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Chapter 8 Measuring Total Economic Activity 
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I. Gross domestic product (GDP)
   A. The sum of all the goods and services produced within an economic unit (country, state) within a period of time 
       (normally a year)
   B. Excludes non-productive transfers
       1. Stock market sales
       2. Working at home
       3. The "Underground Economy" (unreported taxable income)
   C. Two approaches to calculating GDP
       1. Expenditure approach
           a. GDP equals Personal Consumption plus Business Investment plus Government Spending plus Net Exports 
              (exports minus imports)
           b. GDP = C + I + G + XN
              
c. I is gross investment which is new capital and  replacement capital (depreciation).          
      2.
Income approach
          a. GDP equals Rent plus Wages plus Interest plus Profits plus Depreciation plus Indirect Business Taxes plus miscellaneous
          b. GDP = R + W + I + P + Acc. Dep. + Ind. Bus. Taxes + Misc.

II. National income accounts measure economic activity
     A. The highest figure calculated is Gross Domestic Product.                                                                                
     B. 2005 National Income Accounts (billions of dollars) from Bureau of Economic Analysis: National Economic Accounts

    12,487 Gross Domestic Product (GDP)                                                       
         508 Plus rest of world factor receipts of U.S. companies
         474 Minus rest of world factor payments to non-U.S. companies
    12,521 Gross National Product (GNP)
      1,574 Less capital consumption allowance (depreciation)
    10,947 Net National Product
           55  Less statistical discrepancy
     10,892 National Income (NI)
                Less 
      1,352  Corporate profits
         498  Net interest
         870  Contributions for social insurance
           80  Business transfer payments (net)
         848  Taxes on production and imports less subsidies
          -11 Current surplus on government enterprises
                Plus
      1,457 Personal interest income and Personal dividend income
      1,525 Personal government transfer payments to people
     10,238 Personal Income (PI)
       1,207  Personal Taxes 
       9,030 Disposable Personal Income (DPI)
       9,072 Less Consumption (C)
           -42 Saving (S)

 

corporations often pass on much of their tax burden

 

The Problem With the Corporate Tax
N. GREGORY MANKIW
NYT, June 1, 2008

US Bureau of Economic Analysis for an historical analysis of the National Income Accounts.

III. Interpreting national income account data
      A. Comparing data over time requires adjusting for inflation, population increases, and number of people working.
      B. National income accounts do not consider leisure time.
      C. Because measuring the quality of goods and services produced is subjective and therefore difficult, national income 
           accounting ignores
quality improvement. Some argue that because improvement is consistent over time, ignoring it 
           is not a problem. But the recent
increase in foreign competition may have increased the rate of quality improvement 
           and we may be substantially underestimating GDP.
      D. Positive and negative effects of economic activity upon the environment are not measured by national income accounts.

IV. Money vs. real GDP (taking inflation out of financial data)
      A. A Price Index measures price changes for a basket of commonly used goods over a period of years. 
          1. One year is chosen as a base year, set equal to 100 and years before and after are expressed as a percent
 of the base year. 
          2. For convenience all index calculations are multiplied by 100 allowing the percent sign to be dropped. 
          3. Two
important indexes are the Consumer Price Index (CPI) and the Producer Price Index (PPI) which respectively 
              measure the inflation associated with consumer and producer goods.
     B. An index can be used to determine whether someone's salary, a consumer good, and other items of interest have changed
          more or less than inflation.
         1. Nominal salary is salary measured in current dollars.
         2. Real salary is salary adjusted for inflation.
    C. This example uses actual consumer price changes and 1982 as the base year (PB). The item of interest could be 
         someone's salary,
the price of a new car, etc. (PC is price in current year).

