Ep039 The Randall Carlson Podcast: Modern Geocosmic Threats - Meteors an...

No Such Thing as a Free Lunch: Principles of Economics (Part 104)

It's a recession when your neighbor loses his job; it's a depression when you lose yours.

Harry S. Truman

Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

(Part B)

by

Charles Lamson

Recessions, Depressions, and Unemployment

We now move from considering long-run trends in the last post to considering deviations of the economy from long-run trends. In other words, we consider business cycles, the periodic ups and downs in the economy.

A recession is roughly a period in which real GDP declines for at least two consecutive quarters. Also recall that real GDP is a measure of the actual output of goods and services in the economy during a given period. When real GDP falls, less is being produced. When less output is produced, fewer inputs are used, employment declines, unemployment rate rises, and a smaller percentage of the capital stock at our disposal is utilized (more plants and equipment are running at less than full capacity). When real output falls, real income declines.

A depression is a prolonged and deep recession, although there is disagreement over how severe and how prolonged a recession must be to be called a depression. Nearly everyone agrees the U.S. economy experienced a depression between 1929 and the late 1930s. The most severe recession since the 1930s took place between 1980 and 1982.

Since 1970 there have been four "recessionary" periods in the U.S., 1974-1975, 1980-1982, 1990-1991, and 2001. Table 1 summarizes some of the differences between the recession of 1980-1982 and the early part of the Great Depression. Between 1929 and 1933, real GDP declined by 26.6 percent. In other words, in 1933 the United States produced 26.6 percent less than in 1929. While only 3.2 percent of the labor force was unemployed in 1929, 25.2 percent was unemployed in 1933. By contrast, between 1980 and 1982 real GDP was essentially unchanged rather than declining. The unemployment rate rose from 5.8 percent in 1979 to 9.7 percent in 1980. Capacity utilization rates, which show the percentage of factory capacity being used in production, are not available for the 1930s, so we have no point of comparison. However, Table 1 shows that capacity utilization fell from 85.2 percent in 1979 to 72.1 percent in 1982. Although the recession in the early 1980s was severe, it did not come close to the severity of the Great Depression.

TABLE 1

Defining and Measuring Unemployment

The most frequently discussed symptom of a recession is unemployment. In September of 1982, the United States unemployment rate was over 10 percent for the first time since the 1930s. Although unemployment is widely discussed, most people are unaware of what unemployment statistics mean or how they are derived. 

The unemployment statistics released to the press on the first Friday of each month are based on a survey of households conducted by the Bureau of Labor Statistics (BLS), a branch of the Department of Labor. Each month the BLS draws a sample of 65,000 households and completes interviews with all but 2,500 of them. Each interviewed household answers questions concerning the work activity of household members 16 years of age or older during the calendar week that contains the twelfth of the month. (The survey is conducted in the week that follows the week that contains the twelfth of the month.)

If a household member 16 years of age or older worked 1 hour or more as a paid employee, either for someone else or in his own business or farm, he is classified as employed. A household member is also considered employed if he worked 15 hours or more without pay in a family enterprise. Finally, a household member is counted as employed if she held a job from which she was temporarily absent due to illness, bad weather, vacation, labor-management disputes, or personal reasons, whether she was paid or not.

Those who are not employed fall into one of two categories, (1) unemployed or (2) not in the labor force. To be considered unemployed, a person must be available for work and have made specific efforts to find work during the previous four weeks. A person not looking for work, either because he or she does not want a job or has given up looking, is classified as not in the labor force. People not in the labor force include full-time students, retirees, individuals in institutions, and those staying home to take care of children or elderly parents.

The total labor force in the economy is the number of people employed plus the number of people unemployed:

Labor force = employed + unemployed

The total population 16 years of age or older is equal to the number of people in the labor force plus the number not in the labor force:

Population = labor force + not in labor force

With these numbers, several ratios can be calculated. The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force:

Unemployment rate = unemployed / employed + unemployed

In April 2021, the unemployment rate was 6.1 percent.

The ratio of the labor force to the population 16 years old or over is called the labor-force participation rate:

Labor force participation rate = labor force / population

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 414-415*

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No Such Thing as a Free Lunch: Principles of Economics (Part 103)

"Don't go through life, grow through life." 

