L> measuring the economy chapter 6 - Measuring domestic Output and NationalIncomeMeasuring the economy OPTIONAL: online textbook: http://william-king.www.drexel.edu/top/prin/txt/GDPch/Ch15ToC.html What you have to know: define GDP. Why is GDP a "monetary measure"? What are "double counting", "intermediate goods", and also "final goods"? What is consisted of in GDP and also what is excluded? how to calculation GDP making use of the expenditure approach. GDP = C + Ig + G + Xn how to calculate network exports (Xn) What is included in gun Private residential Investment (Ig) Define and calculate network Private residential Investment (In) In = Ig - depreciation What it method when net Private residential Investment is positive, zero, and negative. Just how to calculation National revenue NI = wages + rental fees + interest + Corp. Earnings + Prop. Revenue Define and also calculate Net residential Product (NDP) NDP = GDP - depreciation NDP - C + In + G + Xn specify National revenue (NI) Define an individual Income (PI) specify Disposable revenue ((DI) define nominal GDP Define and also calculate real GDP actual GDP = nominal GDP / (GDP Price Index/100) understand the problems (shortcomings) of utilizing GDP together a measure of social welfare (how fine the economic situation is doing) and also whether, due to the fact that of them, GDP has tendency to OVERstate or UNDERstate social welfare IntroductionWe"ve been utilizing the together - ad model to recognize the macroeconomy. The vertical axis measures the PRICE LEVEL which is the typical level of prices in an economy. The horizontal axis actions REAL domestic OUTPUT i m sorry is every the goods and services developed in one economy. however WHAT NUMBERS execute we placed on the axes? exactly how do we measure the price level and also real residential output? we measure real residential output with genuine GDP and also we measure up the price level with a PRICE INDEX. In this great we"ll learn exactly how to calculate genuine GDP and also a price index.Measuring Real domestic Output: actual GDPGDP vs. GNP economists used to usage Gross nationwide Producer (GNP) to measure real residential output, yet switched come Gross domestic Product (GDP). "Domestic" production way anything created in the United states or on us soil nevertheless of that does it. "National" method anything developed by American "nationals" or citizens regardless of whereby they do it. would the value of output produced at an American-owned factory in the U.S. Be contained in GDP? yes - The worth of output created at an American-owned manufacturing facility in the U.S. Would be cure as part of domestic output in GDP accounting. would certainly the value of output developed at a foreign-owned factory in the U.S. Be included in GDP? correctly - The value of output developed at a foreign-owned manufacturing facility in the U.S. Would be treated as component of domestic output in GDP accounting. would the worth of output developed at an American-owned factory in Japan be contained in GDP ? NO - The value of output produced at one American-owned manufacturing facility in Japan would NOT be treated as part of residential output in GDP accounting. Definition: GDPGross residential Product is the full market worth of all final goods and services the are produced in the economic climate in one year. This is one meaning that have to be memorized. Together you have the right to see it has three components. (1) "total industry value" The unit of measure for real domestic output or actual GDP is the market value or $$$ To acquire the "total" sector value climate one would think the you would add up the price time the amount of everything produced: GDP = amount P x Q = ns this year x Q this year (the amount of price times amount for everything produced in a year) This, then, would offer you the market value. (2) "final goods and also services" Only last goods and services are contained to avoid double counting final goods space bought and used by the last consumer. As soon as you to buy a hamburger from McDonald"s the worth of the hamburger should be had in GDP since it is a final good. Intermediate products are to buy so that they deserve to be resold or further processed. As soon as McDonald"s buys buns, floor beef, and also ketchup, the value of these purchases the intermediate products are NOT included to GDP due to the fact that they will certainly be included when a customer buys the hamburger (a last good). If we had the price that the hamburger and also the worth of the bun, ground beef, and also ketchup climate these would certainly be counted twice. Another means to avoid twin counting is to usage the value-added an approach and only include what McDonald"s security on buns, ground beef, and ketchup, yet