Ch05Spring2011

Ch05Spring2011 - CHAPTER 5 GROSS GROSS DOMESTIC PRODUCT...

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Unformatted text preview: CHAPTER 5 GROSS GROSS DOMESTIC PRODUCT PRODUCT Spring, 2011 1 NATIONAL INCOME NATIONAL ACCOUNTING: ACCOUNTING: Has an ex post perspective Has ex Measures actual economic Measures actual performance Permits economists to: Permits Measure gap between actual and Measure gap potential economic performance potential Use data to test economic theories Assess the impact of policy Assess measures on real world outcomes measures Emphasis on output measures is Emphasis output based on circular flow graph based 2 BASIC CIRCULAR FLOW MODEL MODEL The most basic model assumes: The No government No foreign trade Only consumer goods Only produced produced No household saving No The upper loop: flow of product The The lower loop: flow of The earnings earnings Profits adjust to ensure identity Profits of upper and lower loop values See Exhibit 1, page 125 3 THE BASIC CIRCULAR FLOW MODEL, P. 125 MODEL, Figure 15.1 (Macro 5.1) GROSS DOMESTIC PRODUCT Market value Includes sales and excise taxes Prices serve as common Prices denominator for goods measured in different units different “Final” goods and services Excludes second hand sales Excludes “financial” transactions Excludes Intermediate goods Produced by domestically located Produced domestically located productive factors productive 5 GDP vs. GNP GDP GDP Output produced with domestically Output -located productive factors (excludes production by U.S. firms operating abroad and includes production by foreign firms operating in the U.S. operating GNP GNP Output produced by domesticallyowned factors of production, whether located at home or abroad (excludes production by foreign firms operating in the United States and includes production by U.S. firms operating abroad firms 6 FOUR SECTOR FOUR CIRCULAR FLOW CIRCULAR The four sectors: The Households Households Business Government Foreign (rest-of-the-world) Foreign Improvements over simple model: Adds government Adds foreign sector Allows for capital goods production Allows saving by various sectors Allows See Exhibit 2, page 127 7 THE CIRCULAR FLOW IN AN OPEN ECONOMY, P. 148 OPEN Figure 15.2 (Macro 5.2) GDP FROM THE UPPER GDP LOOP: (In Billions of $) Text p. 127 Text Consumption Expenditures Consumption $9,734 $9,734 Gross private domestic Investment exp. 2,125 Government purchases Government 2,690 Net exports: (1301-2028) = EQUALS GDP EQUALS GDP -708 --------------13,841 GDP = C + I(g) + G + (X - M) or GDP GDP + M = C + I(g) + G + X 9 GDP FROM THE LOWERLOOP: p. 130 LOWERLOOP: LABOR: LABOR: Employee Compensation Employee LAND: Rental income Rental CAPITAL: CAPITAL: Net interest Net ENTREPRENEURSHIP: Ttotal Profits 7,874 65 603 2.638 _____ EQUALS Income earned 9,987 + indirect Business Taxes indirect + Depreciation 1,041 1,620 1,620 Equals GDP Equals $13,841 10 NOMINAL VS. REAL GDP Nominal GDP uses current prices to Nominal current value annual output value Result is that nominal GDP may Result change because EITHER: Prices have changed OR Production has changed OR Both have changed Both Need to deflate nominal GDP if prices Need deflate have been rising GDP Price Index is used for this GDP purpose Adjusts for price changes for all Adjusts goods and services, not just consumer goods. consumer 11 CONVERTING NOMINAL GDP CONVERTING TO REAL GDP VALUES IN A 1 PRODUCT ECONOMY Real Year P(x) Q(x) GDP 01 02 03 04 05 $05 $10 $20 $10 $15 20 30 10 20 20 $100 $100 $300 $300 $200 $200 $200 $200 $300 $300 Money Money GDP $200 $200 $300 $300 $100 $100 $200 $200 $200 $200 Example above assumes year 2 is the base year How would this change if year 3 is the How base year? base 12 