I. Gross Domestic Product (GDP)
II. National Income Accounts Measure Production
III. Money vs. Real GDP
IV. Interpreting National Income Account
V. Measurement Problems

Test Review Notes Chapters 8-13

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 



   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 century 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 statistical 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. Wikipedia’s 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) 


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





D. 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.

V. Measurement Problems

WEA Pedagogy Blog

Perspectives on Economics & Society

GDP comparisons across time

March 10, 2020Leave a comment

  from Asad Zaman

This continues a sequence of posts aiming to show how apparently objective statistics conceal large numbers of arbitrary value judgements. 

This is the 8th post, which considers comparisons of GDP across time within a single country.

In comparisons across countries, we face the difficulty that the concept of “wealth” has varied across societies, and changed with time. The “average basket” of goods varies for each country, because different societies have different preferences and values. We cannot compare apples and oranges. It seems that these problems would be reduced if we considered a single society across time. The concept of wealth, and the average bundle of goods would remain relatively stable, at least across short periods of time. We will now discuss difficulties which arise when we consider growth across time, comparing GDP across the years for a single country.  read more

(1) Lies, Damned Lies, and Statistics,

Subjectivity Concealed in Index Numbers,

The Values of a Market Society,

Cross-Country Comparisons of Wealth,

Purchasing Power Parity,

Downfall of Rhetoric in 20th Century,

Facts & Values: Distinction or Dichotomy?.

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Income inequality in the United States: it’s 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.


Measuring Wellbeing

Charles Jones and Peter Klenow proposes an interesting new measure of economic welfare. It is by no means perfect, yet it is considerably more comprehensive than median income, taking into account not only per capita consumption, growth more is better changes in working time. less is better life expectancy more is better
and inequality less is better



Analysis: While U.S. has easily the most income per capita, UK is second with 25% less, is only slightly ahead in wellbeing,

The French
Take long vacations and retire earlier, and so they typically work fewer hours. Their higher life expectancy at birth (80 years in 2005, compared to 77 in the United States),  presumably reflects advantages with respect to health care, diet, lifestyle, and the like. Their income and consumption are somewhat more equally distributed than is the norm in the United States

Our extension of the Jones-Klenow analysis shows U.S. economic welfare has increased at about 2.3 percent per year since 1995, for a cumulative gain in two decades of 60 percent. Gains in income and consumption per capita and in life expectancy are the major reasons for improved welfare. Increased inequality of consumption has subtracted about 0.2 percentage points a year from the welfare measure since 1995. Editor: Very Interesting, very subjective, but basically true.

Economic Normality 1945-2015
looks at the WHY of US Wellbeing.

Economic Wellbeing puts the concept of economic wellbeing in perspective.

Negativity in the Media if properly understood would improve U.S. Civility

Two decades before the 2007 crisis, economic welfare improved rapidly.
The gains in welfare were driven primarily by increases in per capita consumption and by improvements in life expectancy. Rising consumption inequality subtracted less than 2/10 of one-percent from the annualized growth rate in welfare during the pre-crisis period, and changes in leisure/work hours per person were stable but contributions were  small.
Post crisis from 2007–15 economic well-being improved, but slowed considerably, to just about 0.9 percent per year Per capita consumption slowed to about 0.4 percent per year—about the same as the growth rate of per capita GDP. table-2 Disappointing economic growth is the dominant reason for the slower welfare gains.

 The longer-term trend toward inequality continued and intensified slightly after 2007, subtracting about a quarter percentage point from welfare growth.

 Are Americans Better Off than they were a Decade or Two-Ago B. Bernanke

Note: IMF data makes me nervous!


United States Dollar from Wiki




From Shadowstats.com/ 6/24/11













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