Principles of Microeconomics Chapter 6 Measuring Total Output and Income

Chapter Measuring Total Output and Income Start Up The Lockup It is early morning when a senior officials enter the room at the Commerce Department in Washington . Once inside , they will have no communication with the outside world until they have completed their work later that day . They will have no telephone , no computer links . They will be able to slip out to an adjoining restroom , but only in pairs . It is no wonder the room is called the The Lockup produces one of the most important indicators of economic activity we have the official estimate of the value of the economy total output , known as its gross domestic product ( When the team has finished its computations , the results will be placed in a sealed envelope . A government messenger will hand carry the envelope to the Executive Office Building and deliver it to a senior adviser to the president of the United States . The adviser will examine its contents , then carry it across the street to the White House and give it to the president . The senior officials who meet in secret to compute are not spies they are economists . The adviser who delivers the estimate to the president is the chairman of the Council of Economic Advisers . The elaborate precautions for secrecy do not end there . At the next morning , journalists from all over the world will gather in an electronically sealed auditorium at the Commerce Department . There they will be given the figure and related economic indicators , along with an explanation . The reporters will have an hour to prepare their reports , but they will not be able to communicate with anyone else until an official throws the switch at . At that instant their computers will connect to their news services , and they will be able to file their reports . These will be major stories on the Internet and in the next editions of the nation newspapers the estimate of the previous quarter will be one of the lead items on television and radio news broadcasts that day . The clandestine preparations for the release of quarterly figures reflect the importance of this indicator . The estimate of provides the best available reading of performance . It will affect government policy , and it will influence millions of decisions in the private sector . Prior knowledge of the estimate could be used to anticipate the response in the stock and bond markets , so great care is taken that only a handful of trusted officials have access to the information until it is officially released . The estimate took on huge significance in the fall of 2008 as the United States and much of the rest of the world went through the wrenching experience of the worst financial crisis since the Great Depression of the 19305 . The expectation that the financial crisis would lead to an economic collapse was widespread , and the quarterly announcements of figures were more anxiously awaited than ever . The primary measure of the ups and downs of economic business real . 185

Principles of 186 When an economy output is rising , the economy creates more jobs , more income , and more opportunities for people . In the long run , an economy output and income , relative to its population , determine the material standard of living of its people . Clearly is an important indicator of performance . It is the topic we will consider in this chapter . We will learn that can be measured either in terms of the total value of output produced or as the total value of income generated in producing that output . We will begin with an examination of measures of in terms of output . Our initial focus will be on nominal the value of total output measured in current prices . We will turn to real measure of output that has been adjusted for price level in the chapter . We will refer to nominal simply as . When we discuss the real value of the measure , we will call it real .

Measuring Total Output Learning Objectives . Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model . Distinguish between measuring as the sum of the values of final goods and services and as the sum of values added at each stage of production . Distinguish between gross domestic product and gross national product . An economy produces a array of goods and services every year . For example , Domino Pizza produces hundreds of millions of pizzas . The United States Steel Corporation , the nation largest steel company , produces tens of millions of tons of steel . A small logging company in Colorado produces a couple million board feet of lumber . A university football team draws more than half a million fans to its home games . A pediatric nurse in Los Angeles delivers hundreds of babies and takes care of several hundred additional patients . A list of all the goods and services an economy produces in any year would be endless . kind of year is the year we are looking at ?

We would not get very far trying to wade through a list of all the goods and services produced that year . It is helpful to have instead a single number that measures total output in the economy that number is . The Components of We can divide the goods and services produced during any period into four broad components , based on who buys them . These components of are personal consumption ( gross private domestic investment ( I ) government purchases ( and net exports ( Thus Equation consumption ( private investment ( I ) government purchases ( net ( OI We will examine each of these components , and we will see how each fits into the pattern of 187

Principles of 188 activity . Before we begin , it will be helpful to distinguish between two types of variables stocks and flows . A variable is a variable that is measured over a specific period of time . A stock variable is a variable that is independent of time . Income is an example of a flow variable . To say one income is , for example , is meaningless without a time dimension . Is it per hour ?

Per day ?

Per week ?

Per month ?

Until we know the time period , we have no idea what the income figure means . The balance in a checking account is an example of a stock variable . When we learn that the balance in a checking account is , we know precisely what that means we do not need a time dimension . We will see that stock and flow variables play very different roles in analysis . Personal Consumption Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period . Purchases by households of groceries , services , clothing , and are counted as consumption . The production of consumer goods and services accounts for about 70 of total output . Because consumption is such a large part of , economists seeking to understand the of must pay special attention to the of consumption . In a later chapter we will explore these and the impact of consumption on economic activity . Personal consumption represents a demand for goods and services placed on firms by households . In the chapter on demand and supply , we saw how this demand could be presented in a circular flow model of the economy . Figure Personal Consumption in the Circular Flow presents a circular flow model for an economy that produces only personal consumption goods and services . We will add the other components of to the circular flow as we discuss them . Spending for these goods flows from households to firms it is the arrow labeled Personal Firms produce these goods and services using factors of production labor , capital , and natural resources . These factors are ultimately owned by households . The production of goods and services thus generates income to households we see this income as the flow from firms to households labeled Factor incomes in the exhibit . Personal Consumption the Circular Flow

189 Author removed at request of original publisher Personal consumption Consumer goods and services Firms Households Factors of production ( labor , capital , and natural resources ) Factor incomes ( wages , interest , and rent ) Personal spending flaws . In . consumer goods and services from firms In households . To the goods and services . employ factors of production owned by . There is thus a flaw of factor services households to firms . and a of payments of factor incomes to . In exchange for payments that flow from households to firms , there is a of consumer goods and services from firms to households . This is shown in Figure Personal Consumption in the Circular Flow as an arrow going from firms to households . When you buy a soda , for example , your payment to the store is part of the flow of personal consumption the soda is part of the flow of consumer goods and services that goes from the store to a . Similarly , the lower arrow in Figure Personal Consumption in the Circular Flow shows the flow of factors of , capital , and natural households to firms . If you work for a firm , your labor is part of this flow . The wages you receive are part of the factor incomes that flow from firms to households . There is a key difference in our interpretation of the circular picture in Figure Personal Consumption in the Circular Flow from our analysis of the same model in the demand and supply chapter . There , our focus was , which examines individual units of the economy . In thinking about the flow of consumption spending from households to firms , we emphasized demand and supply in particular for such things as blue jeans , haircuts , and apartments . In thinking about the flow of income payments from firms to households , we focused on the demand and supply for particular factors of production , such as textile workers , barbers , and apartment buildings . Because our