Year Cost of a basket of goods Calculation of CPI
(PC/PB)x100
CPI Price of Item of Interest (x) Average Weekly Earnings1  x in 1982 dollars
(x/CPI)100
1980 $505 (505/592)100 85 $235.10 276.59
1981 $557 (557/592)100 94 $255.20 271.49
1982 Pb = $592 (592/592)100 100 $267.26 267.26
1983 $611 (611/592)100 103 $280.70 272.52
1984 $637 (637/592)100 108 $292.86 271.17
1Data is from page 360 of the 2000 Economic Report Of The President
Analysis: After adjusting for inflation, it is apparent the item of interest (salary) did not keep up with inflation.
This person was making one hundred and fifty-three 1982 dollars less in 1984 than they were making in 1980.

 

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Chapter 8 Class Discussion Questions Table of Contents
Chapter 8 Homework Questions Economics Internet Library

Current-Dollar and "Real" Gross Domestic Product 05/27/04
(Seasonally adjusted annual rates)  
               
Annual   Quarterly  
               
  GDP in billions of current dollars GDP in billions of chained 2000 dollars     GDP in billions of current dollars GDP in billions of chained 2000 dollars  
               
1929 103.6 865.2   1947q1 237.2 1,570.5  
1930 91.2 790.7   1947q2 240.5 1,568.7  
1931 76.5 739.9   1947q3 244.6 1,568.0  
1932 58.7 643.7   1947q4 254.4 1,590.9  
1933 56.4 635.5   1948q1 260.4 1,616.1  
1934 66.0 704.2   1948q2 267.3 1,644.6  
1935 73.3 766.9   1948q3 273.9 1,654.1  
1936 83.8 866.6   1948q4 275.2 1,658.0  
1937 91.9 911.1   1949q1 270.0 1,633.2  
1938 86.1 879.7   1949q2 266.2 1,628.4  
1939 92.2 950.7   1949q3 267.7 1,646.7  
1940 101.4 1,034.1   1949q4 265.2 1,629.9  
1941 126.7 1,211.1   1950q1 275.2 1,696.8  
1942 161.9 1,435.4   1950q2 284.6 1,747.3  
1943 198.6 1,670.9   1950q3 302.0 1,815.8  
1944 219.8 1,806.5   1950q4 313.4 1,848.9  
1945 223.1 1,786.3   1951q1 329.0 1,871.3  
1946 222.3 1,589.4   1951q2 336.7 1,903.1  
1947 244.2 1,574.5   1951q3 343.6 1,941.1  
1948 269.2 1,643.2   1951q4 348.0 1,944.4  
1949 267.3 1,634.6   1952q1 351.3 1,964.7  
1950 293.8 1,777.3   1952q2 352.2 1,966.0  
1951 339.3 1,915.0   1952q3 358.5 1,978.8  
1952 358.3 1,988.3   1952q4 371.4 2,043.8  
1953 379.4 2,079.5   1953q1 378.4 2,082.3  
1954 380.4 2,065.4   1953q2 382.0 2,098.1  
1955 414.8 2,212.8   1953q3 381.1 2,085.4  
1956 437.5 2,255.8   1953q4 375.9 2,052.5  
1957 461.1 2,301.1   1954q1 375.3 2,042.4  
1958 467.2 2,279.2   1954q2 376.0 2,044.3  
1959 506.6 2,441.3   1954q3 380.8 2,066.9  
1960 526.4 2,501.8   1954q4 389.5 2,107.8  
1961 544.7 2,560.0   1955q1 402.6 2,168.5  
1962 585.6 2,715.2   1955q2 410.9 2,204.0  
1963 617.7 2,834.0   1955q3 419.5 2,233.4  
