The data of Macroeconomics
Components of GDP are:
1. Consumption
2. Investment
3. Government Purchases and National Defense
4. Exports - Imports
-1-
In 2005 the US GDP =12.5 Trillion, to simplify it let’s compute the GDP per Capita.
GDP per Capita = = $42,123
GDP per Capita measures the amount of expenditure per average American.
-2-
Components of GDP
How the GDP is used?
(1) About 2/3 of GDP ($29,505/person) was spent on consumption.
(2) Investment = $7,095
(3) Government purchases= $7,978 per person, of which $1,981was spent by the federal government on National Defense.
(4) The average American bought goods and services imported from abroad and produce goods that were exported to other nations. (Net Exports= Exports – Imports). Net exports can take positive or negative sign.
When exports exceed imports it takes the positive sign.
When imports exceed exports it takes the negative sign.
(5) The average American earned less from selling to foreigners than he spent on foreign goods. This implies that he imports more than he exports.
The average American must be financed either by:
a) Taking out loans from foreigners.
b) Selling them some of his assets.
The average American borrowed $2,452 from abroad in 2005.
If the reverse occurred, this means that Net Exports has a positive sign, the average American must…
a) lend loans, or
b) Buy assets, for example, investing in the German or the Japanese treasury bills.
-3-
Other Measures of Income
We add or subtract some variable to GDP.
(1)
Gross National Product (GNP)
· We add payments of factor income, such as (wages, profits, rent …) that comes from abroad.
Components of GDP are:
1. Consumption
2. Investment
3. Government Purchases and National Defense
4. Exports - Imports
-1-
In 2005 the US GDP =12.5 Trillion, to simplify it let’s compute the GDP per Capita.
GDP per Capita = = $42,123
GDP per Capita measures the amount of expenditure per average American.
-2-
Components of GDP
How the GDP is used?
(1) About 2/3 of GDP ($29,505/person) was spent on consumption.
(2) Investment = $7,095
(3) Government purchases= $7,978 per person, of which $1,981was spent by the federal government on National Defense.
(4) The average American bought goods and services imported from abroad and produce goods that were exported to other nations. (Net Exports= Exports – Imports). Net exports can take positive or negative sign.
When exports exceed imports it takes the positive sign.
When imports exceed exports it takes the negative sign.
(5) The average American earned less from selling to foreigners than he spent on foreign goods. This implies that he imports more than he exports.
The average American must be financed either by:
a) Taking out loans from foreigners.
b) Selling them some of his assets.
The average American borrowed $2,452 from abroad in 2005.
If the reverse occurred, this means that Net Exports has a positive sign, the average American must…
a) lend loans, or
b) Buy assets, for example, investing in the German or the Japanese treasury bills.
-3-
Other Measures of Income
We add or subtract some variable to GDP.
(1)
Gross National Product (GNP)
· We add payments of factor income, such as (wages, profits, rent …) that comes from abroad.
· We subtract payments of factor income that go to the rest of the world, because they do not have the American nationality for example if we are in the US.
· Therefore, GNP = GDP + factor income from abroad – factor income to abroad.
In the US, payments of factor income from abroad approximately equal payments of factor income to abroad.
To Sum up,
· GDP measures the total income produced domestically no matter who earned it residents or foreigners.
· GNP measures the total income earned by residents no matter the place where they earned it.
(2)
EXAMPLE
The difference between GDP & GNP
A Japanese citizen lives in the US, owns an apartment building…,
· The rental income he receives is a part of the US GDP, because it is earned in the US.
· It is not a part of the US GNP because the Japanese do not have the American nationality. It is a factor payment to abroadNet National Product (NNP)
We subtract the Depreciation of Capital; which is the amount of the economy’s stock of plants, equipments, residential structure that wears out during the year.
Thus,
NNP = GNP - Depreciation of Capital
Depreciation is:
· Consumption of fixed capital, and;
· The Cost of producing the output of the economy.
(3) National Income
We subtract the indirect business taxes such as the “sales taxes” because they make a wedge between:
- The prices the consumer pay for goods, and
- The prices the firms receive.
This tax is not revenue to a business firm, because the government takes it back from firms.
v The rationale of subtracting these taxes is that firms do not receive it. They are not a part of the National Income. Thus,
National Income = Net National Product – Indirect Business Taxes. Or,
NI = GNP – Depreciation of Capital – Indirect Business Taxes.
v National Income Accounts divide the National Income into five components depending on the way the income is earned:
1. Consumption of employees = wages and benefits earned by workers.
2. Proprietor income = the non-corporate business such as the small firms.
3. Rental income that the landlords receive.
4. Corporate profits = income of corporations after payments to their workers.
5. Net Interest = the interest domestic firms pay – the interest they receive + the interest earned from foreigners.
(4) Personal Income
Personal income is the amount of income that households and non-corporate business receives.
