After reading about the shortcomings of GDP as an economics measure, please describe some good or service you know of that is not counted in our GDP (please do not give specific names or divulge any personal information). Do you think this is a major problem?
This is discussion that I should finish. Also I need you to response on three of my class mate discussions. Each respond no more than 35 word.
CHAPTER 7 LECTURE NOTES
I. Learning objectives – After
reading this chapter, students should be able to:
A. Explain how gross domestic product (GDP) is
defined and measured.
B. Describe
the relationships between GDP, net domestic product, national income, personal
income, and disposable income.
C. Discuss
the nature and function of a GDP price index, and describe the difference between
nominal GDP and real GDP.
D. List
and explain some limitations of the GDP measure.
II. Assessing the Economy’s Performance
A. National income
accounting measures the economy’s performance by measuring the flows of income
and expenditures over a period of time.
B. National income
accounts serve a similar purpose for the economy, as do income statements for
business firms.
C. Consistent
definition of terms and measurement techniques allows us to use the national
accounts in comparing conditions over time and across countries.
D. The national income
accounts provide a basis for of appropriate public policies to improve economic
performance.
III. Gross Domestic Product
A. GDP is the monetary
measure of the total market value of
all final goods and services produced within a country in one year.
1. Money valuation
allows the summing of apples and oranges; money acts as the common
denominator. (See Table 24.1.)
2. GDP includes only
final products and services; it avoids double or multiple counting, by
eliminating any intermediate goods used in production of these final goods or
services. (Table 24.2 illustrates how
including sales of intermediate goods would overstate GDP.)
3. GDP is the value of
what has been produced in the economy over the year, not what was actually
sold.
B. GDP Excludes
Nonproduction Transactions
1. GDP is designed to
measure what is produced or created over the current time period. Existing assets or property that sold or
transferred, including used items, are not counted.
2. Purely financial
transactions are excluded.
a. Public transfer
payments, like social security or cash welfare benefits.
b. Private transfer
payments, like student allowances or alimony payments.
c. The sale of stocks
and bonds represent a transfer of existing assets. (However, the brokers’ fees are included for
services rendered.)
3. Secondhand sales
are excluded; they do not represent current output. (However, any value added between purchase
and resale is included, e.g. used car dealers.)
C.
Two Ways to Look at GDP: Spending and Income.
1. What
is spent on a product is income to those who helped to produce and sell it.
2. This is an important
identity and the foundation of the national accounting process.
D. Expenditures
Approach (See Figure 24.1 and Table 24.3)
1. GDP is divided into
the categories of buyers in the market; household consumers, businesses,
government, and foreign buyers.
2. Personal
Consumption Expenditures—(C)—includes durable goods (lasting 3 years or more),
nondurable goods and services.
3. Gross Private
Domestic Investment—(Ig)
a. All final purchases
of machinery, equipment, and tools by businesses.
b. All construction
(including residential).
c. Changes in business inventory.
i. If total output
exceeds current sales, inventories build up.
ii. If businesses are
able to sell more than they currently produce, this entry will be a negative
number.
d. Noninvestment transactions – despite how the
term “investment” is used by the general public, investment does not include transfers of ownership of
paper assets (stocks and bonds) or real assets (houses, jewelry, art). Only newly created capital is counted as
investment.
e. Net Private
Domestic Investment—(In).
i. Each year as current output is being
produced, existing capital equipment is wearing out and buildings are
deteriorating; this is called depreciation or consumption of fixed capital.
ii. Gross Investment minus depreciation (consumption of fixed capital) is called
net investment.
iii. If more new structures and capital equipment
are produced in a given year than are used up, the productive capacity of the
economy will expand. (Figure 24.2)
iv. When gross investment and depreciation are
equal, a nation’s productive capacity is static.
v. When gross investment is less than
depreciation, an economy’s production capacity declines.
vi. CONSIDER THIS … Stocks Versus Flows
4. Government
Purchases (of consumption goods and capital goods) – (G)
a. Includes spending
by all levels of government (federal, state and local).
b. Includes all direct
purchases of resources (labor in particular).
c. This entry excludes
transfer payments since these outlays do not reflect current production.