Eric Butterworth

Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

(Part A)

by

Charles Lamson

An ideal economy is one in which there is rapid growth of output per worker, low unemployment, and low inflation. In this situation government economic policy makers can sleep well at night. Alas, however, an economy is not always in this ideal state. There can be times of low growth, high unemployment, and high inflation. A key part of macroeconomics is to consider what determines output, unemployment, and inflation. Why is the growth of output per worker sometimes high and sometimes low? Why are unemployment and inflation sometimes high? We begin in upcoming posts the task of explaining how the macroeconomy works. Before jumping into the analysis, however, in the next several posts it will be useful to spend a little more time on description.

We first discuss long-run issues, namely, the rate of growth of output and output per worker over a long period of time. We then move to the short-run issues of unemployment and inflation.

Long-Run Output and Productivity Growth

Before we begin our discussion of economic growth it is important to review what is meant by "capital." Capital is anything that is produced that is then used as an input to produce other goods and services. Capital can be tangible, such as buildings and equipment, or intangible. The knowledge and skills acquired through education and training can be thought of as intangible "human capital." Capital can be private or public. The roads and bridges that we drive and walk on are a part of the public capital stock. Capital, thus, can take many forms. To simplify the discussion, however, we will sometimes refer to capital as simply "machines."

In a simplified economy, machines (capital) and workers (labor) are needed to produce output. Suppose that an economy consists of 6 machines and 60 workers, with 10 workers working on each machine, and also that the length of the work week is 40 hours, with this workweek resulting in 50 units of output per month per machine. Total output (GDP) for the month is 300 units (6 machines * 50 units per machine) in this simple economy.

How can output increase in this economy? There are a number of ways. One way is to add more workers. If, for example, 12 workers are added, two extra per machine, then more output can be produced per machine per hour worked because there are more workers helping out on each machine. Another way is to add more machines. For example, if 4 machines are added, then the 60 workers have a total of 10 machines to work with instead of 6, and more output can be produced per worker per hour worked. A third way is to increase the length of the workweek (e.g., from 40 hours to 45 hours). With workers and machines working more hours, more output can be produced. Output can thus increase if labor or capital increases or if the amount of time labor and capital are working per week increases.

Another way for output to increase in our economy is for the quality of the workers to increase. If, for example, the education of the workers increases, this may add to their skills and thus increase their ability to work on the machines. Output per machine might then rise from 50 units per month to some larger number per month. Also, if workers become more physically fit by exercising more and eating less fat and more whole grains and fresh fruits and vegetables, this may increase their output on the machines. People are sometimes said to be adding to their human capital when they increase their mental and physical skills.

The quality of the machines may also increase. In particular, new machines that replace old machines may allow more output to be produced per hour with the same number of workers. In our example, it may be that 55 instead of 50 units of output can be produced per month per new machine with 10 workers per machine and a 40-hour work week. An obvious example is the replacement of an old computer with a new, faster one, which allows more to be done per minute of work on the computer.

To summarize, output can increase if there are more workers, more skills per worker, more machines, faster machines, or longer workweek.

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 411-413*

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Ep041 Nanodiamonds Nail the YDIH Nay-sayers on The Randall Carlson Podca...

No Such Thing as a Free Lunch: Principles of Economics (Part 102)

“Work done off the paid job is looked down upon if not ignored. Autonomous activity threatens the employment level, generates deviance, and detracts​ from the GNP...Work no longer means the creation of a value perceived by the worker but mainly a job, which is a social relationship. Unemployment means sad idleness, rather than the freedom to do things that are useful for oneself or for one's neighbour. An active woman who runs a house and brings up children and takes in those of others is distinguished from a woman who 'works,' no matter how useless or damaging the product of this work might be.”

― Ivan Illich, The Right to Useful Unemployment and Its Professional Enemies

Measuring National Output and National Income

(Part F)

by

 Charles Lamson

Limitations of the GDP Concept

We generally think of increases in GDP as good. Increase in GDP (or preventing its decrease) is usually considered one of the chief goals of the government's macroeconomic policy. Because some serious problems arise when we try to use GDP as a measure of happiness or well-being, we now point out some of the limitations of the GDP concept as a measure of welfare.

 

GDP and Social Welfare

If crime levels went down, society would be better off, but a decrease in crime is not an increase in output and is not reflected in GDP. Neither is an increase in leisure time. Yet, to the extent that households desire extra leisure time (instead of having it forced on them by a lack of jobs in the economy), an increase in leisure is also an increase in social welfare. Furthermore, some increases in social welfare are associated with a decrease in GDP. An increase in leisure during a time of full employment, for example, leads to a decrease in GDP because less time is spent on producing output.