We need to make three adjustments to move from National Income to Personal Income.
Adjustment No.1
We reduce the National Income by the amounts that corporations earn but do not pay out which are:
a. Retaining earnings, and
b. The taxes they pay to the government.
To do so, we subtract the corporate profits that consists of: (Corporate taxes + Dividends + Retained Earnings), then we add Dividends.
Adjustment No.2
We increase national income by the net amount that government pays as transfer payment.
Net Government Transfers = Government Transfers to individuals – Social Insurance contributions paid to the government
Adjustment No.3
We add personal interest incomeWe include the interest of the households rather than the interest the business pay.
We subtract government interest
We add the Difference
The difference = Net Interest
We add the difference between them because the interest on the government debt is part of the interest the households earn, but is not part of the interest the households pay out.
Summary of the Adjustments that should be done to the National Income to transfer it to Personal Income:
Adjustment No.1
Reducing National Income by subtracting the amounts that corporations earn but do not pay out: (1) Retaining Earnings, (2) the taxes they pay to the government.
To do so,
· Subtract corporate profits
· Add Dividends
Adjustment No. 3
Net Interest = personal interest – government interest
Adjustment No.2
Net Government transfer =
Government transfers to individuals – social insurance corporations.
Therefore,
Personal Income = National Income
- Corporate profits
+ Dividends
+ Government Transfers to individuals
- Social insurance contributions
- Net Interest
+ Personal interest income
(5) Disposable Income
Disposable income is the amount households and non-corporate business have available to spend after satisfying their tax obligations.
We subtract:
· Personal Tax payment
· Certain non-tax payments to the government
Disposable Income = Personal Income – (Personal Taxes and non-tax payment)
v Seasonally Adjusted GDP, the data of GDP and GNP are adjusted to remove the regular seasonal fluctuations.
-4-
Measuring the Cost of Living
The cost of living can be measured by using:
1. The Consumer Price Index (CPI)
It is the prices of the basket of goods and services relative to the price of the same basket in some base year.
ü How consumers measure CPI before using it to measure the cost of living?
- CPI is the overall level of prices.
- Inflation is the increase in the overall level of prices.
How economists measure changes in the cost of living?
o By constructing a CPI, collecting the prices of thousands of goods and services
o Turning the prices of many goods and services into a single index measuring the overall level of prices.
o We compute an average of all prices this approach will treat all goods and services equally.
o We weigh different items by computing a basket of goods and services purchased by a typical consumer.
Summary
ü GDP consists of consumption, investment, government purchases and National Defense, Net Exports = Exports – imports
ü If net exports has a negative sign finance must be made by either loaning from foreigners, or selling the government assets.
ü GNP = GDP + Payment of income factors from abroad – payments of income factors to abroad.
ü Net National Product = GNP – Depreciation of Capital.
ü National Income = NNP – Indirect Business Taxes
ü Personal Income = National Income
plus Corporate Profits
minus Dividends
plus Transfer payment to individual
minus Social Insurance contributions
plus Personal Interest Income
minus Government interest
ü Disposable Income is the income available to households and non-corporate firms to spend after satisfying their tax obligations. = personal income – (personal tax & non-tax payment)
ü Seasonally adjusted GDP to remove the regular seasonal fluctuations.
ü Consumer Price Index is used to measure the cost of living by calculating weaighted average prices of differenet goods and services in one pasket relative to the prices of the same basket in some base year.
· Therefore, GNP = GDP + factor income from abroad – factor income to abroad.
In the US, payments of factor income from abroad approximately equal payments of factor income to abroad.
To Sum up,
· GDP measures the total income produced domestically no matter who earned it residents or foreigners.
· GNP measures the total income earned by residents no matter the place where they earned it.
(2)
EXAMPLE
The difference between GDP & GNP
A Japanese citizen lives in the US, owns an apartment building…,
· The rental income he receives is a part of the US GDP, because it is earned in the US.
· It is not a part of the US GNP because the Japanese do not have the American nationality. It is a factor payment to abroadNet National Product (NNP)
We subtract the Depreciation of Capital; which is the amount of the economy’s stock of plants, equipments, residential structure that wears out during the year.
