1 measuring nation income c10

7/27/2019 1 Measuring Nation Income C10

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Introduction to Macroeconomics

Semester 2, 2012-2013

Lecture 1. Measuring a nationsincome

Pham Thi Thu Tra, Ph.D

21 Feb 2013


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Microeconomics vs. Macroeconomics

Microeconomics is the study of how individual households

and firms make decisions, interact with one another in

markets

Macroeconomics is the study of the economy as a whole.

Macroeconomics focuses on the determinants of total

national income

Deals with aggregates such as aggregate consumptionand investment, and looks at the overall level of prices

instead of individual prices.

Its goal is to explain the economic changes that affect

many households, firms, and markets at once.


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Quiz 1

Which of the following pictures are

related to Vietnams economy2012? Provide a brief explanation

to each.

Can you make a story out of these

ictures!


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Macroeconomics answers questionslike the following

How does the economy work? Why do some national economies grow faster than

other national economies?

Why do economies have good times and bad times? What determines productivity? What is the role of savings and investment? What causes inflation? How do changes in the money supply affect the

economy? How do changes in government spending and taxes

affect the economy?


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The main participants in the macro-economy

1. Households

2. Firms.

Households and firms together make up the private sector

3. Government (the pub l ic sector)

4. The rest of the world (the in ternational/foreignsector)

How do these participants interact?


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Rules of the game Lecturer:

PhmTh Thu Tr [email protected] Teaching Assistants:

NguynTh Hong Hiu [email protected] NguynVnh An [email protected]

Course Materials:

Textbook- Principles of Economics, 5e/6e by N. G. Mankiw

Syllabus, lecture slides, reading assignments and all otherrelevant information available on Blackboard

Visit the IT department (A312 Mr. Cuong) to activate youraccount if you have not done so.

Sources of macroeconomic data and reports for Vietnam:

www.gso.gov.vn

www.imf.org

www.worldbank.org/vietnam

www.adb.org/vietnam
mailto:[email protected]:[email protected]:[email protected]://www.gso.gov.vn/http://www.imf.org/http://www.worldbank.org/vietnamhttp://www.adb.org/vietnamhttp://www.adb.org/vietnamhttp://www.worldbank.org/vietnamhttp://www.imf.org/http://www.gso.gov.vn/mailto:[email protected]:[email protected]:[email protected]


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Rules of the game (cont.)

Assessmentdetails:

Mid-term exam 30% (semi-closed book exam)Assignment 20%

Two class tests (10%)

Homework (10%)

Final exam 50% (closed-book exam)

Class participation: Compulsory and subject to university regulations

Minimum attendance requirement: 80% of the classes

Active participation: bonus up to 10% of the score of one test

Homework (End-of-chapter) problems

Submitted in hard copy (hand-writing) every two weeks from week 3.

Late submission NOT accepted

Three to four homeworks will be randomly selected for counting inthe final result.

Tutorial Classes: Four Classes

Check your Blackboard for schedule


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Lecture Topic Reading

Week 18 23 Feb Measuring a nations income Chap 10 (6e)

25 Feb 2 Mar Measuring the cost of living Chap 11 (6e)4 9 Mar Chap 12 (6e)

11 16 Mar Production and Growth Chap 12 (6e)

18 23 Mar Savings, Investment and the Financial System Chap 13 (6e)

25 - 30 Mar Unemployment Chap 15 (6e)1 6 Apr The monetary system Chap 16 (6e)

8 13 Apr Mid-term Exam

15 20 Apr Money Growth and Inflation Chap 17 (6e)

21- 27 Apr Open Economy Macroeconomics: Basic Concepts Chap 18 (6e)

29 Apr 4 May A Macroeconomic Theory of the Open Economy Chap 19 (6e)

6 11 May Aggregate Demand and Aggregate Supply Chap 20 (6e)

13 18 MayThe Influence of Monetary and Fiscal Policies on

Aggregate Demand Chap 21 (6e)

20 26 May Backup week & Review

Class Schedule


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TodayChapter 10. Measuring a nations income

We begin our study of macroeconomics with the

countrys total income and expenditure.

What is Gross Domestic Product (GDP)?

How is GDP measured?

What are the components of GDP?

How is GDP corrected for changes in the pricelevel?

Does GDP measure societys well-being?


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What is GDP?

GDP is the most basic measure of how an economy isperforming.

GDP is the total market value of a countrys output. It isthe market value of all finalgoods and services producedwithin a countryin a given period of time.

