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CHAPTER 5 -- Part 1: NATIONAL-INCOME ACCOUNTING
You should know LO1 after reading this chapter.
What GDP measures and what doesn't.
Aggregate income is equal to aggregate output.
The national-accounting system is essential to tracking the economy's performance because it provides reams of data that government likes to tackle only those problems.
Politicians need to see their results.
The Great Depression of the 1930s taught us a lot about the need for better measures of economic performance.
Since they tend to be dull, there are questions.
If there were more anecdotes about factories closing, farms failing, and people selling apples on the streets, we wouldn't have to worry about measurement problems.
Nobody knew how the economy works or how badly it is doing until it is performing.
We don't have the ability to design policies for workers who have lost their jobs.
The measurement of aggregate eco markets relate to product markets.
Simon Kuznets, who received a Nobel Prize for his relate to production, was an economist during the 1930s.
It shows how government spending may affect economic outcomes.
The problem with finding a summary measure is that all of these things are part of our total output.
The amount of good or service produced each year won't solve our measurement problems.
The list would be both unwieldy and meaningless.
We couldn't add it up since it would be a variety of units.
We couldn't compare one year's output to another's.
Last year we produced 2 billion oranges, 2 million bicycles, and 700 rock concerts, whereas this year we produced 3 billion oranges, 4 million bicycles, and 600 rock concerts.
The answer isn't obvious with more of some goods, but less of others.
The price is the mechanism we use.
The price is used to calculate total output.
The problem of determining how much output was produced this year and last is not new.
There is no obvious way to answer the question in physical terms.
If there is a given time period.
A total of 1,400 million was produced last year and this year.
$700 million was spent on M E A S U R I N G M A C R O U T C O M E S concerts.
We can compare one year's output to another's.
The use of prices to value market output allows us to summarize output activity and compare output from one period to another.
The concept of GDP has recently been used in the U.S. national-income accounts.
GNP would include some output from an Apple computer factory in Singapore, but exclude some output from a Honda factory in Ohio.
The calculation of GNP became more complex in an increasingly global economy where factors of production and ownership move easily across international borders.
All output produced within a nation's borders regardless of who produces it is included in GDP.
Apple's output in Singapore is counted in Singapore's GDP, while Honda's cars are counted in America's GDP.
International comparisons of economic activity are aided by the geographic focus of GDP.
The value of America's GDP is three times larger than Japan's, according to the World View "Comparative Output" in Chapter 2.
The GDP was over $43,000.
The average GDP for the rest of the world's inhabitants was less than $10,000.
America is the richest country in the world.
Statistical comparisons of GDP are meaningless.
They convey differences in the way people live.
The World View looks at the realities of living in a poor nation compared to a rich nation.
People in low-income countries have little access to telephones, TVs, paved roads, or schools because of the disparity in per capita GDP.
People in rich countries die younger.
GDP is not a measure of what every citizen is getting.
Millions of people in the United States have access to more goods and services than our average per capita GDP.
The data on per capita incomes was the same in both countries.
Permission was granted by the International Bank for Reconstruction and Development.
Dramatic differences in the way people live are hidden behind dry statistical comparisons of per capita GDP.
A lot of deprivation is caused by low GDP per capita.
This may seem like a trivial point, but it isn't.
Huge quantities of output never make it to the market.
The homemaker who cleans, washes, gardens, shops, and cooks contributes to the output of goods and services.
Her efforts are not included in the calculation of GDP because she is not paid a market wage for these services.
We count the efforts of those workers who sell similar services in the marketplace.
This seeming contradiction is explained by the fact that homemaker's services aren't sold in the market and therefore have no value.
When we want to compare living standards between countries, the exclusion of homemakers' services from the GDP accounts is problematic.
Most women in the United States now work outside the home.
Because they're done by paid help, a lot of housework and child care that were previously excluded from GDP statistics are now included.
Our historical GDP figures may exaggerate improvements in our standard of living.
Homemaking services are not the only output excluded.
The services never get into the GDP accounts if a friend helps with homework.
If you engage the services of a paper-writing agency or hire a tutor, the transaction becomes part of GDP.
The problem is that we don't have a way to know how much output was produced until it is purchased.
Market activities that aren't reported to tax or census authorities are not captured in the GDP statistics.
Many people get paid off the books with unreported cash.
Tax avoidance and the need to hide illegal activities are what motivates the underground economy.
The value of reported market transactions are not included in GDP statistics.
Un reported transactions in the underground economy can't be counted and may distort the perception of economic activity.
The production is called a contribu 2.
Miller converts wheat to output.
Tax evasion on income earned in otherwise legal activities accounts for most of the underground economy.
Over two-thirds of underground income comes from legitimate wages, salaries, profits, interest, and pensions that aren't reported, according to the Internal Revenue Service.
