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# 551-7 - Chapter 7 Taking the Nation's Economic Pulse In...

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Chapter 7 - Taking the Nation's Economic Pulse In this chapter we look at how the economy's output is measured. We use the National Income and Products Accounts (NIPA), a system of national-income accounting developed during the 1920s and 1930s to measure national income or national output (see p. 149, economist Simon Kuznets). Just like a firm needs accounting to measure income to calculate profits or losses, the entire economy needs an income statement. Gross Domestic Product (GDP) is the most widely used measure of economic performance around the world. We currently have almost \$14T of annual GDP in the U.S. GDP measures the total market value or total spending on all final goods and services produced domestically during a specific period, usually quarters or years. Bureau of Economic Analysis at Dept of Commerce tracks the economy and releases the figures on GDP on a quarterly basis. Time frame - we are now in the second quarter (as the notes are updated) of 2007 (April, May, June). The first estimate of QII 2007 GDP will be released around Aug. 1, second estimate on Sept. 1 and the final estimate around Oct. 1. It takes three months after the end of quarter and six months after the start of the quarter to finalize data. This time frame for the release of GDP will become very important later in the course when we discuss policy (fiscal and monetary). WHAT COUNTS IN GDP?: 1. Only FINAL goods and services purchased by final users. Only retail sales count, not intermediate (wholesale) goods or transactions . When GM buys steel, tires or transmissions, those transactions don't count because it would be double counting since those expenditures will be accounted for in the final retail price of the car. For example, suppose GM spends \$15,000 for a car and sells it to a dealer for \$16,000 and the dealer sells it for \$17,000. We only count the \$17,000 for the final retail sale. We can't count \$15,000 + 16,000 + 17,000 = \$48,000. Only the value of the final output is counted, and the value of the inputs are not directly counted since their value is reflected in the final purchase price. See Example , page 150. Bread example. 2. Only goods and services produced during the time period are counted. Only new production is counted, not secondhand sales. Example : sales of used cars and used houses don't count. They were already counted as new production in the year built. Resale doesn't get counted in current GDP. Commissions on used cars or houses would get counted, because they are current services. 3. Financial transactions and income transfers are excluded. Example: stock or bond purchase is just a transfer of money from one individual to another, it does not involve current production of a good or service. Commissions would count, as a current service (income) provided by the broker. Gifts and income transfers (Social Security, welfare, veterans' pmts, etc.) also don't count, since no current production of goods or services is involved.

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551-7 - Chapter 7 Taking the Nation's Economic Pulse In...

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