Most nonmarket and domestic activities, such as housework and childcare, are not counted in GDP even though they amount to real production. However, if I decide to send my children to daycare or hire someone to clean my house or to drive my car for me, GDP increases. The salaries of daycare staff, cleaning people, and chauffeurs are counted in GDP, but the time I spend doing the same things is not counted. A mere change of institutional arrangements, even though no more output is being produced, can show up as a change in GDP.

Furthermore, GDP seldom reflects losses or social ills. GDP accounting rules do not adjust for production that pollutes the environment. The more production there is, the larger is GDP, regardless of how much pollution results in the process.

GDP also has nothing to say about the distribution of output among individuals in a society. It does not distinguish, for example, between the case in which most output goes to a few people and the case in which output is evenly divided among all people. We cannot use GDP to measure the effects of redistribution policies (which take income from some people and give income to others). Such policies have no direct impact on GDP. GDP is also neutral about the kinds of goods an economy produces. Symphony performances, handguns, cigarettes, professional football games, Bibles, soda pop, milk, economics textbooks, and comic books all get counted similarly without regard to their differing value to society.

In spite of these limitations, GDP is a highly useful measure of economic activity and well-being. If you doubt this, answer this simple question: Would you rather live in the United States of 200 years ago, when rivers were less polluted and crime rates were probably lower, or in the United States of today? Most people say they prefer the present. Even with all the "negatives," GDP per person and the average standard of living are much higher today than 200 years ago.

The Underground Economy

Many transactions are missed in the calculation of GDP, even though in principle they should be counted. Most illegal transactions are missed if they are "laundered" into legitimate business. Income that is earned but not reported as income for tax purposes is usually missed, although some adjustments are made in the GDP calculations to take misreported income into account. The part of the economy that should be counted in GDP but is not is sometimes called the underground economy.

Tax evasion is usually thought to be the major incentive for people to participate in the underground economy.

Why should we care about the underground economy? To the extent that GDP reflects only a part of economic activity instead of a complete measure of what the economy produces, it is misleading. Unemployment rates, for example, may be lower than officially measured if people work in the underground economy without reporting this fact to the government. Also, if the size of the underground economy varies between countries---as it does---we can be misled when we compare GDP between countries.

Gross National Income Per Capita

Making comparisons across countries is difficult because such comparisons need to be made in a single currency, generally U.S. dollars. Converting GNP numbers for Japan into dollars requires converting from yen into dollars. Since exchange rates can change quite dramatically in short periods of time, such conversions are tricky. The World Bank adopted a measuring system for international comparisons. The concept of gross national income (GNI) is GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 404-406*

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No Such Thing as a Free Lunch: Principles of Economics (Part 101)

Macroeconomics is the analysis of the economy as a whole, an examination of overall supply and demand. At the broadest level, macroeconomists want to understand why some countries grow faster than others and which government policies can help growth. 

Alex Berenson

Measuring National Output and National Income

(Part E)

by

Charles Lamson

Nominal versus Real GDP

So far, we have looked at GDP measured in current dollars, or the current prices we pay for things. When a variable is measured in current dollars, it is described in nominal terms. Nominal GDP is GDP measured in current dollars---all components of GDP valued at their current prices.

In many applications of macroeconomics, nominal GDP is not a very desirable measure of production. Why? Assume there is only one good---say, pizza. In each year 1 and 2, 100 units (slices) of pizza were produced. Production thus remained the same for year 1 and year 2. Suppose the price of pizza increased from $1 per slice in year 1 to $1.10 per slice in year 2. Nominal GDP in year 1 is $100 (100 units * $1 per unit), and nominal GDP in year 2 is $1.10 (100 units * $1.10 per unit). Nominal GDP has increased by $10, even though no more slices of pizza were produced. If we use nominal GDP to measure growth, we can be misled into thinking production has grown when all that has really happened is a rise in the price level (inflation).

If there were only one good in the economy---like pizza---it would be easy to measure production and compare one year's value to another's. We would add up all the pizza slices produced each year. In the example, production is 100 in both years. If the number of slices had increased to 105 in year two, we would say production increased by 5 slices between year one and year two, which is a 5 percent increase. Alas, however, there is more than one good in the economy.