Principles of 190 focus now is , the study of of economic activity , we will think in terms of the total of personal consumption and the total of payments to households . Private Investment Gross private domestic investment is the value of all goods produced during a period for use in the of other goods and services . Like personal consumption , gross private domestic investment is a flow variable . It is often simply referred to as private A hammer produced for a carpenter is private investment . A printing press produced for a magazine publisher is private investment , as is a system produced for a manufacturing firm . Capital includes all the goods that have been for use in producing other goods it is a stock variable . Private investment is a flow variable that adds to the stock of capital during a period . Heads Up ! The term investment can generate confusion . In everyday conversation , we use the term investment to refer to uses of money to earn income . We say we have invested in a stock or invested in a bond . Economists , however , restrict investment to activities that increase the economy stock of capital . The purchase of a share of stock does not add to the capital stock it is not investment in the economic meaning of the word . We refer to the exchange of financial assets , such as stocks or bonds , as financial investment to distinguish it from the creation of capital that occurs as the result of investment . Only when new capital is produced does investment occur . Confusing the economic concept of private investment with the concept of financial investment can cause misunderstanding of the way in which key components of the economy relate to one another . Gross private domestic investment includes three flows that add to or maintain the nation capital stock expenditures by business firms on new buildings , plants , tools , equipment , and software that will be used in the production of goods and services expenditures on new residential housing and changes in business inventories . Any addition to a firm inventories represents an addition to investment a reduction from investment . For example , if a clothing store stocks pairs of jeans , the jeans represent an addition to inventory and are part of gross private domestic investment . As the jeans are sold , they are subtracted from inventory and thus subtracted from investment . By recording additions to inventories as investment and reductions from inventories as from investment , the accounting for records production in the period in which it occurs . Suppose , for example , that Levi Strauss manufactures million pairs of jeans late in 2011 and distributes them to stores at the end of December . The jeans will be added to inventory they thus count as investment in 2011 and enter for that year . Suppose they are sold in January 2012 . They will be counted as consumption in for 2012 but subtracted from inventory , and from investment . Thus , the production of the jeans will add to in 2011 , when they were produced . They will not count in 2012 , save for any increase in the value of the jeans resulting from the services provided by the retail stores that sold them .

191 Author removed at request of original publisher Private investment accounts for about 15 of , at times , even less . Despite its relatively small share of total economic activity , private investment plays a crucial role in the for two reasons . Private investment represents a choice to forgo current consumption in order to add to the capital stock of the economy . Private investment therefore adds to the economy capacity to produce and shifts its production possibilities curve outward . Investment is thus one determinant of economic growth , which is explored in another chapter . Private investment is a relatively volatile component of it can change dramatically from one year to the next . Fluctuations in are often driven by fluctuations in private investment . We will examine the of private investment in a chapter devoted to the study of investment . Private investment represents a demand placed on firms for the production of capital goods . While it is a demand placed on firms , it flows from firms . In the circular flow model in Figure Private Investment in the Circular Flow , we see a flow of investment going from firms to firms . The production of goods and services for consumption generates factor incomes to households the production of capital goods for investment generates income to households as well . Investment in Circular Flow Private investment Personal consumption Firms Households Factor incomes Private a demand placed on firms by Other firms . ii also generates incomes mi households . To simplify ine diagram , only me spending flows of goods and services have been . Figure Private Investment in the Circular Flow shows only spending flows and omits the physical flows represented by the arrows in Figure Personal Consumption in the Circular Flow . This simplification will make our analysis of the circular flow model easier . It will also focus our attention on spending flows , which are the flows we will be studying .

Principles of 192 Government Purchases Government agencies at all levels purchase goods and services from firms . They purchase office equipment , vehicles , buildings , janitorial services , and so on . Many government agencies also produce goods and services . Police departments produce police protection . Public schools produce education . The National Aeronautics and Space Administration ( NASA ) produces space exploration . Government purchases are the sum of purchases of goods and services from firms by government agencies plus the total value of output produced by government agencies themselves during a time period . Government purchases make up about 20 of . Government purchases are not the same thing as government spending . Much government spending takes the form of transfer payments , which are payments that do not require the recipient to produce a good or service in order to receive them . Transfer payments include Social Security and other types of assistance to retired people , welfare payments to poor people , and unemployment compensation to people who have lost their jobs . Transfer payments are certainly account for roughly half of all federal government spending in the United States . They do not count in a nation , because they do not reflect the production of a good or service . Government purchases represent a demand placed on firms , represented by the flow shown in Figure Government Purchases in the Circular Flow . Like all the components of , the production of goods and services for government agencies creates factor incomes for households . Government Purchases the Flow Personal consumption Firms Households Government purchases Factor Incomes Government agencies Purchases of goods and services by government agencies Create demands an . As produce these goods and , they Create factor incomes for households .

193 Author removed at request of original publisher Net Exports Sales of a country goods and services to buyers in the rest of the world during a particular time period represent its exports . A purchase by a Japanese buyer of a Ford Taurus produced in the United States is a export . Exports also include such transactions as the purchase of accounting services from a New York accounting firm by a shipping line based in Hong Kong or the purchase of a ticket to Disney World by a tourist from Argentina . Imports are purchases of goods and services by a country residents during a period . United States imports include such transactions as the purchase by Americans of cars produced in Japan or tomatoes grown in Mexico or a stay in a French hotel by a tourist from the United States . Subtracting imports from exports yields net exports . Equation ( imports net exports ( In 2011 , foreign buyers purchased billion worth of goods and services from the United States . In the same year , residents , firms , and government agencies purchased billion worth of goods and services from foreign countries . The difference between these two figures , billion , represented the net exports of the economy in 2011 . Net exports were negative because imports exceeded exports . Negative net exports constitute a trade deficit . The amount of the deficit is the amount by which imports exceed exports . When exports exceed imports there is a trade surplus . The magnitude of the surplus is the amount by which exports exceed imports . The United States has recorded more deficits than surpluses since World War II , but the amounts have typically been relatively small , only a few billion dollars . The trade deficit began to soar , however , in the and again in the 20005 . We will examine the reasons for persistent trade deficits in another chapter . The rest of the world plays a key role in the domestic economy and , as we will see later in the book , there is nothing particularly good or bad about trade surpluses or deficits . Goods and services produced for export represent roughly 14 of , and the goods and services the United States imports add significantly to our standard of living . In the circular flow diagram in Figure Net Exports in the Circular Flow , net exports are shown with an arrow connecting firms to the rest of the world . The balance between the flows of exports and imports is net exports . When there is a trade surplus , net exports are positive and add spending to the circular flow . A trade deficit implies negative net exports spending flows from firms to the rest of the world . Circular Flow

