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Measuring a Nation

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Chapter 5 Measuring a Nation s Production and Income – PowerPoint PPT presentation

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Title: Measuring a Nation


1
Chapter 5
  • Measuring a Nations Production and Income

2
Note pg. 97!
  • Circular Flow Model with Production and Income!

3
GDP CIGX-M WHICH MAKES THE MAJORITY OF GDP?
  • Consumption
  • Investment
  • Govt. spending
  • Exports
  • Imports

4
There are 2 Types of GDP
  • REAL GDP measure that adjusts for changes in
    price.
  • NOMINAL GDP The value of GDP in current dollars

5
REAL GDP
  • If 10 computers are produced in the economy for
    1,000 (10,000)
  • THAT becomes the base year or the chained year
    that we compare to.

6
Real GDP
  • If in year 2, there are 12,000 dollars in sales
    of computers then REAL GDP in year 2 is greater
    than REAL GDP for year one by a factor of 1.2.

7
Real GDP
  • Construct a measure using the SAME prices for
    both years and taking price changes into account.
  • Eliminates inflation / deflation.
  • Constant prices

8
Nominal GDP
  • Using current prices for GDP.
  • GDP will grow for one of only TWO reasons.
  • Production of goods has increased.
  • Prices for the goods have increased.

9
IMPORTANT!
  • Face value of money or income doesnt matter to
    people.
  • What matters to people is the real value of the
    money or the PURCHASING POWER.

10
GDP Definitions for the advanced person!
  • CONSUMPTION
  • Purchases by consumers
  • Doesnt matter if imports or domestic.

11
Consumption What kind of goods do we buy?
  • Durable
  • Last for a long time (well, hopefully!)
  • Cars, appliances, etc.
  • Nondurable
  • Goods that dont last.
  • Food
  • Services
  • People do the delivery of service.
  • Medical, dental, travel agents, hair cuts

12
(No Transcript)
13
Investment Private Investment Expenditures
  • Purchases by firms!

14
Three Forms of Private Investment Expenditures
  • Spending on new plants / equipment during the
    year.
  • Newly produced housing is investment spending.
  • Companies that increase their inventories.

15
Definitions of Investment
  • Gross Investment Actual investment purchases.
  • Total of new investment expenditures.

16
Definitions of Investment
  • Depreciation The wear and tear of capital as it
    is used in production.
  • (Note Apply this notion to Econ teachers at your
    own peril!)
  • Net Investment Simple equation
  • Gross Investment depreciation net investment

17
Investing has two meanings to Economists.
  • Investment in the GDP means purchases of NEW
    final goods and services.
  • Counted in the GDP!

18
Investing has two meanings to Economists
  • You might talk about Investment like buying
    stock.
  • Buying EXISTING financial assets.
  • NOT counted in the GDP.

19
Government Purchases
  • Purchases of newly produced goods and services by
    all levels of government.
  • Copy machine paper, copy machines, weapons, cars,
    chairs, etc.

20
Government Spending
  • TRANSFER PAYMENTS
  • Payments to individuals from governments that do
    not correspond to the production of goods and
    services.
  • Social Security, Military Benefits
  • Medicare
  • Interest on the debt
  • ETC

21
Government Spending
  • Transfer Payments are NOT included in GDP.
  • They have a BIG impact on incomes of individuals
    and their consumption and savings behavior!

22
Transfer Payments Mandatory Spending for
Government
  • Big impact on the growing deficit / debt!

23
US Federal Budget Deficit Projection
Congressional Budget Office
24
Net Exports
  • Equation!
  • Exports Imports NET EXPORTS
  • Exports gt Imports Trade Surplus
  • Exports lt Imports Trade Deficit

25
The US Trade Deficit Consequences?
  • We give up more dollars than we bring in when we
    export.
  • American money in the hands of foreigners.

26
Look at it this way
  • College Students need money
  • Sell your assets (property)
  • Sell your future prospects.
  • Plans for a career, you will be able to pay
    back later with interest.

27
US Trade Deficit
  • THAT is the same for the US!
  • We can sell our assets.
  • Real Estate, Stocks, Corporate Bonds
  • We can sell our debt with the expectations that
    we will continue to be a growing economy.
  • US Savings Bonds to fund the debt

28
Who Gets the Income? MORE definitions!
  • National Income The income that flows into the
    private sector.
  • GNP GDP plus net income earned from abroad.
  • NNP Net National Product GNP depreciation
  • Indirect Taxing Sales and Excise Taxes

29
MORE Definitions
  • Value Added
  • Sum of all income
  • Wages, interest, profits, rent, etc. generated by
    an organization.
  • SEE PAGE 106 for example!

30
And Finally!
  • Personal Income
  • Income (including transfer payments) received by
    households.
  • Personal Disposable Income
  • Personal income after taxes.

31
INTERESTING STATISTIC! Families dont have the
same buying power
  • Average family income has dropped 2.3 between
    2001 2004.
  • Federal Reserve Survey of Consumer Finances

32
So, Why dont we notice that we have less
purchasing power?
  • CHEAP imports!

33
Two Sides to GDP
  • Who buys the output that is produced?
  • Who gets the income that is created by production?

34
Who buys the output that is produced?
  • 67 of GDP is from consumer spending!

35
Who is getting the income from production?
  • 70 of national income is paid in wages and
    benefits.

36
GDP Deflator
  • An index that measures how the prices of goods
    included in GDP change over time.
  • SEE PAGE 108 for an explanation!

37
GDP is NOT a perfect measurement!
  • Does not count transactions in underground
    economies
  • Leisure time is not counted.
  • Some growth might be from women in the workforce
  • More need for services since women are working.
  • Makes GDP look bigger?
  • Does not count externalities like pollution
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