then NOT include what consumers invest on the hamburger. The allude is we desire to gain a measure of the sector value that the last goods that an economic situation produces. (3) "produced in one year" GDP is a measure of what is developed or do in one year, therefore: a. Secondhand sales are not included since nothing new is produced, and b. Jae won transactions no included due to the fact that nothing is created A car produced in 1999 is consisted of in 1999"s GDP. Therefore, if a supplied 1999 vehicle is marketed in the year 2001 we would NOT again include its price in the GDP because that 2001 due to the fact that it to be not produced then. We WOULD encompass the revenues earned by the used vehicle salesperson in 2001 due to the fact that he or she did clean, advertise, and sell the used automobile in that year, but we would not encompass the value of the 1999 car itself. Also, a lot of the "business news" the you hear concerning the billions of dollars spent on stocks and bonds each day go not impact the GDP directly. When human being buy stocks and also bonds from whom perform they buy them? If i buy $100 in IBM, indigenous whom carry out I purchase it? I might buy it v a stock broker, but whose stock do I buy? I probably didn"t buy it from IBM (unless it was an IPO - Initial publicly Offering), yet rather ns bought that from someone who had bought it earlier. In other words, i bought :used" stock. Yet the main suggest is, as soon as I to buy $100 on IBM stock, nothing is being produced so the $100 is not added to GDP. REVIEW: (Textbook inquiry 6-13) i m sorry of the complying with are actually had in this years GDP? define your price in every case. A. Interest on an at&t bond. B. Social security payments got by a retired manufacturing facility worker. C. The unpaid services of a family member in painting the family home. D. The earnings of a dentist. E. The money received by Smith when she selling her economics textbook come a publication buyer. F. The monthly pin money a college college student receives from home. G. Rent obtained on a two-bedroom apartment. H. The money obtained by Josh once he resells his current-year-model Honda auto to Kim. I. The publishing of a university textbook. J. A 2-hour to decrease in the size of the workweek. K. The acquisition of an at & t corporate bond. L. A $2 billion increase in business inventories. M. The acquisition of 100 shares of GM typical stock. N. The acquisition of an insurance money policy. ANSWERS room at the bottom that this webpage. Circular circulation ModelThe circular flow model can help us to recognize the twoapproaches used to measure GDP.1. Expenditures strategy 2. Revenue approachArrow # 3 is genuine GDP (goods and services produced). This isoutput created by business and also sold in the product industries toconsumers (households). This is what we want to measure. This is realdomestic output. To measure this level of created output we canmeasure arrowhead #4 which space the expenditures invested on this output.This is the expenditure APPROACH. If something is produced and also soldthe amount sold must equal the quantity produced. The only problemwith this is what happens if other is produced one year yet notsold in the next year? If we just added up the market values that goodsand solutions that were offered these items would certainly be included in thewrong year. To handle this difficulty we include items produced one yearand sold the following as changes in company inventories i m sorry AREincluded the year the they space produced.We can also measure arrowhead #1 i m sorry is the revenue earned byhouseholds as soon as they sell their sources (arrow #2) come businesses.The value of output developed (GDP) is same to the worth of all theincome earn by anyone who had anything to carry out with creating theoutput. If a $20,000 vehicle is sold, climate $20,000 was earned by everyonewho was affiliated in producing and also selling the car. So to measure up GDP( the worth of the commodities produced) we can sum up every the incomeearned in producing that level that GDP. This is the INCOME approach tocalculating GDP.Expenditures approach GDP = C + Ig + G + Xn know THIS ! GDP = C + Ig + G + Xn1. An individual consumption expenditures (C) consists of durable products (lasting 3 years or more), nondurable goods and services. 