Principles of 194 Private investment Personal consumption Government purchases Net Exports Factor incomes Net the balance exports and imports . Net exports can he positive DI negative . If they ate positive , net spending from the ! at the world to . If they are negative , spending from firms to the hi the world . The production of goods and services for personal consumption , private investment , government purchases , and net exports makes up a nation . Firms produce these goods and services in response to demands from households ( personal consumption ) from other firms ( private investment ) from government agencies ( government purchases ) and from the rest of the world ( net exports ) All of this production creates factor income for households . Figure Spending in the Circular Flow Model shows the circular model for all the spending we have discussed . Each is numbered for use in the exercise at the end of this section . Spending in the Flow Model

195 Author removed at request of original publisher Private investment ( Personal consumption ( Firms Households Government purchases Factor Incomes ( Exports ( Government Rest of the agencies world our equals me sum of production by or goods and services for personal consumption ( private ( government purchases ( and net exports ( The circular model shows these flaws and shows he production of goods and services generates factor incomes ( to households . The circular flow model identifies some of the forces at work in the economy , forces that we will be studying in later chapters . For example , an increase in any of the flows that place demands on firms ( personal consumption , private investment , government purchases , and exports ) will induce firms to expand their production . This effect is characteristic of the expansion phase of the business cycle . An increase in production will require firms to employ more factors of production , which will create more income for households . Households are likely to respond with more consumption , which will induce still more production , more income , and still more consumption . Similarly , a reduction in any of the demands placed on firms will lead to a reduction in output , a reduction in firms use of factors of production , a reduction in household incomes , a reduction in income , and so on . This sequence of events is characteristic of the contraction phase of the business cycle . Much of our work in will involve an analysis of the forces that prompt such changes in demand and an examination of the economy response to them . Figure Components of , 2011 in Billions of Dollars shows the size of the components of in 2011 . We see that the production of goods and services for personal consumption accounted for about 70 of . Imports exceeded exports , so net exports were negative . Figure Components of , 2011 in Billions of Dollars

Principles of 196 Government Net exports purchases billion billion Investment billion Consumption billion Consumption makes up the largest share of . Net exports were negative in 2011 . Total sum of personal consumption , private investment , government purchases , and net billion in 2011 . Source Bureau of Economic Analysis , National Income and Product Accounts , Table ( revised February 29 , 2012 ) Final Goods and Value Added is the total value of all final goods and services produced during a particular period valued at prices in that period . That is not the same as the total value of all goods and services produced during a period . This distinction gives us another method of estimating in terms of output . Suppose , for example , that a logger cuts some trees and sells the logs to a sawmill . The mill makes lumber and sells it to a construction firm , which builds a house . The market price for the lumber includes the value of the logs the price of the house includes the value of the lumber . If we try to estimate by adding the value of the logs , the lumber , and the house , we would be counting the lumber twice and the logs three times . This problem is called double counting , and the economists who compute seek to avoid it . In the case of logs used for lumber and lumber produced for a house , would include the value of the house . The lumber and the logs would not be counted as additional production because they are intermediate goods that were produced for use in building the house . Another approach to estimating the Value of final production is to estimate for each stage of production the value added , the amount by which the value of a firm output exceeds the value of the goods and services the firm purchases from other firms . Table Final Value and Value Added illustrates the use of value added in the production of a house . Table Final Value and Value Added

197 Author removed at request of original publisher Good Produced by Purchased by Price Value Added Logs Logger Sawmill Lumber Sawmill Construction firm House Construction firm Household Final Value Sum of Values Added If we sum the value added at each stage of the production of a good or service , we get the final value of the item . The example shown here involves the construction of a house , which is produced from lumber that is , in turn , produced from logs . Suppose the logs produced by the logger are sold for to a mill , and that the mill sells the lumber it produces from these logs for to a construction firm . The construction firm uses the lumber to build a house , which it sells to a household for . To simplify the example , we will ignore inputs other than lumber that are used to build the house . The value of the final product , the house , is . The value added at each stage of production is estimated as follows . The logger adds by cutting the logs . The mill adds ( by cutting the logs into lumber . The construction firm adds ( by using the lumber to build a house . The sum of values added at each stage ( equals the final value of the house , The value of an economy output in any period can thus be estimated in either of two ways . The values of final goods and services produced can be added directly , or the values added at each stage in the production process can be added . The Commerce Department uses both approaches in its estimate of the nation . An Alternative Measure of Output While represents the most commonly used measure of an economy output , economists sometimes use an alternative measure . Gross national product ( is the total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country . The difference between and is a subtle one . The of a country equals the value of final output produced within the borders of that country the of a country equals the value of final output produced using factors owned by residents of the country . Most production in a country employs factors of production owned by residents of that country , so the two measures overlap . Differences between the

Principles of 198 two measures emerge when production in one country employs factors of production owned by residents of other countries . Suppose , for example , that a resident of , Washington , owns and operates a watch repair shop across the . border in Victoria , British Columbia . The value of watch repair services produced at the shop would be counted as part of Canada because they are produced in Canada . That value would not , however , be part of . But , because the watch repair services were produced using capital and labor provided by a resident of the United States , they would be counted as part of in the United States and not as part of in Canada . Because most production fits in both a country as well as its , there is seldom much difference between the two measures . The relationship between and is given by Equation net income received from abroad by residents of a nation In the third quarter of 2011 , for example , equaled billion . We add income receipts of billion earned by residents of the United States from the rest of the world and then subtract income payments of billion that went from the United States to the rest of the world to get of billion for the third quarter of 2011 . is often used in international comparisons of income we shall examine those later in this chapter . Key Ta is the sum of final goods and services produced for consumption ( private investment ( I ) government purchases ( and net exports ( Thus I . can be viewed in the context of the circular flow model . Consumption goods and services are produced in response to demands from households investment goods are produced in response to demands for new capital by firms government purchases include goods and services purchased by government agencies and net exports equal exports less imports . Total output can be measured two ways as the sum of the values of final goods and services produced and as the sum of values added at each stage of production . plus net income received from other countries equals . is the measure of output typically used to compare incomes generated by different economies . Here is a exercise . Suppose you are given the following data for an economy

199 Author removed at request of original publisher Personal consumption Home construction 100 Increase in inventories 40 Equipment purchases by firms 60 Government purchases 100 Social Security payments to households 40 Government welfare payments 100 Exports 50 Imports 150 Identify the number of the flow in Figure Spending in the Circular Flow Model to which each of these items corresponds . What is the economy ?

