Chapter 8 Measuring Total Economic Activity

        I. Gross Domestic Product (GDP)

II. National Income Accounts Measure Production

III. Money vs. Real GDP

IV. Interpreting National Income Account

V. Measurement Problems

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I. Gross Domestic Product (GDP)
A. The sum of all the goods and services produced within an economic
        unit (country, state) within a period of time (normally a year)
   B. Excludes non-productive transfers
       1. Stock market sales
       2. Working at home
       3. The "Underground Economy" unreported taxable income
   C. Two approaches to calculating GDP
        1. Expenditure approach
            GDP equals Personal Consumption plus Business Investment
            plus Government  Spending plus Net Exports (exports -  imports)
            GDP = C + I + G + Xwhere I is gross investment which is new
            capital and replacement capital (depreciation).
2. Income approach
            GDP equals Rent plus Wages plus Interest plus Profits plus
            Depreciation plus Indirect Business Taxes plus miscellaneous.
                   GDP = R + W + I + P + Dep. + Ind. Bus. Taxes + Misc.
        3. Q1 GDP revised 6/13 from 


   D. Functional Approach Needed
       1. If GDP measures value then worth is determined by what
          a product does.
       2. A Smart Phone value would be the sum of doing what the average
           person does it in terms of the value of competing products
       3. For me it is a replacement for a land line, a portable phone, a second
           connection to Internet, audio book storage and reader, portable tape
           recorder, camera, movie camera, TV, radio ...
       4. Using this system GDP is much higher making productivity much
   E. Readings and Videos
GDP shortcomings as a measure of economic health 
America has changed way it measures GDP Economist Magazine
Beyond-GDP Are There Better Ways Measure Well-Being
          4. GDP: A Brief But Affectionate History
          5. Problem of GDP as a barometer
          6. We need a 21st ce ntury view of economy
  7. Is it Time to Abandon GDP?
   8. Impact Of Including R And D In GDP from the St Louis Fed
9. Composition-gross-domestic-product/video hoover

Image result for revising gdp graph

II. National Income Accounts Measure Production 
       A. The highest figure calculated is Gross Domestic
       B. 2010 National Income Accounts (billions of $) through Q3 from
               from the 2011 Economic Report of the President

        14,745 Gross Domestic Product (GDP)
             188 Minus rest of world factor payments to  non-U. S. companies

        14,933 Gross National Product (GNP)
          1,872 Less capital consumption allowance (depreciation)
        13,061 Net National Product
             184  Less s tatistical discrepancy

        12,877 National Income (NI)
1,640  Corporate profits
             720  Net interest
          1,010  Contributions for social insurance
             133  Business transfer payments (net)
          1,002  Taxes on production and imports less subsidies
               14 Current deficit on government enterprises
  1,890 Personal interest and Personal dividend income
          2,316 Personal government transfer payments to people

        12,593 Personal Income (PI)
          1,178 Personal current taxes

        11,415 Disposable Personal Income (DPI)
        10,736 Consumption (C)

           679 Saving (S)




    C. Why GDP is not a good economic barometer and
           Weapons of economic misdirection
      D. Reading
          1. corporations often pass on much of their tax burden
          2.The Problem With the Corporate Tax  N. MANKIW NYT, 
          3. Historical analysis from US Bureau of Economic Analysis  
4. Wikipediaís entry on the 2007 Budget is also interesting.
          5.2008 figures of total nominal GDP
             (bottom) compared to - adjusted GDP (top) from Wiki


III. Money vs. Real GDP (taking inflation out of financial data) 

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

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

IV. Interpreting National Income Account Data
  A. Comparing data over time requires adjusting for inflation, increased pop-
           ulation, and number of people working, and quality of goods produces.
          As the chart to the right indicates, some people think government
          adjustments distorts government statistics.
      B. National income accounts do not count leisure time and nonmarket
      C. Positive and negative effects of economic activity upon the environment
           are not measured by national income accounts.   
Genuine Progress Indicator (GPD) attempts to make up for important
           economic activities not measured by GDP.
      E. Read Analyzing durable goods over time, from seeking alpha 7/26/13
          by Doug Short

Editor's Note:
 Attempts to measure the quality of goods, value of
services and the volume of the underground economy are poor at best and if they are a growing portion of economic activity; the degree to which GDP underestimates economic activity will grow increasing middle class anxiety,

Vehicle Age Demonstrates GDP Failure to Measure Output

1. Estimated value of new vehicles added to GDP is understated as is the wellbeing of the owner.
2. GDP from used vehicles severely understated as is the wellbeing of new often middle income owners.
3. GDP also doesn't measure the gain to medium income owners from no-fault insurance.