2. Gun private residential investment (Ig) Remember the we characterized investment together the "accumulation the capital" and also we defined resources as "manufactured resources" so invest occurs once businesses to buy capital. If a carpenter buys a hammer it is one investment. (Note: if one economist buys 100 share of share in Microsoft, that is not an investment.) investment includes: 1) all last purchases that machinery, equipment, and also tools by companies 2) all building 3) transforms in inventories (To encompass items created one year yet sold the next. If businesses are able come sell much more than they currently produce, this entry will be a an adverse number. ) gross vs. Net domestic investment (In) Gross investment is ALL brand-new INVESTMENT and also includes the three items listed above. Net investment includes only the transforms to the nation"s funding stock each year as brand-new goods and services space being produced, several of the existing capital equipment is put on out and buildings space deteriorating. This is called "depreciation" or "consumption of addressed capital". Whereas gross investment adds to a countries stock of capital, depreciation to reduce a country"s stock of capital. Net investment = Gross investment - depreciation In = Ig - depreciation Net investment is connected to financial growth. If net investment is hopeful then the country ends up with an ext capital at the end of the year than it proclaimed with. Since we understand that financial growth is resulted in by obtaining "more resources", if that is hopeful the economy is growing, ("expanding economy"). What kind of financial growth is this (1) increasing our potential from the 5Es or, (2) achieving ours potential (or achieving full employment)? It would be "expanding ours potential i m sorry id reason my getting an ext resources, far better resources, and better technology. If net invest is an adverse this means that depreciation is higher than gross investment, or an ext capital put on out 보다 is developed so us would have a "declining economy". If gross investment (all new capital that is produced) equates to depreciation (capital that wears out) then network investment will certainly equal zero. There will certainly be no transforms to amount of resources that a nation has, and also there will be a "static economy". 3. Federal government purchases (G) This includes purchases by all levels of government (federal, state and local). Whenever the federal government buys other or pays somebody it is had in government purchases. Federal government purchases go NOT include transfer payments. Transfer payments, by definition, room payments because that which nothing is supposed in return. Government transfer payments incorporate welfare and social defense payments, transfers from the federal federal government to state government and from state to neighborhood governments. These space not had in GDP as federal government purchases due to the fact that when the federal government transfers money, nothing IS PRODUCED and GDP only encompass production. The course, when human being on welfare invest their government check on food and rent climate this does get in GDP as consumption (C). 4. Network exports (Xn) network exports (Xn) contained the value of every exports from a nation minus the value of every imports. Xn = X - M If a nation has a trade deficit climate the value of imports is greater than the value of a country"s exports and also net exports (Xn) is negative. It have to be evident why exports is included in GDP and also it should be evident why imports should NOT be added to GDP. But why carry out we need to SUBTRACT imports native GDP. Individually is a lot various than not adding. Imports are subtracted native GDP due to the fact that they to be incorrectly consisted of in intake expenditures (C). Due to the fact that imports are produced in an additional country they have to not be added to our GDP, however they are included as arts of of consumption so as such they have to be removed. Practice trouble Given the data below, use the EXPENDITURES approach to calculation GDP. answer the next question(s) on the communication of the adhering to national revenue data because that the economy. All numbers are in billions. personal consumption expenditure $400 federal government purchases 128 gun private residential investment 88 net exports 7 network foreign variable income earn in the U.S. 0 consumption of fixed capital 43 Indirect service taxes 50 Compensation of employees 369 rental fees 12 interest 15 Proprietors" earnings 52 Corporate income taxes 36 dividends 24 Undistributed corporate earnings 22 R-1 REF07059 ANSWER: prior to scrolling down, choose up some record and a pencil and also actually calculation GDP. Act it you yourself is better than reading it. . . . GDP = C + i + G + Xn . . Native the table we get: GDP = C + i + G + Xn GDP = 400 + 128 + 88 + 7 GDP = C + i + G + Xn = 400 + 128 + 88 + 7 = $ 623Income approach --calculating national revenue (NI)A second method to calculate GDP is by including up all income - flow #1 in the circular circulation diagram listed below is the income received as soon as resources are marketed to