Suppose a dairy farm produces raw milk , which it sells for to a dairy . The dairy produces cream , which it sells for to an ice cream manufacturer . The ice cream manufacturer uses the cream to make ice cream , which it sells for to a grocery store . The grocery store sells the ice cream to consumers for . Compute the value added at each stage of production , and compare this figure to the final Value of the product produced . Report your results in a table similar to that given in Table Final Value and Value Added . Case in Point The Spread of the Value Added Tax

Principles of 200 . i ?

401 ( 2012 Tax . Outside the United States , the value added tax ( VAT ) has become commonplace . Governments of more than 120 countries use it as their primary means of raising revenue . While the concept of the VAT originated in France in the , no country adopted it until after World War II . In 1948 , France became the first country in the world to use the VAT . In 1967 , Brazil became the first country in the Western Hemisphere to do so . The VAT spread to other western European and Latin American countries in the and and then to countries in the region , central European and former Soviet Union area , and Africa in the 19905 and early 20005 . What is the VAT ?

It is equivalent to a sales tax on final goods and services but is collected at each stage of production . Take the example given in Table Final Value and Value Added , which is a simplified illustration of a house built in three stages . If there were a sales tax of 10 on the house , the household buying it would pay , of which the construction firm would keep of the total and turn over to the government . With a 10 VAT , the sawmill would pay the logger , of which the logger would keep and turn over to the government . The sawmill would sell the lumber to the construction firm for , which is the for the lumber itself and it already paid in tax . The government at this stage would get , the difference between the the construction firm collected as tax and the the sawmill already paid in tax to the logger at the previous stage . The household would pay the construction firm . Of that total , the construction firm would turn over to the government , which is the difference between the it collected for the government in tax from the household and the in tax that it already paid when it bought the lumber from the sawmill . The table below shows that in the end , the tax revenue generated by a 10 VAT is the same as that generated by a 10 tax on final sales . Why bother to tax in stages instead of just on final sales ?

One reason is simply record keeping , since it may be difficult to determine in practice if any particular sale is the final one . In the example , the construction firm does not need to know if it is selling the house to a household or to some intermediary business . Also , the VAT may lead to higher revenue collected . For example , even if somehow the household buying the

201 Author removed at request of original publisher house avoided paying the tax , the government would still have collected some tax revenue at earlier stages of production . With a tax on retail sales , it would have collected nothing . The VAT has another advantage from the point of view of government agencies . It has the appearance at each stage of taking a smaller share . The individual amounts collected are not as obvious to taxpayers as a sales tax might be . Good Price Value Added Tax Collected Tax Already Paid Value Added Tax Logs Lumber House Total Answer to Try It ! Problem . equals and is computed as follows ( the numbers in parentheses correspond to the flows in Figure Spending in the Circular Flow Model ) Personal consumption ( Private investment ( 200 Housing 100 Equipment and software 60 Inventory change 40 Government purchases ( 100 Net exports ( Notice that neither welfare payments nor Social Security payments to households are included . These are transfer payments , which are not part of the government purchases component of . Here is the table of value added .

Principles of 202 Good Produced by Purchased by Price Value Added Raw milk Dairy farm Dairy Cream Dairy Ice cream maker Ice cream Ice cream manufacturer Grocery store Retail ice cream Grocery store Consumer Final Value Sum of Values Added ring Total Income Learning Objectives . Define gross domestic income and explain its relationship to gross domestic product . Discuss the components of gross domestic income . Define disposable personal income and explain how to calculate it from . We saw in the last section that the production of goods and services generates factor incomes to households . The production of a given value of goods and services generates an equal value of total income . Gross domestic income ( equals the total income generated in an economy by the production of final goods and services during a particular period . It is a variable . Because an economy total output equals the total income generated in producing that output , We can estimate either by measuring total output or by measuring total income . Consider a box of Cheerios . It is part of total output and thus is part of . Who gets the ?

Part of the answer to that question can be found by looking at the cereal box . Cheerios are made from oat flour , wheat starch , sugar , salt , and a variety of vitamins and minerals . Therefore , part of the goes to the farmers who grew the oats , the wheat , and the beets or cane from which the sugar was extracted . Workers and machines at General Mills combined the ingredients , crafted all those little , toasted them , and put them in a box . The workers were paid part of the as wages . The owners of General Mills and the capital it used received part of the as profit . The box containing the Cheerios was made from a tree , so a lumber company somewhere received part of the . The truck driver who brought the box of cereal to the grocery store got part of the , as did the owner of the truck itself and the owner of the oil that fueled the truck . The clerk who rang up the sale at the grocery store was paid part of the . And so on . How much of the was income generated in the production of the Cheerios ?

The answer is simple all of it . Some of the money went to workers as wages . Some went to owners of the capital and natural resources used to produce it . Profits generated along the way went to the owners of the firms involved . All these items represent costs of producing the Cheerios and also represent income to households . Part of the cost of the Cheerios , while it makes up a portion of , does not represent ordinary income actually earned by households . That part results from two other production costs depreciation and taxes related to the production of the Cheerios . Nevertheless , they are treated as a kind of income we will examine their role in below . As it is with Cheerios , so it is with everything else . The value of output equals the income generated as the output is produced . 203

Principles of 204 The Components of Employee compensation is the largest among the components of factor income . Factor income also includes profit , rent , and interest . In addition , includes charges for depreciation and taxes associated with production . Depreciation and taxes , such as sales taxes , make up part of the cost of producing goods and services and must be accounted for in estimating . We will discuss each of these components of next . Employee Compensation Compensation of employees in the form of wages , salaries , and benefits makes up the largest single component of income generated in the production of . In the third quarter of 2011 , employee compensation represented 55 of . The structure of employee compensation has changed dramatically in the last several decades . In 1950 , virtually all employee of in the form of wages and salaries . The remainder , about , came in the form of additional benefits such as employer contributions to retirement programs and health insurance . In 2011 , the share of benefits was nearly 20 of total employee compensation . The profit component of income earned by households equals total revenues of firms less costs as measured by conventional accounting . Profits amounted to about 17 of in 2011 , down sharply from five decades earlier , when profits represented about 25 of the income generated in Profits are the reward the owners of firms receive for being in business . The opportunity to earn profits is the driving force behind production in a market economy . Rental Income Rental income , such as the income earned by owners of rental housing or payments for the rent of natural resources , is the smallest component of ( less than ) it is the smallest of the income flows to households . The meaning of rent in the computation of is the same as its meaning in conventional usage it is a charge for the temporary use of some capital asset or natural . Although reported separately by the Department of Commerce , we have combined proprietors income ( typically independent business owners and farmers ) with corporate profits to simplify the discussion . If you have studied , you know that the term rent in economics has a quite different meaning . The national income and product accounts use the accounting , not the economic , meaning of rent .

