XIV. Gross Domestic Product

A. Measuring the Nation's Output

1. Gross Domestic Product: Single most important measure of overall economic performance is (GDP)-that dollar amount of all final goods and services produced within a countries national border in a year.

a. Measurement: All final goods and services produces in a 12-month period are multiplied by their prices to get the dollar values of production.

1. Structures: includes residential housing, apartments and buildings for commercial purposes.

b. Sampling and Survey Methods: This method is used to estimate both the quantity and the respective prices of the individual products.

c. Intermediate Products: Products used in making other products already counted in GDP.

d. Second Hand Sales: The sales of used goods.

e. Production Within National Borders: The total production within the nationís borders, regardless of who owns the resources.

2. Other Considerations: factors that reduce its reliability.

a. Reporting Delays: the reporting process includes so much data that GDP estimates are made only quarterly, or every 3 months.

b. Composition of Output

c. Quality of Life

d. Exclusion of Non market Activities

1. Non-market transactions: transactions that do not take place in the market.

e. Illegal Activities

3. Importance of GDP Analysis

a. Economic Performance

b. Economic Health

B. Measuring the Nationís Income

1. The concept of Aggregate Income

2. Five Measures of Income

a. Gross National Product-The largest measure of an economyís total income. GNP is the dollar value of all final goods, services, and structures produced in one year.

b. Net National Product-The second largest measure of the nationís total income that is the GNP minus capital consumption allowances.

1.Capital Consumption Allowance-Depreciation and other deterioration of the capital stock that takes place as a result of production.

c. National Income-Net national product minus all taxes, except the corporate profits tax, that businesses may pay as a cost of doing business.

1. Indirect Business Taxes-Excise taxes, property taxes, licensing fees, etc.

d. Personal Income-Total amount of income going to consumers before individual income taxes are subtracted.

1. Retained earnings or Undistributed Corporate Profits-Profits corporations keep to reinvest in new plants and equipment.

e. Disposable Personal Income-Total amount of income the consumer sector has at its disposal after personal income taxes.

3. Economic Sectors and Circular Flows

a. Consumer Sector

1. Household-People who occupy living quarters.

2. Unrelated Individual-Lives alone or with someone non-related

3. Family-Group of two or more people related by blood, marriage, etc.

b. Investment Sector-Made up of proprietorships, partnerships, and corporations.

c. Government Sector- Environment, or public sector.

d. Foreign Sector-Includes all consumers and products outside of U.S.

4. The Output-Expenditure Model-A macroeconomic model used to show aggregate demanded by the consumer, investment, government, and foreign sectors.

a. Personal Consumption Expenditures-Groceries, rent, books, automobiles, clothes, etc.

b. Gross Private Domestic Investment-Total value of capital goods created in the economy during the year.

c. Net Exports of Goods and Services-Difference between the U.S. exports and imports.

C. GDP and Changes in the Price Level

1. Constructing a Price Index

a. Price Index is conducted to reduce the distortions of inflation

b. Constructing a Price Index:

1. Base year-serves as the basis of comparison

2. Market basket of goods are selected (captures overall trend in prices).

3. Price of each item in market basket is recorded and totaled

2. Major Price Indices

a. Consumer Price Index CPI-reports on price changes for about 90,000 items in 364 categories.

b. Producer Price Index (wholesale price index)-measures price changes received by domestic producers for their output.

c. Implicit GDP Price Deflator-shows the average level of prices for all goods/services in the economy.

3. Real vs. Current GDP-not adjusted GDP is current/normal GDP; distortions of inflation have been removed its real GDP/GDP in constant dollars.

a. Converting GDP to Real Dollars-

Real GDP= GDP in current dollars/GDP deflator x100

b. Comparing GDP in Different Years

1.Main reason for converting nominal dollar amounts into real dollars is to make comparisons over time.