 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
Measuring Domestic Output and the Price Level
Chapter HighlightsCHAPTER 6- Gross domestic product (GDP), a basic measure of an economy's economic performance, is the market value
of all final goods and services produced within the borders of a nation in a year.
- Intermediate goods, non-production transactions, and second-hand sales are purposely excluded in calculating
GDP.
- GDP may be calculated by summing total expenditures on all final output or by summing the income derived
from the production of that output.
- By the expenditures approach, GDP is determined by adding consumer purchases of goods and services,
gross investment spending by businesses, government purchases, and net exports: GDP = C + Ig + G + Xn.
- Gross investment is divided into (a) replacement investment (required to maintain the nation's stock of capital
at its existing level), and (b) net investment (the net increase in the stock of capital). Positive net investment
is associated with an expanding production capacity; negative net investment, with a declining
production capacity.
- By the income approach, GDP is calculated as the sum of wages and salaries, dividends, interest, net income
of farmers, net income of non-farm unincorporated business (including rent), corporation income taxes,
undistributed corporation profits, and the two non-income charges (indirect taxes less subsidies and capital
consumption allowances).
- Other national income accounting measures are derived from the GDP. Net domestic income (NDI) is total
income earned by resource suppliers; it is found by subtracting indirect taxes and capital consumption
allowances from GDP. Personal income (PI) is the total income paid to households prior to any allowance
for personal taxes. Disposable income (DI) is personal income after personal taxes have been paid. DI measures
the amount of income households have available to consume or save.
- Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular
period by the price of the same market basket in a base period and multiplying the result (the quotient)
by 100. The GDP price index is used to adjust nominal GDP for inflation or deflation and thereby obtain
real GDP.
- Nominal (current-dollar) GDP measures each year's output valued in terms of the prices prevailing in that
year. Real (constant-dollar) GDP measures each year's output in terms of the prices that prevailed in a
selected base year. Because real GDP is adjusted for price-level changes, differences in real GDP are due
only to differences in production activity.
- The consumer price index (CPI) measures changes in the price of a market basket of goods and services purchased
by a typical urban consumer. Unlike the GDP price index, in which the weights of the goods change
annually with spending patterns, the CPI is a fixed-weight price index, meaning that each year the items in
the market basket remain the same as those in the base period (1992).
- GDP is a reasonably accurate and very useful indicator of a nation's economic performance, but it has its
limitations. It fails to account for non-market and illegal transactions, changes in leisure and in product quality,
the composition and distribution of output, and the environmental effects of production. The link
between GDP and well-being is tenuous.
|
|
2002 McGraw-Hill Higher Education