USING A PRICE INDEX: Assume Year 2 is the Base Assume Year Year Yr. P(x) 01 02 03 04 05 Q(x) Q(x Price Money Real Price Index GDP GDP Index GDP GDP $05 $10 $20 $10 $15 20 050 $100 30 100 $300 $300 10 200 $200 20 100 $200 20 150 $300 (Money GDP) Real GDP = ------------------- * 100 Real (Price Index) (Price $200 $300 $100 $200 $200 For Year 5: $200 = ($300/150) * 100 For 13 CHANGES IN REAL AND NOMINAL GDP, 1982-1995 (1992 = BASE YEAR) (1992 Figure 15.4 (Macro 5.4) NOTE REAL GDP < NOMINAL GDP AFTER THE BASE YEAR OF 1996 OF Year Nominal GDP Nominal 1960 1970 1980 1990 1992 1994 1996 1997 1998 2000 $0527 $1040 $2796 $5803 $6319 $7054 $7813 $8318 $8781 $9873 Real GDP Real $2377 $3578 $4901 $6708 $6880 $7348 $7813 $8159 $8509 $9224 GDP AS A MEASURE OF GDP ECONOMIC WELL-BEING ECONOMIC Adjustments required for: Adjustments 1. 1. 2. 3. 3. 4. 5. 5. 6. 6. 7. 7. Price changes Quality changes Quality Leisure time Non-market activities Non-market A. Self-produced goods & A. Self-produced services services B. Underground economy Underground Negative externalities Negative Positive externalities Positive Income distribution Income 16 CHAPTER 5 QUESTIONS??? 17 17 SAMPLE GDP PROBLEM Revised 02/11/10 Consumption Expenditures Gross Investment Expenditures Government Purchases Net Exports Net Exports Exports Imports Imports $250 $040 $090 - $30 $30 = $10 $10 = $40 $40 Employee Compensation: Employee Wages and Salaries = $90 Wages $90 Soc. Security Contributions by Employers = $40 Net Interest Rental Income Total Corporate Profits Corporate Income Taxes = $50 $50 Dividends = $30 Dividends $30 Undistributed Corp. Profits = $10 Proprietorship and Partnership Profits $130 $130 Depreciation Depreciation Indirect Business Taxes $020 $020 $010 Personal Taxes paid by households Government Transfer Payments Government $040 $070 $070 $010 $060 $090 $030 18 SAMPLE GDP PROBLEM Page 2: Calculating GDP Consumption Exp. Gross Investment Exp. Government Purchases Net Exports ($00 - $00) Net EQUALS GDP $250 $040 $090 - $30 ----$350 Less depreciation -$20 Less Indirect Bus. Taxes -$ 10 ----------EQUALS Income Earned $320 19 SAMPLE GDP PROBLEM Page 4: Calculating PI INCOME EARNED INCOME $320 $320 Less Corp. Income Tax Less - $50 $50 Less Undistributed Corporate Profits $10 $10 Less Social Security contributions by contributions employers Plus Government TransPlus fer Payments to HH EQUALS EQUALS ------------PERSONAL INCOME - - $ 40 + $70 20 $ 290 SAMPLE GDP PROBLEM Page 5: Calculating DI and S Page Personal Income (Income Received before personal taxes. $290 Less personal taxes EQUALS - $40 ------- Disposable Income Disposable Less consumpt exp. Less EQUALS EQUALS Household saving $250 -$250 ------$00 SAVING AND INVESTMENT TABLE SAVING FOR AN OPEN ECONOMY FOR SECTOR RECIPTS AND EXPENDITURES HOUSEHOLD SECTOR: Receipts: Disposable Income Expenditures: Consumption Expenditures: Balance: No Saving Saving BUSINESS SECTOR: BUSINESS Receipts: Depreciation Undistributed Corp. Profits Undistributed Expenditures: Gross Investment Balance: Negative Saving Negative $250 $250 $250 $250 $000 +030 +030 $020 $010 $040 <$010 > GOVERNMENT SECTOR: GOVERNMENT Receipts available to buy goods and services Receipts Indirect Bus. Tax $010 Indirect $010 Corporate. Inc. Tax $050 Soc. Sec. Contrib. $040 Personal Taxes $040 $040 Less Transfer Pay. $070 Less $070 Expenditures: Government Purchases Expenditures: Balance: Negative Saving Balance: $070 $090 <$020> REST-OF-THE-WORLD SECTOR REST-OF-THE-WORLD Receipts (U.S. Imports.) Receipts Expenditures (U.S. Exports) Balance: Positive Saving Balance: $40 $10 $30 22 Note: Saving by the rest-of-the-world sector finances the deficits of Note: the U.S. economy. ...
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