The following is a discussion of how the Bureau of Economic Analysis (BEA) adjusts nominal GDP for price changes. As you read the discussion, keep in mind that this adjustment is not easy. Even in an economy of just apples and oranges, it would not be obvious how to add up apples and oranges to get an overall measure of output. The BEA's task is to add up thousands of goods, each of whose price is changing over time.

In the following we will use the concept of a weight, either price weights or quantity weights. What is a weight? It is easiest to define the term by an example. Suppose in an economics course there is a final exam and two other tests. If the final exam counts for one-half of the grade and the other two tests for one-fourth each, the "weights" are one-half, one-fourth, and one-fourth. If instead the final exam counts for 80 percent of the grade and the other two tests for 10 percent each, the weights are .8, .1, and .1. The more important an item is in a group, the larger its weight.

Calculating Real GDP

Nominal GDP adjusted for price changes is called real GDP. All the main issues involved in computing real GDP can be discussed using a simple three-good economy and 2 years. Table 6 presents all the data that we will need. The table presents price and quantity data for two years and three goods. The goods are labeled A, B, and C, and the years are labeled 1 and 2. P denotes price, and Q denotes quantity.

TABLE 6

The first thing to note from Table 6 is that nominal output in current dollars in year one for good A is the price of good A in year 1 ($0.50) times the number of units of good A produced in year 1 (6), which is $3.00. Similarly, nominal output in year 1 is 7 * $0.30 = $2.10 for good B and 10 * $0.70 = $7 for good C. The sum of these three amounts, $12.10 in column 5, is nominal GDP in year 1 in this simple economy. Nominal GDP in year 2---calculated by using the year 2 quantities and the year 2 prices---is $19.20 (column 8). Nominal GDP has risen from $12.10 in year 1 to $19.20 in year 2, an increase of 58.7 percent.

You can see that the price of each good changed between year 1 and year 2---the price of good A fell ($0.50 cents to $0.40) and the price of goods B and C rose (B from $0.30 to $1.00; C from $0.70 to $0.90). Some of the change in nominal GDP between years 1 and 2 is due to price changes and not production changes. How much can we attribute to price changes and how much to production changes? Here, things get tricky.  The procedure that the BEA used prior to 1996 was to pick a base year and use the prices in that base year as weights to calculate real GDP. This is a fixed-weight procedure because the weights used, which are the prices, are the same for all years---namely, the prices that prevailed in the base year.

This example shows that growth rates can be sensitive to the choice of the base year---24.8 percent using year 1 prices as weights and 4.3 percent using year 2 prices as weights. The old BEA procedure simply picked one year as the base year and did all the calculations using the prices in that year as weights. The new procedure makes two important changes. The first (using the current example) is to "split the difference" between 24.8 percent and 4.3 percent. What does "splitting the difference" mean? One way would be to take the average of the two numbers, which is 14.55 percent. What the BEA does is to take the geometric average (The geometric mean is most appropriate for series that exhibit serial correlation. This is especially true for investment portfolios (investopedia.com)], which for the current example is 14.09 percent. These two averages (14.55 percent and 14.09 percent) are quite close, and the use of either would give similar results. The point here is not that the geometric average is used, but that the first change is to split the difference using some average. Note that this new procedure requires two "base" years, because 24.8 percent was computed using year 1 prices as weights and 4.3 percent was computed using year 2 prices as weights.

The second BEA change is to use years 1 and 2 as the base years when computing the percentage change between years 1 and 2, then use years 2 and 3 as the base years when computing the percentage change between years 2 and 3, and so on. The two base years change as the calculations move through time. The series of percentage changes computed in this way is taken to be the series of growth rates of real GDP, and so in this way nominal GDP is adjusted for price changes. To make sure you understand this, review the calculations in Table 6; all the data you need to see what is going on are in this table.

Calculating the GDP Deflator

We now switch gears from real GDP, a quantity measure, to the GDP deflator, a price measure. One of economic policymakers' goals is to keep changes in the overall price level small. For this reason policymakers need not only good measures of how real output is changing but also good measures of how the overall price level is changing. The GDP deflator is one measure of the overall price level. We can use the data in Table 6 to show how the GDP deflator is computed by the BEA.