businesses. There space four types of resources (four determinants of production): labor land capital entrepreneurial ability each of these source types obtain what economist call INCOME when they room sold: labor receives incomes land obtain rent resources receives interest entrepreneurial capability receives revenues therefore if we add up: wages + rent + interest + revenues we should acquire GDP -- well almost. Actually we get something referred to as National earnings (NI), or the earnings EARNED by the resources. The textbook goes through the calculation on how to acquire from NI come GDP - yet we won"t need to do that in this course. What we will do is divide the profits earned by entrepreneurs into two types: proprietor"s income and corporate profits. So: NI = salaries + rents + interest + Corp. Revenues + Prop. Revenue Definitions: nationwide income: all earnings earned by American provided resources, whether right here or abroad, to add taxes top top production and imports. Compensation of employees has wages, salaries, fringe benefits, salary and also supplements, and payments make on behalf of workers choose social security and other health and also pension plans. Rents: payments for supplying home resources (adjusted for depreciation it is network rent). Interest: payments from private service to providers of money capital. Proprietors" income: earnings of incorporated businesses, sole proprietorships, partnerships, and cooperatives. Corporate profits: after corporate income taxes are paid come government, dividends are spread to the shareholders, and the remainder is left together undistributed corporate earnings (also described as kept earnings). Practice problem Given the data below, use the INCOME technique to calculation National revenue (NI). prize the next question(s) top top the communication of the following national earnings data because that the economy. All figures are in billions. personal consumption expenditures $400 federal government purchases 128 pistol private domestic investment 88 network exports 7 network foreign aspect income deserve in the U.S. 0 intake of fixed resources 43 Indirect organization taxes 50 Compensation of employee 369 rental fees 12 interest 15 Proprietors" income 52 Corporate income taxes 36 dividends 24 Undistributed corporate revenues 22 ANSWER: prior to scrolling down, pick up some paper and a pencil and also actually calculate GDP. Act it yourself is far better than reading it. . . . NI = incomes + leas + interest + Corp. Earnings + Prop. Earnings . . Indigenous the table we get: NI = earnings + leas + attention + Corp. Earnings + Proprietor"s income NI = 369 + 12 + 15 + 82 + 52 NI = wages + rental fees + interest + Corp. Revenues + Prop. Revenue Corporate revenues are offered for three various purposes: Corporate income taxes = 36 dividend = 24 Undistributed corporate earnings = 22 Corporate earnings then same 36 + 24 + 22 = 82 . ~ above the exams ns will give you "corporate profits". NI = 369 + 12 + 15 + 82 + 52 = $ 530 GDP = C + ns + G + Xn = 400 + 128 + 88 + 7 = $ 623 together you deserve to see, National earnings does not equal GDP. There are some expenditures (that are contained in the expenditure approach) that are not income (therefore not included in the earnings approach). They room indirect organization taxes ( 50), depreciation (43), and net foreign income factor ( 0 ), But, again, girlfriend won"t have to do this in this course. other Social account Net residential Product (NDP) GDP - Depreciation = NDP National income (NI) NI = salaries + rental fees + attention + Corporate earnings + Proprietor"s income NI is income EARNED by the determinants of manufacturing (resources). Personal Income (PI) PI is the revenue RECEIVED by the factors of production (resources). To calculate, take it NI minus payroll counting (social defense contributions), minus corporate revenues taxes, minus undistributed this firm profits, and include transfer payments. Disposable earnings (DI) is her SPENDABLE income. DI is an individual income minus personal taxes. GDP and Economic Well-BeingGDP every capita is frequently used to measure up a country"s fine being orstandard the living. The higher the GDP every capita for a country thebetter turn off the country is. Yet there room some problems with using GDPper capita to measure up a country"s typical of living.Problems v using GDP to measure the typical ofLiving:1. Non-market transactions room not had in GDP 2. Recreation increases the typical of living however it isn"t counted 3. Enhanced product quality often isn"t accounted for in GDP 4. GDP does no account because that the composition and distribution of calculation 5. GDP does not account because that the distribution of output 6. Rises in GDP may harm the environment and decrease the standard of life 7. The underground economic climate produces goods and services however they are not included in GDP 8. GDP does not account because that a possible future decrease in calculation due to source depletion. 