CC + + IgIg + + GG + + Xn Xn [ [X-MX-M]] =

GDPGDP–Depreciation= [what is for sale]

NDPNDP +NFFIEUS–Statistical discrepancy =

NINI–UUn Cor Pro–CCor Inc Tax-SSoc Sec-Taxes on pro & M+TTP= [PIPI is what you can spendspend,, savesave,, oror pay in taxespay in taxes]

PIPI – Personal Income Taxes = [DIDI is what you can spendspend oror savesave ]

[“Replacement capital”][“Replacement capital”]

[[GDPGDP and its four cousins] and its four cousins]

--

National Income AccountingNational Income Accounting

GDPGDP – – measures legal production in U.S. measures legal production in U.S. in one year. in one year. GDP measures allGDP measures all final goods/services final goods/services produced produced by by workers workers and and capital located capital located in the U.S.in the U.S., regardless of ownership., regardless of ownership. [[Domestically located resourcesDomestically located resources] ] Final goodsFinal goods are goods are goods ready for consumptionready for consumption..

1. 1. Intermediate GoodsIntermediate Goods – components of the final good. – components of the final good. A. Ford buys A. Ford buys batteries or tiresbatteries or tires for its cars. for its cars.

B. KFC buys B. KFC buys chickenschickens to eventually sell to customers. to eventually sell to customers.

Value AddedValue Added – increase in the market value at each stage

$1$1

$4$4

$7$7

$8$8

$1$1 $1$1 $1$1

$4$4$4$4

$7$7

Valu

e of

Out

put($

)Va

lue

of O

utpu

t($)

$20$20

$12$12

$5$5

$1$1

Final GoodFinal GoodRetail ShirtRetail Shirt

WWholesaleholesaleShirtShirt

ClothCloth

CottonCotton

Valu

e A

dded

($)

Valu

e A

dded

($)Intermediate GoodIntermediate Good

SSum = um = $$3838 CottonCottonFarmerFarmer

TextileTextileMillMill

ShirtShirtManufacturerManufacturer

00 RetailRetailStoreStore

$20 = sum$20 = sum

88

77

44

11

So, to avoidSo, to avoid “multiple counting”“multiple counting”, we count the, we count the $20 $20 final price, notfinal price, not $38$38..

$20 $20 ““Wife-beaterWife-beater””Shirt from KohlsShirt from Kohls

Only Only Final SalesFinal Sales($20)($20) CountCount [[to prevent to prevent “multiple counting”“multiple counting”(($38$38))]]

[It has not been produced again[It has not been produced again in in 19631963 & & would not count.]would not count.]

2. 2. 2nd Hand Sales2nd Hand Sales – – no no current production.current production. A. 1957 Chevy boughtA. 1957 Chevy bought in in 20072007

The salesman is doing productive work. His commission would count.The salesman is doing productive work. His commission would count.B. Boots producedB. Boots produced in in 1980 are bought 1980 are bought in ain a Thrift Store in 07. Thrift Store in 07.

They also have not been produced again.They also have not been produced again.Salesman’s commission would count.Salesman’s commission would count.You are buying his services.You are buying his services.

SalesmanSalesman

Shoe salesmanShoe salesman

57 Chevy57 Chevy

The salesman’s commission does count.The salesman’s commission does count.

• So again, So again, second hand salessecond hand sales, let’s say , let’s say from Salvation Army, do not count. from Salvation Army, do not count.

The next two slides are “Nonproduction Transactions”[just “Financial Transactions”]

They include:A. Stock Market TransactionsB. Public Transfer PaymentsC. Private Transfer Payments

3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. Ex: If 100 shares of Dell stock100 shares of Dell stock is bought

I’m not buying a Dell computerI’m not buying a Dell computerbut part ownership of Dell.but part ownership of Dell.

Exchanging one financial asset for anotherExchanging one financial asset for another[swapping bits of paper][swapping bits of paper]

Buying stock is not buying a product but Buying stock is not buying a product but buying buying ownership of the firmownership of the firm. Buying bonds is . Buying bonds is making a loan..

4. 4. Public Transfer PaymentPublic Transfer Paymentss –welfare, unemployment, social –welfare, unemployment, social securitysecurity. [There is nono contribution to final productioncontribution to final production]

“Now that I’ve gotten my welfare check, I can get an iPhone”

Also, Private Transfer Payments, like your parents giving you $250 cash for Christmas, or - $100 for making an “A” in economics. [Just transferring funds from one private individual to another private individual]

Unreported “legal”“legal” business activity does not count.This is two-thirdstwo-thirds of the “underground economy.”“underground economy.”