205 Author removed at request of original publisher Net Interest Businesses both receive and pay interest . includes net interest , which equals interest paid less interest received by domestic businesses , plus interest received from foreigners less interest paid to foreigners . Interest payments on mortgage and home improvement loans are counted as interest paid by businesses , because homeowners are treated as businesses in the income accounts . In 2011 , net interest accounted for about of . Depreciation Over time the machinery and buildings that are used to produce goods and services wear out or become obsolete . A farmer tractor , for example , wears out as it is used . A technological change may make some equipment obsolete . The introduction of personal computers , for example , made the electric typewriters used by many firms obsolete . Depreciation is a measure of the amount of capital that wears out or becomes obsolete during a period . Depreciation is referred to in official reports as the consumption of fixed capital . Depreciation is a cost of production , so it represents part of the price charged for goods and services . It is therefore counted as part of the income generated in the production of those goods and services . Depreciation represented about 13 of in 2011 . Indirect Taxes The final component of the income measure of is indirect business Indirect taxes are taxes imposed on the production or sale of goods and services or on other business activity . By contrast , a direct tax is a tax imposed directly on income the personal income and corporate income taxes are direct taxes . Indirect taxes , which include sales and excise taxes and property taxes , make up part of the cost to firms of producing goods and services . Like depreciation , they are part of the price of those goods and services and are therefore treated as part of the income generated in their production . Indirect business taxes amounted to nearly of in 2011 . Table and , 2011 shows the components of in the third quarter of 2011 . Employee compensation represented the largest share of . The exhibit also shows the components of for the same year . In principle , and should be equal , but their estimated values never are , because the data come from different sources . Output data from a sample of firms are used to estimate , while income data from a sample of households are used to estimate . The difference is the statistical discrepancy . The adjustment for indirect business taxes includes two other minor elements transfer payments made by business firms and surpluses or deficits of government enterprises .

Principles of 206 shown in the column of Table and , 2011 . Some of the difficulties with these data are examined in the Case in Point feature on discrepancies between and . Table and , 2011 Gross domestic product Gross domestic income Personal consumption expenditures Compensation of employees Gross private domestic investment Government consumption expenditures and gross . Rental income of persons investment Net exports of goods and services Net interest Taxes on production and Consumption of fixed capital ( depreciation ) Statistical discrepancy The table shows the composition of and in the third quarter of 2011 ( in billions of dollars at an annual rate ) Notice the rough equality of the two measures . They are not quite equal because of measurement errors the difference is due to a statistical discrepancy and is reduced significantly over time as the data are revised . Source Bureau of Economic Analysis , National Income and , Tables and ( revised February 29 , 2012 ) Tracing Income from the Economy to Households We have seen that the production of goods and services generates income for households . Thus , the value of total output equals the value of total income in an economy . But we have also seen that our measure of total income , includes such things as depreciation and indirect business taxes that are not actually received by households . Households also receive some income , such as transfer payments , that does not count as part of or . Because the income households actually receive plays an important role in determining their consumption , it is useful to examine the relationship between a nation total output and the income households actually receive . Table From to Disposable Personal Income traces the path we take in going from to disposable personal income , which equals the income households have available to spend on goods and services . We first convert to and then subtract elements of that do not represent income received by households and add payments such as transfer payments that households receive but do not . Profit is corporate profit ( plus proprietors income ( both with inventory valuation and capital consumption adjustment . Indirect taxes include taxes on production and imports of plus business transfer payments ( less subsidies ( and current surplus of government enterprise ( Prior to the 2003 National Income and Product Accounts ( NIPA ) revisions , the category taxes on production and imports was , with some technical and other minor adjustments , referred to as indirect business See Brent and Eugene , Preview of the 2003 Comprehensive Revision of the National Income and Product Accounts , Bureau of Economic Analysis , Survey of Current Business , June 2003 ,

207 Author removed at request of original publisher earn in the production of . Disposable personal income is either spent for personal consumption or saved by households . Table From to Disposable Personal Income net factor earnings from abroad gross national product ( depreciation ( consumption of fixed capital ) net national product ( statistical discrepancy national income ( income earned but not received , taxes on production and imports , social security payroll taxes , corporate profit taxes , and retained earnings transfer payments and other income received but not earned in the production of personal income ( PI ) PI personal income taxes disposable personal income ( a measure of total output , equals , the total income generated in the production of goods and services in an economy . The chart traces the path from to disposable personal income , which equals the income households actually receive . We first convert to . Then , we subtract depreciation to obtain net national product and subtract the statistical discrepancy to arrive at national income ( gross national income net of depreciation and the statistical discrepancy ) Next , we subtract components of and that do not represent income actually received by households , such as taxes on production and imports , corporate profit and payroll taxes ( contributions to social insurance ) and corporate retained earnings . We add items such as transfer payments that are income to households but are not part of and . The adjustments shown are the most important adjustments in going from and to disposable personal income several smaller adjustments ( subsidies , business current transfer payments net , and current surplus of government enterprises ) have been omitted . Key Ta Gross domestic product , equals gross domestic income , which includes compensation , profits , rental income , indirect taxes , and depreciation . We can use , a measure of total output , to compute disposable personal income , a measure of income received by households and available for them to spend . The following income data refer to the same economy for which you had output data in the first part of the previous Try It ! Compute from the data below and confirm that your result equals the figure you computed in the previous Try It ! Assume that for this problem ( that is , assume all factor incomes are earned and paid in the domestic economy )

Principles of 208 Employee compensation 700 Social Security payments to households 40 Welfare payments 100 Profits 200 Rental income 50 Net interest 25 Depreciation Indirect taxes 175 Case in Point The Gap 209 Author removed at request of original publisher ! I ' 42 17 ' I equals at least , that is the way it is supposed to work . But in an enormously complex economy , the measurement of these two Variables inevitably goes awry . Estimates of the two are never quite equal . In recent years , the absolute Value of the gap has been quite sizable , while in other years , it has been quite small . For example , for the years 2006 through 2010 , has differed from by , and billion per year , respectively . Although the gap seems large at times , it represents a remarkably small fraction of measured or less . Of course , of a big number is still a big number . But it is important to remember that , relative to the size of the economy , the gap between and is not large . The gap is listed as a statistical discrepancy in the Department of Commerce reporting of the two numbers . Why does the gap exist ?