The ability of GDP to adequately measure total U.S. economic activity and the resulting wellbeing  has decrease dramatically over the last one-hundred years. Its undervaluation of economic activity has grown. This has resulting in  productivity growth being undervalued. The inability to measure product quality and the value of services has added to the problem. GDP's ability to adequately measure the value of automobiles, TVs and Smart Phones will be contrasted.

The automobile and its related infrastructure and TV were easily measured by GDP. The auto production increased employment dramatically. TV production increased employment somewhat but production techniques improved lowering both cost and employment dramatically as did the contribution to GDP and productivity. Then came the cell/smart phones. Their increase consumer wellbeing was similar to vehicles and TV's but production cost and sales value were relatively minor as was the increase in GDP, employment and productivity..

How do you measure the GDP of a smart phone. Its a phone, a TV, a tape recorder, a camera, a movie camera, a library.... Add the cost of said items in 1950's and 60's prices to today's GDP. How much income did it take to buy these items 50 years ago during the glory days of GDP and income growth. Now add the drop in cost phone call across the country to income. If you take, save and send a picture little is added to GDP, productivity  and income. But there is value. Now adjust for quality. Color TV, Now estimate the value of all this being portable. The middle class has a lot more income and wellbeing than is being measured. Last night I watched Taxes beat Notre Dame on my phone while first watching a Blue Ray DVD on my movie screen sized TV. Then I switched to streaming Bosch on Amazon TV and finally ended up watching golf on Direct TV. The Boston Braves moved out when I was 12 and my life came to an end. Since retiring to Florida I have continued to watch the PATs.

Major scientific accomplishments such as aspirin, penicillin and curing childhood diseases pile up and contribute to wellbeing not according to GDP. Soon to come gene therapy. How can you measure making a blind person see? For a comparison of today with past see Recent Decades Ranked By Problems

Editor's Note: GDP includes an estimated quality improvement but to me some items make such a large improvement that increased GDP must be dramatically understated. The automobile was the first great consumer good GDP measured and it along its infrastructure were easy to measure and GDP increased substantial. Employment also increased dramatically Then came the TV. It also represented a tremendous increase in wellbeing but over time production techniques dropped dramatically as did GDP and the employment required per unit of enjoyment.   Then came the cell/smart phones and the enjoyment was as large as vehicles and TV's but cost was minimal and so was the increase in GDP and employment.  Other major scientific accomplishments as aspirin, penicillin, curing childhood diseases pile up and contribute to wellbeing but GDP and employment are minimally affected. Soon to come gene therapy. How can you measure making a blind person see?

If GDP is so much larger why are so many unhappy? One reason is the yellow journalism created of fear pornography which used to result from because of major national events. Then technology got inexpensive, sources of news multiplied and reaching people required little capital investment meaning reaching a small group could meaningfully increase profits.

Fear pornography for a particular event appeals to a fairly small audience but this can mean huge profits. No longer is a major world event like the U.S. 1961 blockade of Cuba needed to generate a meaningful and profitable  audience. Today, by naming snowstorms, The Weather Channel has reached a significantly larger audience who must watch the track of this particular disaster. As bad as a school shooting is fear affects enough people so CNN ran a Connecticut tragedy 24 hours a day for four plus days. Years ago  a land falling hurricane was needed to move the ratings. But there are a few who must watch this media created disaster and CNN, Fox and others make big bucks.

Measurment Problems  

Income inequality in the United States: itís flatter than you probably realize (Phillip W. Magness)  Magness reviews distortions introduced in Piketty-Saez analyses by incorrect treatment of U.S. tax laws in their calculations.  Magness has constructed what he says is a corrected income distribution curve for the U.S.  Econintersect:  Of course, none of this impacts wealth distribution which also has gone through extreme swings.



Note: IMF data makes me nervous!


United States Dollar from Wiki




From 6/24/11















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