9. Noneconomic sources of Well-Being favor courtesy, crime reduction, etc., are not spanned in GDP. 10. We have to use every capita GDP to compare the living requirements of different countries. 1. Non-market transactions room not included in GDP GDP doesnt measure up some very useful output since it is unpaid (homemakers services, parental child care, volunteer efforts, home advancement projects). Dubbed non-market transactions 2. Recreation increases the standard of living but it isn"t counting GDP doesnt measure enhanced living problems as a an outcome of more leisure. 3. Improved product quality often isn"t accounted because that in GDP GDP doesnt measure enhancements in product quality unless castle are included in the price 4. GDP does not account because that the ingredient of calculation GDP renders no value adjustments for alters in the ingredient of output. In the name GDP merely adds the dollar worth of what is produced; it provides no difference if the product is a semiautomatic rifle or a seasoned of baby food. 5. GDP does not account because that the circulation of output GDP provides no value adjustments for changes in the distribution of income. Per capita GDP may offer some hint as to the loved one standard of life in the economy; however GDP numbers do not administer information around how the earnings is distributed. 6. Boosts in GDP may injury the environment and also decrease the standard of life The harmful effects of contamination are no deducted native GDP (oil spills, enhanced incidence that cancer, devastation of habitat for wildlife, the ns of a clear unobstructed view). GDP does include payments produced cleaning up oil spills and the price of health care for cancer victims. 7. The underground economy produces goods and also services however they are not included in GDP GDP walk not include output native the underground Economy. Illegal tasks are no counted in GDP (estimated come be about 8% the U.S. GDP). Legit economic task may likewise be component of the underground, normally in an effort to prevent taxation. Illegal activities are not counted in GDP (estimated to be around 8% the U.S. GDP). Legit economic task may also be component of the "underground," commonly in an effort to prevent taxation. 8. GDP does not account because that a possible future decrease in calculation due to resource depletion. 9. Noneconomic resources of Well-Being choose courtesy, crime reduction, etc., are not extended in GDP. 10. We have to use every capita GDP to compare the living standards of different countries. Which nation has a higher GDP, Switzerland or India? Which has actually a higher level of economic well-being: Switzerland: GDP: $239.3 exchange rate (2003 est.) Population: 7,450,867 (July 2004 est.) GDP per capita: $32,700 (2003 est.) India: GDP: $3.033 sunshine (2003 est.) Population: 1,065,070,607 (July 2004 est.) GDP every capita: $2,900 (2003 est.) GDP every capita = GDP / populace REVIEW: perform each that the following reason GDP come OVERSTATE the economic well-being that a nation or UNDERSTATE it? 1. Non-market transactions (Does GDP OVERstate or UNDERstate economic well-being?) not consisted of so, GDP UNDERstates well-being. 2. Boosted product top quality (Does GDP OVERstate or UNDERstate financial well-being?) not accounted for, so GDP UNDERstates well-being. 3. More recreation (Does GDP OVERstate or UNDERstate financial well-being?) not accounted for, therefore GDP UNDERstates well-being. 4. The ingredient of output (Does GDP OVERstate or UNDERstate economic well-being?) if "bad" things space being produced, climate GDP OVERstates well-being. 5. The circulation of income (Does GDP OVERstate or UNDERstate financial well-being?) one unequal circulation of income would result in GDP OVERstating the wellness of most of a country"s population 6. The underground economic situation (Does GDP OVERstate or UNDERstate financial well-being?) not accounted for, for this reason GDP UNDERstates well-being 7. GDP and also the atmosphere (Does GDP OVERstate or UNDERstate economic well-being?) harmful results of pollution and costs of contamination reduction space not deducted from GDP, for this reason GDP OVERstates well-being. 