1964 663.6 2,998.6   1955q4 426.0 2,245.3  
1965 719.1 3,191.1   1956q1 428.3 2,234.8  
1966 787.8 3,399.1   1956q2 434.2 2,252.5  
1967 832.6 3,484.6   1956q3 439.3 2,249.8  
1968 910.0 3,652.7   1956q4 448.1 2,286.5  
1969 984.6 3,765.4   1957q1 457.2 2,300.3  
1970 1,038.5 3,771.9   1957q2 459.2 2,294.6  
1971 1,127.1 3,898.6   1957q3 466.4 2,317.0  
1972 1,238.3 4,105.0   1957q4 461.5 2,292.5  
1973 1,382.7 4,341.5   1958q1 454.0 2,230.2  
1974 1,500.0 4,319.6   1958q2 458.1 2,243.4  
1975 1,638.3 4,311.2   1958q3 471.7 2,295.2  
1976 1,825.3 4,540.9   1958q4 485.0 2,348.0  
1977 2,030.9 4,750.5   1959q1 495.4 2,392.9  
1978 2,294.7 5,015.0   1959q2 508.4 2,455.8  
1979 2,563.3 5,173.4   1959q3 509.3 2,453.9  
1980 2,789.5 5,161.7   1959q4 513.2 2,462.6  
1981 3,128.4 5,291.7   1960q1 526.9 2,517.4  
1982 3,255.0 5,189.3   1960q2 526.1 2,504.8  
1983 3,536.7 5,423.8   1960q3 528.9 2,508.7  
1984 3,933.2 5,813.6   1960q4 523.6 2,476.2  
1985 4,220.3 6,053.7   1961q1 527.9 2,491.2  
1986 4,462.8 6,263.6   1961q2 539.0 2,538.0  
1987 4,739.5 6,475.1   1961q3 549.4 2,579.1  
1988 5,103.8 6,742.7   1961q4 562.5 2,631.8  
1989 5,484.4 6,981.4   1962q1 576.0 2,679.1  
1990 5,803.1 7,112.5   1962q2 583.2 2,708.4  
1991 5,995.9 7,100.5   1962q3 590.0 2,733.3  
1992 6,337.7 7,336.6   1962q4 593.3 2,740.0  
1993 6,657.4 7,532.7   1963q1 602.4 2,775.9  
1994 7,072.2 7,835.5   1963q2 611.2 2,810.6  
1995 7,397.7 8,031.7   1963q3 623.9 2,863.5  
1996 7,816.9 8,328.9   1963q4 633.5 2,885.8  
1997 8,304.3 8,703.5   1964q1 649.6 2,950.5  
1998 8,747.0 9,066.9   1964q2 658.8 2,984.8  
1999 9,268.4 9,470.3   1964q3 670.5 3,025.5  
2000 9,817.0 9,817.0   1964q4 675.6 3,033.6  
2001 10,100.8 9,866.6   1965q1 695.7 3,108.2  
2002 10,480.8 10,083.0   1965q2 708.1 3,150.2  
2003 10,987.9 10,398.0   1965q3 725.2 3,214.1  
        1965q4 747.5 3,291.8  
        1966q1 770.8 3,372.3  
        1966q2 779.9 3,384.0  
        1966q3 793.4 3,406.3  
        1966q4 807.1 3,433.7  
        1967q1 817.9 3,464.1  
        1967q2 822.5 3,464.3  
        1967q3 837.1 3,491.8  
        1967q4 852.8 3,518.2  
        1968q1 879.9 3,590.7  
        1968q2 904.2 3,651.6  
        1968q3 919.4 3,676.5  
        1968q4 936.3 3,692.0  
        1969q1 961.0 3,750.2  
        1969q2 976.3 3,760.9  
        1969q3 996.5 3,784.2  
        1969q4 1,004.6 3,766.3  
        1970q1 1,017.3 3,760.0  
        1970q2 1,033.2 3,767.1  
        1970q3 1,050.7 3,800.5  
        1970q4 1,052.9 3,759.8  
        1971q1 1,098.3 3,864.1  
        1971q2 1,119.1 3,885.9  
        1971q3 1,139.3 3,916.7  
        1971q4 1,151.7 3,927.9  
        1972q1 1,190.6 3,997.7  
