive or negative.

Gross Domestic Product


The blue and red flows are the circular flow of expenditure and
income. The green flows are borrowing and lending
.

Gross Domestic Product


The sum of the red flows equals the blue flow.

Gross Domestic Product


That is:
Y

=
C

+
I

+
G

+
X

-

M

The Components of GDP


Recall: GDP is total spending.


Four components:


Consumption (
C
)


Investment (
I
)


Government Purchases (
G
)


Net Exports (
NX
)


These components add up to GDP (denoted
Y
):

Y = C + I + G + NX

Consumption (C)



Total spending by households on good and services.


Note on housing costs:


For renters, consumption includes rent payments.



Investment (I)



is total spending on goods that will be used in the future to
produce more goods.


includes spending on


capital equipment (
e.g
., machines, tools)


structures (factories, office buildings, houses)


inventories (goods produced but not yet sold)

Note:
“Investment”

does not
mean the purchase of financial
assets like stocks and bonds.

Government Purchases (G)



is all spending on the good and services purchased by
government at the federal, state, and local levels.


G

excludes
transfer payments
, such as

Social Security or unemployment insurance benefits.


These payments represent transfers of income, not purchases
of good and services.

Net Exports (NX)


NX

= exports


imports


Exports represent foreign spending on the economy’s good
and services.


Imports are the portions of
C
,
I
, and
G


that are spent on good and services produced abroad.


Adding up all the components of GDP gives:

Y = C + I + G + NX

Expenditure

Name

Symbol

Billions of dollars

Percentage of
GDP

Consumption

C

8,668

70.0

Investment

I

2,054

16.6

Government

G

2,338

18.9

Net Exports

NX

-
687

-
5.5

GDP

Y

12,373

100.0

Measures GDP by using data on consumption, investment, government
expenditure and net exports .

Amount in 2005

GDP, Income, Expenditure


Expenditure Equals Income


Because firms pay out everything they receive
as incomes to the factors of production, total
expenditure equals total income.


That is:

Y = C + I + G + NX


The value of production equals income equals
expenditure


Aggregate Income


Aggregate income earned from production
of final goods,
Y
, equals the total paid out
for the use of resources, wages, interest,
rent, and profit.



Firms pay out all their receipts from the
sale of final goods, so income equals
expenditure


Y

=
C

+
I

+
G

+ (
X



M
).

Income Approach


Wages


Compensation of employees in the national accounts, is the
payment for labor services.


It includes salaries plus fringe benefits paid by employers
such as health care insurance, social security contributions,
and pension contributions


Interest


Is the income households receive on loans


Rent


Includes payments for the use of land


Profit


Includes the profits of corporations (Corp Income tax,
dividends and undistributed Corp. profit) and small
businesses.



Income Approach Adjustments


Indirect Business Tax


firms treat this as cost of the production process and therefore add to the
prices of the products they sell (sale and excise taxes, license fees, and
duties) Production of widgets adds 1.00 of wages, rent interest, and profit
income. But government adds .05 to the price of a product. The value of
the output is 1.05 but only 1.00 if this value is paid to the household.


Net to Gross


Expenditure includes investment. Because some new capital is
purchased to replace depreciated capital ( annual charge which estimates
the amount of capital equipment used in each years production)


To get gross domestic product from the income approach, we must add
depreciation to total income.


Net foreign Factor


National Income is the total income of American, whether earned in the
United States or abroad




Gross Domestic Product



Gross investment

is the total amount
spent on purchases of new capital and on
replacing depreciated capital.



Net investment

is the change in the stock
of capital and equals gross investment
minus depreciation.

Gross Domestic Product



This figure
illustrates the
relationships
among capital,
gross investment,
depreciation, and
net investment.