From an accounting point of View , it should not . The total value of final goods and Principles of 210 services produced must be equal to the total value of income generated in that production . But output is measured from sales and inventory figures collected from just 10 of commercial establishments . Preliminary income figures are obtained from household surveys , but these represent a tiny fraction of households . More complete income data are provided by income tax returns , but these are available to the economists who estimate only after a to delay . The Department of Commerce issues revisions of its and estimates as more complete data become available . With each revision , the gap between and estimates is significantly reduced . While and figures can not provide precise measures of economic activity , they come remarkably close . Indeed , given that the numbers come from entirely different sources , the fact that they come as close as they do provides an impressive check of the accuracy of the estimates of and . Answer to Try It ! Problem equals . Note that this value equals the value for obtained from the estimate of output in the first part of the previous Try It ! Here is the computation Employee compensation 700 Profits 200 Rental income 50 Net interest 25 Depreciation 50 Indirect taxes 175 Once again , note that Social Security and welfare payments to households are transfer payments . They do not represent payments to household factors of production for current output of goods and services , and therefore are not included in .

and Economic Learning Objectives . Discuss and give examples of measurement and conceptual problems in using real as a measure of economic performance and of economic . Explain the use of per capita real or to compare economic performance across countries and discuss its limitations . is the measure most often used to assess the economic of a country . Besides measuring the pulse of a country , it is the figure used to compare living standards in different countries . Of course , to use as an indicator of overall economic performance , we must convert nominal to real , since nominal values can rise or fall simply as a result of changes in the price level . For example , the movie Avatar , released in 2009 , brought in 761 highest amount to date in gross box office receipts , while Gone with the , released in 1939 , earned only 199 million and ranks in terms of nominal receipts . But does that mean that Avatar actually did better than Gone with the Wind ?

After all , the average price of a movie ticket in 1939 was about 25 cents . At the time of Avatar , the average ticket price was about . A better way to compare these two movies in terms of popularity is to control for the price of movie same strategy that economists use with real in order to determine whether output is rising or falling . Adjusting the nominal receipts using 2012 movie prices to obtain real revenue reveals that in real terms Gone with the continues to be the top real grosser of all time with real receipts of about billion . Avatar real receipts amounted to a mere 776 As illustrated by this example on revenues from popular movies , we might draw erroneous conclusions about performance if we base them on nominal values instead of on real values . In contrast , real , despite the problems with price indexes that were explained in another chapter , provides a reasonable measure of the total output of an economy , and changes in real provide an indication of the direction of movement in total output . We begin this section by noting some of the drawbacks of using real as a measure of the economic welfare of a country . Despite these shortcomings , we will see that it probably remains our best single indicator of performance . Based on estimates at Domestic Grosses Adjusted for Ticket Price Inflation , Box Office Mojo , accessed April 10 , 2012 , 211

Principles of 212 Measurement Problems in Real There are two measurement problems , other than those associated with adjusting for price level changes , in using real to assess domestic economic performance . Revisions The first estimate of real for a calendar quarter is called the advance estimate . It is issued about a month after the quarter ends . To produce a measure so quickly , officials at the Department of Commerce must rely on information from relatively few firms and households . One month later , it issues a revised estimate , and a month after that it issues its final estimate . Often the advance estimate of and the final estimate do not correspond . The recession of 2001 , for example , began in March of that year . But the first estimates of real for the second and third quarters of 2001 showed output continuing to rise . It was not until later revisions that it became clear that a recession had been under way . But the revision story does not end there . Every summer , the Commerce Department issues revised figures for the previous two or three years . Once every five years , the department conducts an extensive analysis that traces flows of inputs and outputs throughout the economy . It focuses on the outputs of some firms that are inputs to other firms . In the process of conducting this analysis , the department real estimates for the previous five years . Sometimes the revisions can paint a picture of economic activity that is quite different from the one given even by the revised estimates of . For example , revisions of the data for the recession issued several years later showed that the recession had been much more serious than had previously been apparent , and the recovery was more pronounced . Concerning the most recent recession , the first estimates of fourth quarter 2008 showed that the economy shrank by . The first revision , however , showed a drop of , and the second revision showed a drop of ! The Service Sector Another problem lies in estimating production in the service sector . The output of goods in an economy is relatively easy to compute . There are so many bushels of corn , so many pounds of beef . But what is the output of a bank ?

Of a hospital ?

It is easy to record the dollar value of output to enter in nominal , but estimating the quantity of output to use in real is quite another matter . In some cases , the Department of Commerce estimates service sector output based on the quantity of labor used . For example , if this technique were used in the banking industry and banking used 10 more labor , the department would report that production has risen 10 . If the number of employees remains unchanged , reported output remains unchanged . In effect , this approach assumes that output per those sectors remains constant when studies have indicated that productivity has increased greatly in the service sector . Since 1990 progress has been made in measurement in this area , which allows in particular for better estimation of productivity changes and price indexes for

213 Author removed at request of original publisher different service sector industries , but more remains to be done in this large sector of the economy ( Bosworth , 2008 ) Conceptual Problems with Real A second set of limitations of real stems from problems inherent in the indicator itself . Real measures market activity . Goods and services that are produced and exchanged in a market are counted . goods and services that are produced but that are not exchanged ' markets are not . Household Production Suppose you are considering whether to eat at home for dinner tonight or to eat out . You could cook dinner for yourself at a cost of for the ingredients plus an hour or so of your time . Alternatively , you could buy an equivalent meal at a restaurant for perhaps 15 . Your decision to eat out rather than cook would add 10 to the . But that 10 addition would be misleading . After all , if you had stayed home you might have produced an equivalent meal . The only difference is that the value of your time would not have been counted . But surely your time is not worthless it is just not counted . Similarly , does not count the value of your efforts to clean your own house , to wash your own car , or to grow your own vegetables . In general , omits the entire value added by members of a household who do household work themselves . There is reason to believe this omission is serious . Economists Steven and Stephanie of the Bureau of Economic Analysis estimated in a 2000 paper the value of household output from 1946 to 1997 . Their estimate of household output in 1946 was 50 of reported . Since then , that percentage has fallen , because more women have entered the workforce , so that more production that once took place in households now occurs in the market . Households now eat out more , purchase more prepared foods at the grocery store , hire out services they once performed themselves , and so on . Their estimate for 1997 , for example , suggests that household production amounted to 36 of reported ( 2000 ) This problem is especially significant when is used to make comparisons across countries . In income countries , a much greater share of goods and services is not exchanged in a market . Estimates of in such countries are adjusted to reflect nonmarket production , but these adjustments are inevitably imprecise . There are two exceptions to this rule . The Value of food produced and consumed by farm households is counted in . More important , an estimate of the rental values of homes is included . If a family rents a house , the rental payments are included in . If a family lives in a house it owns , the Department of Commerce estimates what the house would rent for and then includes that rent in the estimate , even though the house services were not exchanged in the marketplace .