        1972q2 1,225.9 4,092.1  
        1972q3 1,249.7 4,131.1  
        1972q4 1,287.0 4,198.7  
        1973q1 1,335.5 4,305.3  
        1973q2 1,371.9 4,355.1  
        1973q3 1,391.2 4,331.9  
        1973q4 1,432.3 4,373.3  
        1974q1 1,447.0 4,335.4  
        1974q2 1,485.3 4,347.9  
        1974q3 1,514.2 4,305.8  
        1974q4 1,553.4 4,288.9  
        1975q1 1,570.0 4,237.6  
        1975q2 1,605.6 4,268.6  
        1975q3 1,663.1 4,340.9  
        1975q4 1,714.6 4,397.8  
        1976q1 1,772.6 4,496.8  
        1976q2 1,804.9 4,530.3  
        1976q3 1,838.3 4,552.0  
        1976q4 1,885.3 4,584.6  
        1977q1 1,939.3 4,640.0  
        1977q2 2,006.0 4,731.1  
        1977q3 2,066.8 4,815.8  
        1977q4 2,111.6 4,815.3  
        1978q1 2,150.0 4,830.8  
        1978q2 2,275.6 5,021.2  
        1978q3 2,336.2 5,070.7  
        1978q4 2,417.0 5,137.4  
        1979q1 2,464.4 5,147.4  
        1979q2 2,527.6 5,152.3  
        1979q3 2,600.7 5,189.4  
        1979q4 2,660.5 5,204.7  
        1980q1 2,725.3 5,221.3  
        1980q2 2,729.3 5,115.9  
        1980q3 2,786.6 5,107.4  
        1980q4 2,916.9 5,202.1  
        1981q1 3,052.7 5,307.5  
        1981q2 3,085.9 5,266.1  
        1981q3 3,178.7 5,329.8  
        1981q4 3,196.4 5,263.4  
        1982q1 3,186.8 5,177.1  
        1982q2 3,242.7 5,204.9  
        1982q3 3,276.2 5,185.2  
        1982q4 3,314.4 5,189.8  
        1983q1 3,382.9 5,253.8  
        1983q2 3,484.1 5,372.3  
        1983q3 3,589.3 5,478.4  
        1983q4 3,690.4 5,590.5  
        1984q1 3,809.6 5,699.8  
        1984q2 3,908.6 5,797.9  
        1984q3 3,978.2 5,854.3  
        1984q4 4,036.3 5,902.4  
        1985q1 4,119.5 5,956.9  
        1985q2 4,178.4 6,007.8  
        1985q3 4,261.3 6,101.7  
        1985q4 4,321.8 6,148.6  
        1986q1 4,385.6 6,207.4  
        1986q2 4,425.7 6,232.0  
        1986q3 4,493.9 6,291.7  
        1986q4 4,546.1 6,323.4  
        1987q1 4,613.8 6,365.0  
        1987q2 4,690.0 6,435.0  
        1987q3 4,767.8 6,493.4  
        1987q4 4,886.3 6,606.8  
        1988q1 4,951.9 6,639.1  
        1988q2 5,062.8 6,723.5  
        1988q3 5,146.6 6,759.4  
        1988q4 5,253.7 6,848.6  
        1989q1 5,367.1 6,918.1  
        1989q2 5,454.1 6,963.5  
        1989q3 5,531.9 7,013.1  
        1989q4 5,584.3 7,030.9  
        1990q1 5,716.4 7,112.1  
        1990q2 5,797.7 7,130.3  
        1990q3 5,849.4 7,130.8  
        1990q4 5,848.8 7,076.9  
        1991q1 5,888.0 7,040.8  
        1991q2 5,964.3 7,086.5  
        1991q3 6,035.6 7,120.7  
        1991q4 6,095.8 7,154.1  
        1992q1 6,196.1 7,228.2  
        1992q2 6,290.1 7,297.9