Then he has LASIK but thesurgeon doesn’t reportdoesn’t report $500$500 of his $3,400 bill?

And what if thiswaitress doesn’tdoesn’treport all tipsreport all tips?

And what if the dentist doesn’t doesn’t report $400 forreport $400 forteeth whiteningteeth whitening?

Before LASIK SurgeryBefore LASIK Surgery

Making money illegally (drug money)and making it look like it was legallyearned (like buying a laundry mator car wash that deal in cash) and report it as legally earned.

Illegal business activity, because it goes unreported, also does not count. Making up 1/31/3 of the “underground economy,”“underground economy,” it includes murder for hire, gambling, drugs, prostitution, and money laundering.

And, what about“Jane Ho”?

“I’m getting $1,000 to killyou, Ziggy, but at least itwill not count in GDP.”

Money Laundering

SSelf elf EEmployedmployed $255$255

OOther ther Legal $25Legal $25RRents & ents & RoyaltiesRoyalties $ $3030

CCorporate

orporate Profits $50

Profits $50

Interest $55

Interest $55

Wages andWages andSalaries $185Salaries $185

Drugs $120

Drugs $120

Bribery $35

Bribery $35Gambling andGambling andLoan Sharking $10Loan Sharking $10

Pornography $20Pornography $20

Fraud $30Fraud $30

Other Illegal $20

Other Illegal $20

Prosti

tutio

n $30

Prosti

tutio

n $30

Stol

en G

oods

$35

Stol

en G

oods

$35

IIllegalllegal$300 B$300 B

LLegalegal$600 B$600 B

What gets reported isWhat gets reported isthe “Above Ground”the “Above Ground”

WWhat hat doesn’t get reporteddoesn’t get reportedis the “Underground”is the “Underground”

Underground EconomyUnderground Economy [compared to “above ground”][compared to “above ground”]Unreported exchanges that take place - Unreported exchanges that take place - legal legal and and Illegal [Hidden – “off the books”]Illegal [Hidden – “off the books”]

Total Total illegal illegal activities - activities - $300 billion$300 billionTotalTotal legallegal activities - activities - $600 billion$600 billionTotalTotal legallegal and and illegalillegal - - $900 billion$900 billionUnderground EconomyUnderground Economy 1. 1. Illegal business activitiesIllegal business activities ( (1/31/3) – gambling, ) – gambling, narcotics trade, prostitution, loan sharking, etc.narcotics trade, prostitution, loan sharking, etc. 2. 2. Unreported legal business activitiesUnreported legal business activities ( (2/32/3)) a. waitresses not reporting all of her tipsa. waitresses not reporting all of her tips b. Cabdriver not reporting all of his incomeb. Cabdriver not reporting all of his income c. Self employedc. Self employed cheat the most. cheat the most. Off-the-books cash transactionsOff-the-books cash transactions d. $300 billiond. $300 billion*IRS*IRS estimates that about estimates that about $300 billion$300 billion in income taxes from in income taxes from the underground economy escapes federal taxes each year.the underground economy escapes federal taxes each year.$300 B$300 B

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

You need to do some ofYou need to do some ofthis housework.this housework.

Work in your own householdown household or volunteer workvolunteer work in the community does not count because there was no payment.

So, don’t marry your don’t marry your maidmaid, , gardenergardener, or , or fitness instructorfitness instructor, or you will hurt GDP.

IfIf U. S. corporationsU. S. corporations produce goods overseasproduce goods overseas, it does not count in GDP, but would count in GNP.it does not count in GDP, but would count in GNP.Remember, we are measuring production insideRemember, we are measuring production insidethe U.S. Imports represent production outside ofthe U.S. Imports represent production outside ofthe U.S. the U.S.

GM in GM in FranceFrance

Nike in Nike in IndonesiaIndonesia

1. Second Hand Sales[no production]2. Public/Private Transfer Payments3. Purely Financial Transactions4. Intermediate Goods5. U.S. Corporations producing overseas6. Non-market transactions [household or volunteer work]Underground EconomyUnderground Economy7. Illegal business activity8. Unreported legal business activity

___ ___ 1. New Toyota Tundra truckNew Toyota Tundra truck manufactured in San Antonio and sold to your economics teachersold to your economics teacher the year it was producedthe year it was produced.___ ___ 2. You buy a new Wii at GameStop in 2007. Does it count if you resell it on eBay in March of 2008resell it on eBay in March of 2008?