In Table 6 the price of good A fell from $0.50 in year 1 to $0.40 in year 2; the price of good B rose from $0.30 to $1; and the price of good C rose from $0.70 to $0.90 cents. If we were interested only in how individual prices change, this is all the information we would need. However, if we are interested in how the overall price level changes, we need to weight the individual prices in some way. The obvious weights to use are the quantities produced, but which quantities---those of year 1 or of year 2? The same issues arise here for the quantity weights as for the price weights in computing real GDP.

Let us first use the fixed-weight procedure and year 1 as the base year, which means using year 1 quantities as the weights. Then in Table 6, the "bundle" price in year 1 is $12.10 (column 5), and the bundle price in year 2 is $18.40 (column 7). Both columns use year 1 quantities. The bundle price has increased from $12.10 to $18.40, an increase of 52.1 percent.

Next use the fixed-weight procedure in year 2 as the base year, which means using year 2 quantities as the weights. Then the bundle price in year 1 is $15.10 (column 6), and the bundle price in year 2 is $19.20 (column 8). Both columns use year 2 quantities. The bundle price has increased from $15.10 to $19.20, an increase of 27.2 percent.

This example shows that overall price increases can be sensitive to the choice of the base year: 52.1 percent using year 1 quantities as weights and 27.2 percent using year 2 quantities as weights. Again, the old BEA procedure simply picked one year as the base year and did all the calculations using the quantities in the base year as weights. The new procedure first split the difference between 52.1 percent and 27.2 percent by taking the geometric average, which is 39.1 percent. Second, it uses year 1 and 2 as the base years when computing the percentage change between years 1 and 2, years 2 and 3 as the base years when computing the percentage change between years 2 and 3, and so on. The series of percentage changes in the GDP deflator, that is, a series of inflation rates of the overall price level.

The Problems of Fixed Weights

To see why the BEA switched to the new procedure, let us consider a number of problems with using fixed-price weights to compute real GDP. First, 1987 price weights, the last price weights the BEA used before it changed procedures, are not likely to be very accurate for, say, the 1950s. Many structural changes have taken place in the U.S. economy in the last 30 to 40 years, and it seems unlikely that 1987 prices are good weights to use for the 1950s.

Another problem is that the use of fixed-price weights does not account for the responses in the economy to supply shifts. Say bad weather leads to a lower production of oranges in year 2. In a simple supply and demand diagram for oranges, this corresponds to a shift of the curve to the left, which leads to an increase in the price of oranges and a decrease in the quantity demanded. As consumers move up the demand curve, they are substituting away from oranges. If technical advances in year 2 result in cheaper ways of producing computers, the result is a shift of the computer supply curve to the right which leads to a decrease in the price of computers and an increase in the quantity demanded. Consumers are substituting toward computers. (You should be able to draw supply and demand diagrams for both these cases.) Table 6 shows this tendency. The quantity of good A rose between years 1 and 2 and the price decreased (the computer case), whereas the quantity of good B fell and the price increased (the orange case). The computer supply curve has been shifting to the right over time, due primarily to technical advances. The result has been large decreases in the price of computers and large increases in the quantity demanded.

To see why these responses pose a problem for the use of fixed-price weights, consider the data in Table 6. Because the price of good A was higher in year one, the increase in production of good A is weighted more if we use year 1 as the base year than if we used year 2 as the base year. Also, because the price of good A was lower in year 1, the decrease in production of good B is weighted less if we use year 1 as the base year. These effects make the overall change in real GDP larger if we use year 1 price weights than if we use year 2 price weights. Using year 1 price weights ignores the kinds of substitution responses discussed in the previous paragraph and leads to what many feel are too-large estimates of real GDP changes in the past, the BEA tended to move the base year forward about every five years, resulting in the past estimates of real GDP growth being revised downward. It is undesirable to have past growth estimates change simply because of the change to a new base year. The new BEA procedure avoids many of these fixed weight problems.

Similar problems arise when using fixed quantity weights to compute price indexes. For example, the fixed-weight procedure ignores the substitution away from goods whose prices are increasing and toward goods whose prices are decreasing or increasing less rapidly. The procedure tends to overestimate the increase in the overall price level. As discussed in upcoming posts, there are still a number of price indexes that are computed using fixed weights. The GDP deflator differs because it does not use fixed weights. It is also a price index for all the goods and services produced in the economy. Other price indexes cover fewer domestically produced goods and services but also include some imported (foreign-produced) goods and services.