5. Net Exports—(Xn)
a. All spending on
final goods produced in the U.S. must be included in GDP, whether the purchase
is made here or abroad.
b. Often goods
purchased and measured in the U.S. are produced elsewhere (Imports).
c. Therefore, net exports,
(Xn) is
the difference: (exports minus imports)
and can be either a positive or negative number depending on which is the
larger amount.
6. Summary: GDP = C + Ig + G + Xn
E. Income Approach to
GDP (See Table 24.3): Demonstrates how
the expenditures on final products are allocated to resource suppliers as
income.
1.
Compensation of employees includes wages, salaries,
fringe benefits, salary and supplements, and payments made on behalf of workers
like social security and other health and pension plans.
2.
Rents: payments
for supplying property resources (adjusted for depreciation it is net rent).
3.
Interest:
payments from private business to suppliers of money capital.
4. Proprietors’
income: income of incorporated
businesses, sole proprietorships, partnerships, and cooperatives.
5. Corporate
profits: After corporate income taxes
are paid to government, dividends are distributed to the shareholders, and the
remainder is left as undistributed
corporate profits (also referred to as retained
earnings).
6. Taxes on production
and imports: general sales taxes, excise
taxes, business property taxes, license fees, and customs duties.
7. The sum of the
above entries equals national income: all income earned by American supplied
resources, whether here or abroad, plus taxes on production and imports.
8. Adjustments
required to balance both sides of the account:
a. Net foreign factor income: National
income measures the income of Americans both here and abroad. GDP
measures the output of the geographical U.S. regardless of the nationality of
the contributors. Net foreign
factor income measures American income earned abroad minus the income of
foreign nationals producing in the U.S. To make the final adjustment from
national income to GDP (thereby only measuring what is produced within U.S.
borders), net foreign factor income must be subtracted from national
income. This removes the income earned by Americans outside the borders,
but adds in what foreign workers produced on U.S. soil. Sometimes net foreign
factor income is negative, making the net contribution to GDP positive. (Without
this adjustment you have GNP.)
b. Statistical
discrepancy: NIPA accountants add a
statistical discrepancy to national income to equalize the income and
expenditures approaches ($209 billion in 2009).
c. Depreciation/Consumption
of Fixed Capital: The firm also regards
the decline of its capital stock as a cost of production. The depreciation allowance is set aside to
replace the machinery and equipment used up.
In addition to the depreciation of private capital, public capital
(government buildings, port facilities, etc.), must be included in this entry.
IV. Other National Accounts (see Table 24.4)
A. Net domestic product
(NDP) is equal to GDP minus depreciation allowance (consumption of fixed
capital).
B. National income
(NI) is income earned by American‑owned resources here or abroad. Adjust NDP by adding net foreign factor
income. (Note: This may be a negative number if foreigners
earned more in U.S. than American resources earned abroad.)
C. Personal income
(PI) is income received by households.
To calculate, take NI minus payroll taxes (social security
contributions), minus corporate profits taxes, minus undistributed corporate
profits, and add transfer payments.
D. Disposable income
(DI) is personal income less personal taxes.
V. Circular Flow Revisited (see Figure 24.3)
A. Compare to the
simpler model presented in earlier chapters.
Now both government and foreign trade sectors are added.
B. Note that the
inside covers of the text contain a useful historical summary of national
income accounts and related statistics.
VI. Nominal versus Real GDP
A. Nominal GDP is the
market value of all final goods and services produced in a year.
1. GDP is a (P x Q)
figure including every item produced in the economy. Money is the common denominator that allows
us to sum the total output.