8. Non-economic sources of well-being (Does GDP OVERstate or UNDERstate economic well-being?) no accounted for, so GDP UNDERstates health 9. Per-capita income (Does GDP OVERstate or UNDERstate financial well-being?) GDP OVERstates health in countries with large populations and UNDERstates well-being in nations with small populations measuring the Price LevelIntroductionWe"ve been making use of the together - advertisement model to understand the macroeconomy.The upright axis steps the PRICE LEVEL which is the average levelof prices in an economy. The horizontal axis steps REAL DOMESTICOUTPUT i beg your pardon is every the goods and also services created in aneconomy.But WHAT NUMBERS execute we placed on the axes? exactly how do we measure theprice level and also real domestic output?We have actually seen that you measure real residential output with real GDPand we have actually learned how to calculation GDP. Currently we will learn how tomeasure the general price level. Us measure the price level through aPRICE INDEX.Nominal GDP and also real GDPNominal GDP is the industry value that all final goods and also services developed in a year. In the name of GDP is a (P x Q) figure including the amount of every item developed in the economic climate in one year time its price the year. Nominal GDP is calculated utilizing the present prices prevailing when the output was produced however real GDP is a figure that has been changed for price level changes. In the name of GDP = sum (this year"s prices x this year"s quantities) = (P this year x Q this year) Therefore, if in the name of GDP increases is it because we are producing more ( Q this year ) or is it due to the fact that the Price Level increased ( p this year ) ? In truth it is possible for in the name GDP to increase even though the quantity created has DECREASED. How? Nom. GDP = (P this year x Q this year) IF prices enhanced a lot, in the name of GDP would increase also if the quantity produced went down. (P this year x Q this year ) = Nom. GDP so if we know that in the name of GDP has increased, us still do not recognize if we space producing much more (and reduce scarcity) or if the price level has just increased. Genuine GDP is a measure of just how much was actually produced. That is why it is uses on the AS/AD graph together a measure up of real domestic output (RDO). We calculate genuine GDP by summing the quantity created of every little thing in an economy times its PRICE IS A basic YEAR. Because we constantly use the very same base year price if the quantity developed increases it will increase real GDP. Genuine GDP = amount (base year"s price x this year"s quantities) = p base year x Q this year By making use of the exact same price level (base year prices) we remove the impacts of a higher price level (inflation) and if real GDP increases we know that the economic climate is producing much more and scarcity is gift reduced.real GDP genuine GDP = amount P base year x Q particular year particular year"s quantities x basic years prices actual GDP = sum (base year"s price x this year"s quantities) = p base year x Q this year By making use of the same price level (base year prices) we remove the results of a greater price level (inflation) and also if actual GDP boosts we recognize that the economic situation is producing much more and scarcity is gift reduced. Calculating a price indexTo measure the price level we usage a price index. A price table of contents isa measure of the price level together a percent the the price level in aBASE year. This is different from inflation i m sorry is the rate ofincrease in the price level native the vault year.As you have read, to calculation a price table of contents a year is selected asa basic year. The median level of prices for the year is assigned avalue the 100. Climate the price levels because that all other years arecalculated together a percent that the basic year.GDP Price Index meaning a price table of contents is a measure up of the price that a specified arsenal of goods and also services, dubbed a "market basket", in a provided year as contrasted to the price that an similar (or extremely similar) collection of goods and also services in a recommendation year (called the "base year") calculating a GDP price table of contents price index in a offered year = (price of market basket in a particular year / price the same market basket in basic year) x 100 calculating actual GDP real GDP = nominal GDP / Price Index actually , girlfriend then should multiply it by 100. Genuine GDP = (Nominal GDP / Price Index) x 100 The complying with data display nominal GDP and also the appropriate price index for several years. Compute genuine GDP for each year. In i m sorry year(s) to be there a recession (decline in real GDP)?.
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Every GDP room in billions. NominalPrice level YearGDPindexReal GDP 1$117120___ 2124104___ 314385___ 414996___ 5178112___ 6220143___ The answers room below: ANSWERS: NominalPrice level YearGDPindexReal GDP 1$117120$ 98 2124104119 314385168 414996155 5178112159 6220143154