It should finally be stressed that there is no "right" way of computing real GDP. The economy consists of many goods, each with its own price, and there is no exact way of adding together the production of the different goods. We can say that the BEA's new procedure for computing real GDP avoids the problems associated with the use of fixed weights, and it seems to be an improvement over the old procedure. We will see in upcoming posts, however, that the Consumer Price Index (CPI)---a widely used price index---is still computed using fixed weights. 

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 401-404*

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Revealed: Pineal Gland Activation in 45 Minutes

Ep040 Randall Carlson Podcast - Megaflooded Boulder Fields/Streams of th...

No Such Thing as a Free Lunch: Principles of Economics (Part 100)

Macroeconomics, even with all of our computers and with all of our information, is not an exact science and is incapable of being an exact science.

Paul Samuelson

Measuring National Output and National Income

(Part D)

by

Charles Lamson

From GDP to Disposable Personal Income

Although GDP is the most important item in national income accounting, other concepts are also useful to know. A country's GDP is total production by factors of production owned by that country. If we take U.S. GDP, add it to factor income earned by U.S. citizens from the rest of the world (receipts of factor income from the rest of the world), add and subtract from it factor income earned in the United States by foreigners (payments of factor income to the rest of the world), we get GNP.

From GNP we can calculate net national product (NNP). Recall that the expenditure approach to GDP includes gross investment as one of the components of GDP (and of GNP). Gross domestic product does not account for the fact that some of the nation's capital stock is used up in the process of producing the nation's product. NNP is GNP minus depreciation. In a sense, it is a nation's total product minus (or "net of") what is required to maintain the value of its capital stock. Because GDP does not take into account any depreciation of the capital stock that may have occurred NNP, is sometimes a better measure of how the economy is doing than is GDP.

To calculate national income, we subtract indirect taxes minus subsidies from NNP (subtract indirect business taxes and add subsidies). We subtract indirect taxes because they are included in NNP but do not represent payments to factors of production and are not part of national income. We add subsidies because they are payments to factors of production but are not included in NNP.

Personal income is the total income of households. To calculate personal income from national income, new items are subtracted: (1) corporate profits minus dividends, and (2) social insurance payments. Both need explanation. First, some corporate profits are paid to households in the form of dividends, and dividends are a part of personal income. The profits that remain after dividends are paid---corporate profits minus dividends---are not paid to households as income. Therefore, corporate profits minus dividends must be subtracted from national income when computing personal income. Second, social insurance payments are payments made to the government, some by firms and some by employees. Because these payments are not received by households, they must be subtracted from national income when computing personal income.

Two items must be added to national income to calculate personal income: (1) personal interest income received from the government and consumers, and (2) transfer payments to persons. As we have pointed out interest payments made by the government and consumers (households) are not counted in GDP and not reflected in national income figures. However, these payments are income received by households, so they must be added to national income when computing personal income. Households can pay and receive interest. As a group, households receive more interest than they pay. Similarly, transfer payments to persons are not counted in GDP because they do not represent the production of any goods or services. Social Security checks and other cash benefits are income received by households and must also be added to national income when computing personal income. 

Personal income is the income received by households before paying personal income taxes but after paying social insurance contributions. The amount of income that households have to spend or save is called disposable personal income, or after-tax income. It is equal to personal income minus personal taxes.

Because disposable personal income is the amount of income that households can spend or save, it is an important income concept. There are three categories of spending: (1) personal consumption expenditures, (2) interest paid by consumers in business, and (3) personal transfer payments to foreigners. The amount of disposable personal income left after total personal spending is personal saving. If your monthly disposable income $500 and you spend $450, you have $50 left at the end of the month. Your personal saving is $50 for the month. Your personal saving level can be negative: if you earn $500 and spend $600 during the month you have dissaved $100. To spend $100 more than you earn, you will either have to borrow the $100 from someone, take the $100 from your savings account, or sell an asset that you own.

The personal saving rate is the percentage of disposable personal income saved, an important indicator of household behavior. A low rate means households are spending a large amount of their income. A high saving rate means households are cautious in their spending. The U.S. personal savings rate in March 2021 was 27.6 percent (bea.gov. "Personal Saving Rate"), compared to the 2019 average of 7.6 percent (statista.com). Saving rates tend to rise during recessionary periods, when consumers become anxious about their future, and fall during boom times, as pent-up spending demand gets released. 

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 399-401*

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