Principles of 214 Underground and Illegal Production Some production goes unreported in order to evade taxes or the law . It is not likely to be counted in . Legal production for which income is unreported in order to evade taxes generally takes place in what is known as the underground For example , a carpenter might build a small addition to a dentist house in exchange for orthodontic work for the carpenter children . Although income has been earned and output generated in this example of bartering , the transaction is unlikely to be reported for income tax or other purposes and thus is not counted in . Illegal activities are not reported for income taxes for obvious reasons and are thus difficult to include in . Leisure Leisure is an economic good . All other things being equal , more leisure is better than less leisure . But all other things are not likely to be equal when it comes to consuming leisure . Consuming more leisure means supplying less work effort . And that means producing less . If everyone decided to work 10 fewer hours , would fall . But that would not mean that people were worse off . In fact , their choice of more leisure would suggest they prefer the extra leisure to the goods and services they give up by consuming it . Consequently , a reduction in would be accompanied by an increase in satisfaction , not a reduction . The Accounts Ignore Bads Suppose a wave of burglaries were to break out across the United States . One would expect people to respond by buying more and louder burglar alarms , better locks , fiercer German shepherds , and more guard services than they had before . To the extent that they pay for these by dipping into savings rather than replacing other consumption , increases . An epidemic might have much the same effect on by driving up spending . But that does not mean that crime and disease are good things it means only that crime and disease may force an increase in the production of goods and services counted in the . Similarly , the accounts ignore the impact of pollution on the environment . We might produce an additional 200 billion in goods and services but create pollution that makes us feel worse off by , say , 300 billion . The accounts simply report the 200 billion in increased production . Indeed , some of the environmental degradation might itself boost . air may force us to wash clothes more often , to paint buildings more often , and to see the doctor more often , all of which will tend to increase !

215 Author removed at request of original publisher Conclusion and Human Happiness More can not necessarily be equated with more human happiness . But more does mean more of the goods and services we measure . It means more jobs . It means more income . And most people seem to place a high value on these things . For all its faults , does measure the production of most goods and services . And goods and services get produced , for the most part , because we want them . We might thus be safe in giving two cheers for holding back the third in recognition of the conceptual difficulties that are inherent in using a single number to summarize the output of an entire economy . International Comparisons of Real and Real or estimates are often used in comparing economic performance among countries . In making such comparisons , it is important to keep in mind the general limitations to these measures of economic performance that we noted earlier . Further , countries use different for collecting and compiling data . Three other issues are important in comparing real or for different countries the adjustment of these figures for population , adjusting to a common currency , and the incorporation of nonmarket production . In international comparisons of real or real , economists generally make comparisons not of real or but of per capita real or , which equals a country real or divided by its population . For example , suppose Country A has a real of about billion and Country has a real of about 40 billion . We can conclude that Country A produced 100 times more goods and services than did Country . But if Country A has 200 times as many people as Country ( for example , 200 million people in Country A and million in Country ) then Country A per capita output will be half that of Country ( versus in this example ) Figure Comparing Per Capita Real , 2010 compares per capita real for 11 countries in 2010 . It is based on data that uses a measure called international dollars in order to correct for differences in the purchasing power of across countries . The data also attempt to adjust for nonmarket production ( such as that of rural families that grow their own food , make their own clothing , and produce other household goods and services themselves ) Figure Comparing Capua

Principles of 216 Per capita real 2010 ( International dollars ) Country There IS a huge gap between per capita income in one of Lhe poorest countries in me world , me Democratic Republic uf Congo . and wealthier such as the United and . Source Bank . World Development Indicators Online The disparities in income are striking , the country with the highest per capita real , had an income level nearly 200 times greater than the Democratic Republic of Congo , the country with the lowest per capita real . What can we conclude about international comparisons in levels of and ?

Certainly we must be cautious . There are enormous difficulties in estimating any country total output . Comparing one country output to another presents additional challenges . But the fact that a task is difficult does not mean it is impossible . When the data suggest huge disparities in levels of per capita , for example , we observe real differences in living standards . Key Ta Real or real is often used as an indicator of the economic of a country . Problems in the measurement of real , in addition to problems encountered in converting from nominal to real , stem from revisions in the data and the difficulty of measuring output in some sectors , particularly the service sector . Conceptual problems in the use of real as a measure of economic include the facts that it does not include nonmarket production and that it does not properly adjust for bads produced in the economy . Per capita real or can be used to compare economic performance in different countries . What impact would each of the following have on real ?

Would economic increase or decrease as a result ?

217 Author removed at request of original publisher . On average , people in a country decide to increase the number of hours they work by . Spending on homeland security increases in response to a terrorist attack . The price level and nominal increase by 10 . Case in Point Per Capita Real and Olympic Medal Counts David Adam . In the popular lore , the Olympics provide an opportunity for the finest athletes in the world to compete with each other on the basis of raw talent and hard work . And yet , contenders from tend to finish last or close to it in almost any event in which they compete . One Laotian athlete garnered the unenviable record of having been the slowest entrant in the nearly long history of the walk . In contrast , athletes won 103 medals at the 2004 Athens Olympics and 110 medals at the 2008 Beijing Olympics . Why do fare so poorly and Americans so well , with athletes from other countries falling in between ?

Economists Daniel Johnson and Ali have been able to predict with astonishing accuracy the number of medals different countries will win on the basis of a handful of factors , including population , climate , political structure , and real per capita . For example , they predicted that the United States would win 103 medals in Athens and that is precisely how many the United States won . They predicted 103 medals for the United States in Beijing 110 were won . They did not expect the to win any medals in either Athens or Beijing , and that was indeed the outcome . Johnson and Ali estimated that summer game participant nations average one more medal per additional of per capita real . With per capita real in less than the equivalent of 500 compared to per capita real in the United States of about , the results for these two nations could be considered a foregone conclusion . According to Johnson and Ali , High productive capacity or income per person displays an ability to pay the costs necessary to send athletes to the Games , and may also be associated with a higher quality of training and better For example , a Laotian swimmer at Athens , had never practiced in an pool , and a runner , had worn the same running shoes for four years . The good news is that as the per capita real in some relatively poor countries has risen , the improved living standards have led to increased Olympic medal counts . China , for instance , won 28 medals in 1988 and 63 in 2004 . As the host for the 2008 games , it won an impressive total of 100 medals . While not a perfect measure of the of people in a country , per capita real does tell us about the opportunities available to the average citizen in a country . Americans would surely find it hard to imagine living at the level of consumption of the average Laotian . In The Progress Paradox How Life Gets Better While People Feel Worse , essayist Gregg notes that a higher material standard of living is not

