Gross Domestic Product [What is not included]

National Income Accounting C + Ig + G + Xn [ X-M ] = GDP – Depreciation = [what is for sale] NDP + NFFIEUS –Statistical discrepancy = NI – U n C or P ro – C or I nc T ax - S oc S ec - T axes on pro & M+ T P = [ PI is what you can spend , save , or pay in taxes ] PI – Personal Income Taxes = [ DI is what you can spend or save ] [“Replacement capital”] [ GDP and its four cousins] -

GDP – measures legal production in U.S. in one year. What 8 Things Do Not Count In GDP GDP measures all final goods/services produced by workers and capital located in the U.S. , regardless of ownership. [ Domestically located resources ] Final goods are goods ready for consumption . To Be or Not To Be Counted in GDP

1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers. What Eight Things Do Not Count In GDP?

Value Added – increase in the market value at each stage $1 $4 $7 $8 $1 $1 $1 $4 $4 $7 Value of Output($) $20 $12 $5 $1 Final Good Retail Shirt W holesale Shirt Cloth Cotton Value Added ($) Intermediate Good S um = $ 38 Cotton Farmer Textile Mill Shirt Manufacturer 0 Retail Store $20 = sum 8 7 4 1 So, to avoid “multiple counting” , we count the $20 final price, not $38 . $20 “ Wife-beater ” Shirt from Kohls Only Final Sales ($20) Count [ to prevent “multiple counting” ( $38 ) ]

[It has not been produced again in 1963 & would not count.] 2. 2nd Hand Sales – no current production. A. 1957 Chevy bought in 2007 The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 07. They also have not been produced again. Salesman’s commission would count. You are buying his services. Salesman Shoe salesman 57 Chevy GDP - what is not counted [#2]

The salesman’s commission does count. ,[object Object]

The next two slides are “Nonproduction Transactions” [just “Financial Transactions”] They include: A. Stock Market T ransactions B. Public Transfer Payments C. P rivate Transfer P ayments

3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production . Ex: If 100 shares of Dell stock is bought I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another [swapping bits of paper] Buying stock is not buying a product but buying ownership of the firm . Buying bonds is making a loan . GDP - what is not counted [#3]

4. Public Transfer Payment s –welfare, unemployment, social security . [There is no contribution to final production ] GDP – what is not counted [#4]. 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] “ Now that I’ve gotten my welfare check, I can get an iPhone”

Unreported “legal” business activity does not count. This is two-thirds of the “underground economy.” Then he has LASIK but the surgeon doesn’t report $500 of his $3,400 bill? And what if this waitress doesn’t report all tips ? And what if the dentist doesn’t report $400 for teeth whitening ? Before LASIK Surgery 5. Unreported “Legal” Business Activity

Making money illegally (drug money) and making it look like it was legally earned (like buying a laundry mat or 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 1/3 of the “underground economy,” it includes murder for hire, gambling, drugs, prostitution, and money laundering. And, what about “ Jane Ho”? “ I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.” 6. Illegal business activity is also not counted. Money Laundering

S elf E mployed $255 O ther Legal $25 R ents & Royalties $ 30 C orporate Profits $50 Interest $55 Wages and Salaries $185 Drugs $120 Bribery $35 Gambling and Loan Sharking $10 Pornography $20 Fraud $30 Other Illegal $20 Prostitution $30 Stolen Goods $35 U.S. Underground Economy I llegal $300 B L egal $600 B What gets reported is the “Above Ground” W hat doesn’t get reported is the “Underground”

Underground Economy [compared to “above ground”] Unreported exchanges that take place - legal and Illegal [Hidden – “off the books”] Total illegal activities - $300 billion Total legal activities - $600 billion Total legal and illegal - $900 billion Underground Economy 1. Illegal business activities ( 1/3 ) – gambling, narcotics trade, prostitution, loan sharking, etc. 2. Unreported legal business activities ( 2/3 ) a. waitresses not reporting all of her tips b. Cabdriver not reporting all of his income c. Self employed cheat the most. Off-the-books cash transactions d. $300 billion *IRS estimates that about $300 billion in income taxes from the underground economy escapes federal taxes each year. U.S. Underground Economy $300 B

Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework. 7. Non-market Transactions Are Not Counted

Work in your own household or volunteer work in the community does not count because there was no payment. So, don’t marry your maid , gardener , or fitness instructor , or you will hurt GDP. 7. Non-market Transactions Are Not Counted

If U. S. corporations produce goods overseas , it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. GM in France Nike in Indonesia 8. U.S. Corporations Producing Goods Overseas

[object Object],[object Object],[object Object],[object Object],5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity Eight Things Not Counted in GDP [no production]

___ ___ 1. New Toyota Tundra truck manufactured in San Antonio and sold to your economics teacher the 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 2008 ? Is It Counted In GDP? On the next slide, read each sentence and determine, “ To Be or Not To Be Counted?” That is the question. If “Yes” , put “Y” and tell if it is “C”, “Ig”, “G”, or “X”. If “No” , put “N” and give the number from below on why it is not counted in GDP. GDP DOES NOT INCLUDE 1. Second hand sales [no current production] [but the salesman’s commission counts] 2. Public/Private transfer payments [no current production] 3. Purely financial transactions [no current production] [broker’s fees do count] 4. Intermediate goods [component of final good] 5. U.S. corporations producing overseas . 6. Non-market transactions [ household or volunteer work. Underground Economy [not reported] 7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.] 8. Unreported legal business activity [“off the books”] Example: Y C 1 N

Is It Counted In GDP? ___ ___ 1. You buy a purple “Tinky Winky” from Wal-Mart. ___ ___ 2. You and your family paint your house . [labor involved] ___ ___ 3. You marry your housemaid . [“working-for-love”] [her services] ___ ___ 4. You buy 100 shares of Microsoft Corporation. ___ ___ 5. You volunteer to babysit your little sister to help your parents while they work. ___ ___ 6. Bob buys a 1965 ford Mustang convertible which is in mint condition. ___ ___ 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2008. ___ ___ 8. You and your friend volunteer 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 and doesn’t report count? ___ ___ 10. You are given s suitcase full of $100 bills from the sale of smuggled drugs . ___ ___ 11. Your mother is teaching you to read [and not having much success]. ___ ___ 12. Your dad bakes you a home-baked loaf of bread . [his labor] ___ ___ 13. You buy a loaf of bread from Kroger’s Grocery Store. ___ ___ 14. The U.S. government purchases 5 B-2 Bombers for $2 B each. ___ ___ 15. Ford buys a ton of sheet metal used in making car doors . ___ ___ 16. You buy a new “iPod Classic” from the Apple store, ___ ___ 17. You send in a $90 check to your dentist for cleaning your teeth . ___ ___ 18. Your family buys a new house next to the mansion of Bill Gates. ___ ___ 19. 100 additional teachers are hired by the Frisco ISD. ___ ___ 20. GM invest in $500 million worth of robots to assemble their cars. ___ ___ 21. You volunteer 10 hours a week of your time to work for senior citizens. ___ ___ 22. Ford produces 25,000 new F150s which are not sold by the end of the year. ___ ___ 23. Russia buys 3,000 Dell computers as they become Rusky Dell Dudes . ___ ___ 24. A man’s wife does all his cooking and sewing, working for him 16 hours per day . ___ ___ 25. Nike produces $10 million worth of Nike Air Jordan’s in Vietnam . Y C N 6 N 6 N 3 N 6 N 1 Y C N 8 N N 7 N 6 6 N 6 Y C Y G N 4 Y C Y C Y Ig Y G Y Ig N 6 Y Ig Y X N 6 N 5 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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Gross Domestic Product [What is not included]

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