Basic Economy

MEASURING TOTAL OUTPUT

Output of each product is valued at its selling price.

GNP (Gross National Product)

GDP (Gross Domestic Product)

2 ways to measure the GNP:

1) Expenditure approach: spent in purchasing.

2) Income approach: income in producing.

The TOTAL EXPENDITURE made by household must equals the sum of INCOME RECEIVED by the various economic resources (rent+wages+interest+profits).

THE EXPENDITURE APPROACH

Made by household, business, various levels of government, and foreign consumers.

1. PERSONAL COMPSUNTION EXPENDITURES.

Amount expend by consumers for goods and services (purchases of consumer durable + purchases of nondurable).

2. GROSS PRIVATE DOMESTIC INVESTMENT.

All types of expenditures on “income-producing assets” (business expenditures for new factories and equipment) and “household expenditures” (new homes and major home improvements).

3. GOVERNMENT PURCHASES.

Purchases of all kinds of goods and services (purchases of government vehicles, office supplies, weapons, concrete for road, consulting service).

Transfer payments (welfare and Social Security) are no included.

4. NET EXPORTS = total exports – total imports.

THE INCOME APPROACH

There are 2 no income payment (indirect business taxes and capital consumption allowances).

Income received by the economic resources and the types of no income payments:

1. COMPENSATION OF EMPLOYEES.

Payroll taxes and employer contributions to health plans.

2. RENTAL INCOME

Income earned by household from the rental of property such as building and land.

3. NET INTEREST

Interest earned by household on the money they lend to businesses to finance inventories, build plant, and purchase new machinery.

4. CORPORATE PROFITS.

Before tax profit of corporations. 3 components:

a) Corporate profit tax liability-> profits used to pay federal and state taxes.

b) Dividends -> profits pay out to stockholders.

c) Retained earnings -> profits kept by businesses for reinvestment.

5. PROPIETOR’S INCOME

Income earned by unincorporated businesses such as proprietorship, partnerships, and cooperatives.

6. INDIRECT BUSINESSES TAXES (no income payment)

Sales taxes.

Excise taxes (impuesto al consumo)

Collected by businesses for government.

7. CAPITAL CONSUMPTION ALLOWANCES (no income payment)

Allowances for depreciation -> funds set aside for the eventual replacement of worn out (agotados) factories and equipment.

Every dollar spent on output must be received by someone as income or as a no income payment.

INTERPRETING GNP STATITICS.

A increase in GNP no always mean that we are better off. A decrease in GNP is not always a cause for concern and corrective action. We have to use the REAL GNP.

We want to know the value the output produced in 1980 at 1970 prices. We can use the Implicit Price Deflactor.

We want to compare the 1970 and 1980 GNP using 1970 as the base year. The price index for 1970 would be 100.

The price index for 1980 of 190, means the price has increased 90%. After this data, we can calculate the 1980 money GNP to real GNP for 1980.

REAL GNP for year Y = GNP in year Y / price index for year Y.

GNP 1970 = $993 billion

GNP 1980 = 2,692 billion

Index price 1980 (base 1970)

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