2. To measure changes
in the quantity of output, we need a yardstick that stays the same size. To make comparisons of length, a yard must
remain 36 inches. To make comparisons of
real output, a dollar must keep the same purchasing power.
3. Nominal GDP is
calculated using the current prices prevailing when the output was produced but
real GDP is a figure that has been adjusted for price level changes.
B. The adjustment
process in a one-good economy (Table 24.5).
Valid comparisons cannot be made with nominal GDP alone, since both
prices and quantities are subject to change.
Some method to separate the two effects must be devised.
1. One method is to
first determine a price index, (see equation 1) and then adjust the nominal GDP
figures by dividing by the price index (in hundredths) (see equation 2).
2. An alternative
method is to gather separate data on the quantity of physical output and
determine what it would sell for in the base year. The result is Real GDP. The price index is implied in the ratio: Nominal GDP/Real GDP. Multiply by 100 to put it in standard index
form.
C. Real World
Considerations and Data
1. The actual GDP
price index in the U.S. is called the chain-type
annual-weights price index, and is more complex than can be illustrated
here.
2. Once nominal GDP
and the GDP price index are established, the relationship between them and real
GDP is clear (see Table 24.7).
3. The base year price
index is always 100, since Nominal GDP and Real GDP use the same prices. Because the long-term trend has been for
prices to rise, adjusting Nominal GDP to Real GDP involves inflating the lower
prices before the base year and deflating the higher prices after the base
year.
4. Real GDP values
allow more direct comparison of physical output from one year to the next,
because a “constant dollar” measuring device has been used. (The purchasing power of the dollar has been
standardized at the base year level -- currently 2005)
VII. Shortcomings of GDP
A.
GDP doesn’t measure some very useful output because it
is unpaid (homemakers’ services, parental child care, volunteer efforts, and
home improvement projects).
B.
GDP doesn’t measure improved living conditions as a result
of more leisure.
C.
GDP does not measure improvements in product quality or
make allowances for increased leisure time.
D.
The Underground Economy
1.
Illegal activities are not counted in GDP (estimated to
be around 8% of U.S. GDP).
2.
Legal economic
activity may also be part of the “underground,” usually in an effort to avoid
taxation.
E. GDP and the
environment.
1. The harmful effects
of pollution are not deducted from GDP (oil spills, increased incidence of
cancer, destruction of habitat for wildlife, the loss of a clear unobstructed
view).
2. GDP
does include payments made for cleaning up the oil spills, and the cost of
health care for the cancer victim.
F. GDP makes no value adjustments for changes in
the composition of output or the distribution of income.
1. Nominal GDP simply
adds the dollar value of what is produced; it makes no difference if the
product is a semi-automatic rifle or a jar of baby food.
2.
Per capita GDP may give some hint as to the relative
standard of living in the economy; but GDP figures do not provide information
about how the income is distributed.
G. Noneconomic
Sources of Well-Being like courtesy, crime reduction, etc., are not covered in
GDP.
VIII. LAST
WORD: Magical Mystery Tour
A.
GDP is compiled by the Bureau of Economic Analysis (BEA)
in U.S. Commerce Department. Where does
it get its data? Explanation follows.
B.
Consumption data comes from:
1.
Census Bureau’s “Retain Trade Survey” from sample of
22,000 firms.
2.
Census Bureau’s “Survey of Manufacturers,” which gets
information on consumer goods shipments from 50,000 firms.
3.
Census Bureau’s “Service Survey” of 30,000 service
businesses.
4.
Industry trade sources like auto and aircraft sales.
C.
Investment data comes from:
1.
All the consumption sources listed above.
2.
Census construction surveys.
D.
Government purchase data is obtained from:
1.
U.S. Office of Personnel Management, which collects
data on wages and benefits.
2.
Census construction surveys of public projects.
3.
Census Bureau’s “Survey of Government Finance.”
E.
Net export information comes from:
1.
U.S. Customs Service data on exports and imports.
2.
BEA surveys on service exports and imports.