On the next slide, read each sentence and determine,On the next slide, read each sentence and determine,““To BeTo Be or or Not To Be Counted?” That Not To Be Counted?” That is theis the question. question.If If “Yes”“Yes”, put , put “Y”“Y” and tell if it is and tell if it is “C”, “Ig”, “G”, or “X”.“C”, “Ig”, “G”, or “X”.If If “No”“No”, put , put “N”“N” and give the number from below on and give the number from below on why it is not counted in GDP.why it is not counted in GDP.GDP DOES NOT INCLUDEGDP DOES NOT INCLUDE1. Second hand salesSecond hand sales [no current production] [but the salesman’s commission counts]2. Public/Private transfer paymentstransfer payments [no current production]3. Purely financial transactionsPurely financial transactions [no current production] [broker’s fees do count]4. Intermediate goodsIntermediate goods [component of final good]5. U.S. corporations producing overseasU.S. corporations producing overseas.6. Non-market transactionsNon-market transactions [ household or volunteer work. Underground Economy [not reported]Underground Economy [not reported]7. Illegal business activityIllegal business activity [prostitution, murder-for-hire, illegal drugs, etc.]8. Unreported legal business activityUnreported legal business activity [“off the books”]

Example:Example:YYCC

11 NN

___ ___ 1. You buy a purple “Tinky Winky”“Tinky Winky” from Wal-Mart.___ ___ 2. You and your family paint your housepaint your house. [labor involved]___ ___ 3. You marry your housemaidmarry your housemaid. [“working-for-love”] [her services]___ ___ 4. You buy 100 shares of Microsoftbuy 100 shares of Microsoft Corporation.___ ___ 5. You volunteer to babysit your little sisterbabysit your little sister to help your parents while they work.___ ___ 6. Bob buys a 1965 ford Mustang1965 ford Mustang convertible which is in mint condition.___ ___ 7. The salesman gets a commissioncommission [pay] for selling that 1965 Ford Mustang1965 Ford Mustang in 2008.___ ___ 8. You and your friend volunteer to cookvolunteer to cook at the senior class picnic.___ ___ 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it.

Does the $500 the dentist keeps$500 the dentist keeps and doesn’t report count?___ ___ 10. You are given s suitcase full of $100 bills$100 bills from the sale of smuggled drugssmuggled drugs.___ ___ 11. Your mother is teaching you to readmother is teaching you to read [and not having much success].___ ___ 12. Your dad bakes you a home-baked loaf of breadbakes you a home-baked loaf of bread. [his labor]___ ___ 13. You buy a loaf of breadbuy a loaf of bread from Kroger’s Grocery Store.___ ___ 14. The U.S. government purchases 5 B-2 Bombersgovernment purchases 5 B-2 Bombers for $2 B each.___ ___ 15. Ford buys a ton of sheet metal used in making car doorston of sheet metal used in making car doors.___ ___ 16. You buy a new “iPod Classic”“iPod Classic” from the Apple store, ___ ___ 17. You send in a $90 check to your dentist for cleaning your teethcleaning your teeth.___ ___ 18. Your family buys a new housebuys a new house next to the mansion of Bill Gates.___ ___ 19. 100 additional teachers are hiredteachers are hired by the Frisco ISD.___ ___ 20. GM invest in $500 million $500 million worth of worth of robotsrobots to assemble their cars.___ ___ 21. You volunteer 10 hours a weekvolunteer 10 hours a week of your time to work for senior citizens.___ ___ 22. Ford produces 25,000 new F150s25,000 new F150s which are not sold by the end of the year.___ ___ 23. Russia buys 3,000 Dell computersDell computers as they become Rusky Dell DudesRusky Dell Dudes.___ ___ 24. A man’s wifeman’s wife does all his cooking and sewing, working for him 16 hours per dayworking for him 16 hours per day.___ ___ 25. Nike producesproduces $10 million worth of Nike Air Jordan’s in VietnamNike Air Jordan’s in Vietnam.

YYCCNN66NN66NN33NN66NN11YYCCNN

88 NN

NN77NN66

66

NN66YYCCYYGGNN44YYCCYYCCYYIgIgYYGGYYIgIgNN66YYIgIgYYXXNN66NN55

1. 2nd Hd sales2. Transfers3. Financial4. Intermediate5. Overseas6. Non-market7. Illegal8. Unreported