Principles of 218 associated with higher reported happiness . But , he concludes , the problems of prosperity seem less serious than those of poverty , and prosperity gives people and nations the means to address problems . The Olympic medal count for each nation strongly reflects its average standard of living and hence the opportunities available to its citizens . Sources Gregg , The Progress Paradox How Life Gets Better While People Feel Worse ( New York Random House , 2003 ) Daniel Johnson and Ali , A Tale of Two Seasons Participation and Medal Counts at the Summer and Winter Olympic Games , Social Science Quarterly 84 , no . December 2004 ) David , Why I Cheer for , Parade Magazine , August , 2004 , Answer to Try It ! Problem . Real would increase . Assuming the people chose to increase their work effort and forgo the extra leisure , economic would increase as well . Real would increase , but the extra expenditure in the economy was due to an increase in something bad , so economic would likely be lower . No change in real . For some people , economic might increase and for others it might decrease , since does not affect each person in the same way . References , and Stephanie , Accounting for Nonmarket Household Production within a National Accounts Framework , Review of Income Wealth 46 , no . September 2000 ) and Barry Bosworth , The State of Data for Services Productivity Measurement in the United States , International Productivity Monitor 16 ( Spring 2008 )

Review and Practice Summary This chapter focused on the measurement of . The total value of output ( equals the total value of income generated in producing that output ( We can illustrate the flows of spending and income through the economy with the circular flow model . Firms produce goods and services in response to demands from households ( personal consumption ) other firms ( private investment ) government agencies ( government purchases ) and the rest of the world ( net exports ) This production , in turn , creates a of factor incomes to households . Thus , can be estimated using two types of data ( data that show the total value of output and ( data that show the total value of income generated by that output . In looking at as a measure of output , we divide it into four components consumption , investment , government purchases , and net exports . equals the sum of final values produced in each of these areas . It can also be measured as the sum of values added at each stage of production . The components of measured in terms of income ( are employee compensation , profits , rental income , net interest , depreciation , and indirect taxes . We also explained other measures of income such as and disposable personal income . Disposable personal income is an important economic indicator , because it is closely related to personal consumption , the largest component of . is often used as an indicator of how well off a country is . Of course , to use it for this purpose , we must be careful to use real rather than nominal . Still , there are problems with our estimate of real . Problems encountered in converting nominal to real were discussed in the previous chapter . In this chapter we looked at additional measurement problems and conceptual problems . Frequent revisions in the data sometimes change our picture of the economy considerably . Accounting for the service sector is quite difficult . Conceptual problems include the omission of nonmarket production and of underground and illegal production . ignores the value of leisure and includes certain We can not assert with confidence that more is a good thing and that less is bad . However , real remains our best single indicator of economic . It is used not only to indicate how any one economy is performing over time but also to compare the economic of different countries . Concept Problems . is used as a measure of performance . What , precisely , does it measure ?

Many economists have attempted to create a set of social accounts that would come closer to measuring the economic of the society than does . What modifications of the current approach would you recommend to them ?

Every good produced creates income for the owners of the factors of production that created the 219 Principles of 220 10 . 11 . product or service . For a recent purchase you made , try to list all the types of factors of production involved in making the product available , and try to determine who received income as a result of your purchase . Explain how the sale of used textbooks in your campus bookstore affects the calculation . Look again at the circular flow diagram in Figure Spending in the Circular Flow Model and assume it is drawn for the United States . State the flows in which each of the following transactions would be entered . A consumer purchases fresh fish at a local fish market . A grocery store acquires rolls of paper towels for later resale . NASA purchases a new Saturn rocket . People in France to see the latest Brad Pitt movie . A construction firm builds a new house . A couple from Seattle visits and stays in a hotel there . The city of Dallas purchases computer paper from a local firm . Suggest an argument for and an argument against counting in all goods and services that are not sold , such as the value of child care or meals . Suppose a nation firms make heavy use of factors of production owned by residents of foreign countries , while foreign firms make relatively little use of factors owned by residents of that nation . How does the nation compare to its ?

Suppose Country A has the same as Country , and that neither nation residents own factors of production used by foreign firms , nor do either nation firms use factors of production owned by foreign residents . Suppose that , relative to Country , depreciation , indirect business taxes , and personal income taxes in Country A are high , while welfare and Social Security payments to households in Country A are relatively low . Which country has the higher disposable personal income ?

Why ?

Suppose that virtually everyone in the United States decides to take life a little easier , and the length of the average falls by 25 . How will that affect ?

Per capita ?

How will it affect economic welfare ?

Comment on the following statement It does not matter that the value of the labor people devote to producing things for themselves is not counted in because we make the same mistake every year , relative values are Name some of the services , if any , you produced at home that do get counted in . Are there any goods you produce that are not counted ?

Marijuana is sometimes estimated to be California largest cash crop . It is not included in estimates of . Should it be ?

221 Author removed at request of original publisher Numerical Problems . Given the following nominal data , compute . Assume net factor incomes from abroad ( that is , Nominal Data for and Billions Consumption Depreciation Exports Gross private domestic investment Indirect taxes Government purchases Government transfer payments Imports . Find data for each of the following countries on real and population . Use the data to calculate the per capita for each of the following countries Mozambique India Pakistan United States Canada Russia Brazil Iran ! Colombia . Now construct a bar graph showing your results in the previous problem , organizing the countries from the highest to the lowest per capita , with countries on the horizontal axis and per capita on the vertical axis . Suppose Country A has a of trillion . Residents of this country earn 500 million from assets they own in foreign countries . Residents of foreign countries earn 300 million from assets they own in Country Compute . Country A net foreign income . Country A . Suppose a country equals 500 billion for a particular year . Economists in the country

Principles of 222 estimate that household production equals 40 of . What is the value of the ' household production for that year ?

Counting both and household production , what is the country total output for the year ?

A miner extracts iron from the earth . A steel mill converts the iron to steel beams for use in construction . A construction company uses the steel beams to make a building . Assume that the total product of these firms represents the only components of the building and that they will have no other uses . Complete the following table Company Product Total Sales Value Added Acme Mining iron ore ?

Fuller Mill steel beams ?

Crane Construction building ?

Total Value Added ?

You are given the data below for 2008 for the imaginary country of , whose currency is the Consumption 350 billion Transfer payments 100 billion Investment 100 billion Government purchases 200 billion Exports 50 billion Imports 150 billion Bond purchases 200 billion Earnings on foreign investments 75 billion Foreign earnings on investment 25 billion Compute net foreign investment . Compute net exports . Compute . Compute .