Thus,
NNP = GNP - Depreciation of Capital
Depreciation is:
· Consumption of fixed capital, and;
· The Cost of producing the output of the economy.
(3) National Income
We subtract the indirect business taxes such as the “sales taxes” because they make a wedge between:
- The prices the consumer pay for goods, and
- The prices the firms receive.
This tax is not revenue to a business firm, because the government takes it back from firms.
v The rationale of subtracting these taxes is that firms do not receive it. They are not a part of the National Income. Thus,
National Income = Net National Product – Indirect Business Taxes. Or,
NI = GNP – Depreciation of Capital – Indirect Business Taxes.
v National Income Accounts divide the National Income into five components depending on the way the income is earned:
1. Consumption of employees = wages and benefits earned by workers.
2. Proprietor income = the non-corporate business such as the small firms.
3. Rental income that the landlords receive.
4. Corporate profits = income of corporations after payments to their workers.
5. Net Interest = the interest domestic firms pay – the interest they receive + the interest earned from foreigners.
(4) Personal Income
Personal income is the amount of income that households and non-corporate business receives.
We need to make three adjustments to move from National Income to Personal Income.
Adjustment No.1
We reduce the National Income by the amounts that corporations earn but do not pay out which are:
a. Retaining earnings, and
b. The taxes they pay to the government.
To do so, we subtract the corporate profits that consists of: (Corporate taxes + Dividends + Retained Earnings), then we add Dividends.
Adjustment No.2
We increase national income by the net amount that government pays as transfer payment.
Net Government Transfers = Government Transfers to individuals – Social Insurance contributions paid to the government
Adjustment No.3
We add personal interest incomeWe include the interest of the households rather than the interest the business pay.
We subtract government interest
We add the Difference
The difference = Net Interest
We add the difference between them because the interest on the government debt is part of the interest the households earn, but is not part of the interest the households pay out.
Summary of the Adjustments that should be done to the National Income to transfer it to Personal Income:
Adjustment No.1
Reducing National Income by subtracting the amounts that corporations earn but do not pay out: (1) Retaining Earnings, (2) the taxes they pay to the government.
To do so,
· Subtract corporate profits
· Add Dividends
Adjustment No. 3
Net Interest = personal interest – government interest
Adjustment No.2
Net Government transfer =
Government transfers to individuals – social insurance corporations.
Therefore,
Personal Income = National Income
- Corporate profits
+ Dividends
+ Government Transfers to individuals
- Social insurance contributions
- Net Interest
+ Personal interest income
(5) Disposable Income
Disposable income is the amount households and non-corporate business have available to spend after satisfying their tax obligations.
We subtract:
· Personal Tax payment
· Certain non-tax payments to the government
Disposable Income = Personal Income – (Personal Taxes and non-tax payment)
v Seasonally Adjusted GDP, the data of GDP and GNP are adjusted to remove the regular seasonal fluctuations.
-4-
Measuring the Cost of Living
The cost of living can be measured by using:
1. The Consumer Price Index (CPI)
It is the prices of the basket of goods and services relative to the price of the same basket in some base year.
ü How consumers measure CPI before using it to measure the cost of living?
- CPI is the overall level of prices.
- Inflation is the increase in the overall level of prices.
How economists measure changes in the cost of living?
o By constructing a CPI, collecting the prices of thousands of goods and services
o Turning the prices of many goods and services into a single index measuring the overall level of prices.
o We compute an average of all prices this approach will treat all goods and services equally.
o We weigh different items by computing a basket of goods and services purchased by a typical consumer.
Summary
ü GDP consists of consumption, investment, government purchases and National Defense, Net Exports = Exports – imports
ü If net exports has a negative sign finance must be made by either loaning from foreigners, or selling the government assets.
ü GNP = GDP + Payment of income factors from abroad – payments of income factors to abroad.
ü Net National Product = GNP – Depreciation of Capital.
ü National Income = NNP – Indirect Business Taxes
ü Personal Income = National Income
plus Corporate Profits
minus Dividends
plus Transfer payment to individual
minus Social Insurance contributions
plus Personal Interest Income
minus Government interest
ü Disposable Income is the income available to households and non-corporate firms to spend after satisfying their tax obligations. = personal income – (personal tax & non-tax payment)
ü Seasonally adjusted GDP to remove the regular seasonal fluctuations.
ü Consumer Price Index is used to measure the cost of living by calculating weaighted average prices of differenet goods and services in one pasket relative to the prices of the same basket in some base year.
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