In the service sector, unreported income is very common.
People who mow lawns, clean houses, paint walls, or provide child care services are likely to get paid in cash that isn't reported.
The underground income generated by drug dealers, prostitutes, or illegal gambling is more than the volume of mundane transactions.
Not every market transaction is included in the GDP statistics.
The production of goods and services typically involves a number of different stages.
Consider the production of a bagel.
To reach Einstein's or any other bagel store, the farmer must grow wheat, the baker must make bagels with it, and the miller must convert it to flour.
The table shows the chain of production.
Each of the four stages of production involves a separate market transaction.
The farmer sells to the baker, the baker sells to the bagel store, the baker sells to the consumer, and the bagel store sells to the consumer.
If we added up the separate value of each market transaction, we'd come to the conclusion that $1.75 of output had been produced.
Only one bagel has been produced, and it's worth 75 cents.
We should increase GDP by 75 cents.
Final goods are the goods produced at the end of the production sequence for use by consumers.
The easiest way to count final sales is only market transactions.
To know when we had reached the end of the process, we would have to know who purchased each good or service.
The calculation excludes any output produced in stages 1, 2, and 3 but not stage 4.
He does not contribute much to the market value of a product total output.
Each stage of the production process is represented by the $0.12 reflected in the price of his flour.
The value of final output can be determined by summing up the value added at each stage of production.
Imagine if prices doubled from one year to the next.
The price of oranges rose from $0.20 to $0.40, the price of bicycles went from $100 to $200, and the price of rock concerts went from $1 million to $2 million.
GDP would increase from 1,400 million to 2,800 million.
The prices of the goods shown in Table 5.1 have not changed.
We wouldn't want to say that our standard of living has improved because of price increases.
A measure of GDP that takes into account price-level changes is needed to distinguish increases in the quantity of goods and services from increases in their prices.
Table 5.1 prices were the same from one year to the next.
Interyear comparisons of output are easy when prices are constant.
The comparison becomes more complicated if prices double.
The value of fi prices doubled from last year to this year, this year's nominal GDP would rise to output produced in a given period, adjusted for changing $2,800 million.
The quantity of goods produced wouldn't be affected by these price increases.
At constant prices, GDP would remain at $1,400 million.
Real and nominal GDP are reported every year because the price level changes.
Real GDP is calculated by adjusting prices from year to year.
The GDP statistics for 2005 and 2006 can be found in Table 5.3.
The first row shows the increase inNominal GDP between 2005 and 2006 The 6.3 percent increase looks impressive.
Some of the gain was due to higher prices.
Row 3 shows that the price level rose.
The GDP comparison is adjusted by Row 4 in Table 5.3.
The nominal GDP was deflated by the 3.3 percent price increase.
The GDP in 2006 was $12,822 billion.
The time period in 2006 was only $366 billion, not the larger inflation-exaggerated amount in row 2.
In 2005, real and nominal GDP are the same because we're using the basis for index.
GDP increased by 5.
Average prices increased by 3.3 percent between 2005 and 2006 The price-level change is included in the index.
The figure is shown in a table.
When more distant years are compared, the difference between nominal and real GDP becomes critical.
Between 1933 and 2006 prices went up 1,300 percent.
Table 5.4 shows how such price-level changes can distort our views of how living standards have changed since the Great Depression.
We would compare GDP per capita in 2003 with GDP per capita in 1933.
The data made that comparison.
In 2003 the GDP was over $10 billion.
A per capita GDP of $37,760 was given by this larger GDP.
Our standard of living was 85 times higher in 2003 than it was in 1933.
GDP exaggerates our well-being.
Between 1933 and 2003 the increase was 1,300 percent.
In 2003 the cost of the goods and services you bought in 1933 was fourteen dollars.
We needed a lot more money in 2003 to purchase any combination of goods and services.
We have to adjust for the huge jump in prices because of GDP in 2003 with the real GDP of 1933.
With a population of
The reference year is 2000.
GDP increases faster than real GDP.
Figure 5.1 shows how GDP has changed over time.
The level of prices in 2000 is used to calculate real GDP.
The difference between real and nominal GDP is important in measuring the nation's economic health, but the procedure for making adjustments isn't perfect.
Relative prices change a lot over time.
The number of computers sold has increased by 20 to 25 percent a year.
The value of output produced in the past can be found on Dr. Ed Yardeni's Web site.
Real GDP is not expressed in terms of the prices prevailing in a base year when chain-weighted price adjustments are made.
All of the estimates of real GDP are based on the chain-weighted price index.
Some of the growth may come at the expense of future output.
Future production possibilities may shrink if we use up some of these resources to produce alternative combinations of this year's output.
In the production process, we use up plant and equipment.
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