GDP vs GNP (Gross National Product): Total value ofGoods and Services produced by all nationals of acountry (whetherwithin or outside the country)

GNP = GDP (+) total capital gains from overseasinvestment (-) income earned by foreign nationals

domestically


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Example: GDP in 4 countries 2010

Source: IMF

Note: PPP = Purchasing Power Parity

per capita = per person

GDP (Million

US dollars)

GDP (PPP)

(Million US

dollars)

GDP (PPP) per

capita

(US dollars)US 14,657,800 14,657,800 47,284

China 5,878,257 10,085,708 7,519

Vietnam 103,574 276,567 3,134

Thailand 318,850 586,877 9,187


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What is GDP? GDP is the Market Value . . .

Output is valued at market prices.

. . . Of All Final . . .

It records only the value of final goods, not intermediate goods(the value is counted only once).

. . . Goods and Services . . .

It includes both tangible goods (food, clothing, cars) and

intangible services (haircuts, housecleaning, doctor visits). . . . Produced . . .

It includes goods and services currently produced, nottransactions involving goods produced in the past.

. . . Within a Country . . .

It measures the value of production within the geographicconfines of a country.

. . . In a Given Period of Time.

It measures the value of production that takes place within aspecific interval of time, usually a year or a quarter (threemonths).


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GDP-related concepts

Final Goods and Services

Those goods and services that are not produced for either resale or

for use in the production of other goods; produced for consumption.

Intermediate Goods and Services

Those goods and services that are produced by one firm for use byanother firm to produce a final good (or another intermediate good);produced for further production.

Value added (VA)

The difference between the value of the total goods and services andthe value of the intermediate goods.

What Is Not Counted in GDP?GDP includes all items produced in the economy and sold legallyin markets.

GDP excludes most items that are produced and consumed at home and thatnever enter the marketplace.

It excludes items produced and sold illicitly, such as illegal drugs.


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How GDP is measured?

Three approaches:

1. The Expendi ture Approach: GDP equals to totalexpendi tureon the economys output of goods andservices.

2. The Income Approach: GDP equals toto tal incomeofeveryone in the economy (wages and salaries, rent,interest, and profits ...)

3. The Value-added App roach: GDP equals to the sum ofvalue addedof all producers.

For the economy as a whole,

incom e equals expendi ture, because

every dollar of expenditure by a buyer

is a dollar of income for the seller.


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The Value-added Approach to MeasuringGDP

Production Generated Added

Farmer harvest wheat $100 $100

Miller makes into flour 200 100

Baker makes into bread 300 100

$600 $300

GDP counts only the $ valueof the final good

This is the same as the value-added.


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The Circular-Flow Diagram

It is a simple depiction of the macroeconomy.

It illustrates GDP as spending, revenue, factorpayments, and income.

First, recall that:

Factors of product ionare inputs like labor, land,

capital, and entrepreneur.

Factor paymentsare payments to the factors ofproduction (e.g., wages, rent).


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FIGURE 1: The Circular-Flow Diagram

Markets forFactors of

Production

HouseholdsFirms

Income (=GDP)Wages, rent,profit (=GDP)

Factors ofproduction

Labor, land,capital

Spending (=GDP)

G & Sbought

G & Ssold

Revenue (=GDP)Markets forGoods &Services


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What This Diagram Omits

The government

collects taxes

purchases goods and services (g&s)

The financial system

matches savers supply of funds with borrowersdemand for loans

The foreign sector trades g&s, financial assets, and currencies with the

countrys residents


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The Expenditure Approach:The Components of GDP

Recall: GDP is total spending.

GDP has four com ponents:

Consumption (C)

Investment (I) Government Purchases (G)

Net Exports (NX)

These components add up to GDP (denotedY):

Y = C + I + G + NX


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The components of GDP

Consumpt ion(C):

The spending by households on goods and services, with theexception of purchases of new housing.

Investment(I):

The spending by firms and householdson go ods that wi l l beused in the future to produc e more goods:

capital equipment (e.g., machines, tools)

structures (factories, office buildings, houses) Change in inventories (goods produced but not yet sold)

Government Purch ases(G):

The spending on g&s by local and central governments.

Does NOTinclude transfer payments because these paymentsrepresent transfers of income, not purchases of goods &service.

Net Expo rts(NX): Exports minus imports.

Question: the purchase of financial assets like stocks and bonds

included in Investment?


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Net Exports (NX)

NX = exports imports

Exports represent foreign spending on the

economys g&s.

Imports are the portions of C, I, and G

that are spent on g&s produced abroad.

Adding up all the components of GDP gives:

Y = C + I + G + NX


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Vietnam GDP and Its Components 2010

billions VND % of GDPper capita

(thous. VND)

Y 1,980,914 100 22,788

C 1,317,588 66.51 15,157

I 737,560 37.23 8,485

G 129,313 6.53 1,488

NX (203,547) -10.28 (2,342)

Source: GSO


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Quiz 1: GDP and its components

In each of the following cases, determine how much GDP andeach of its components is affected (if at all).

A. Ms. Hanh spends 2mil VND to buy her boyfriend dinner

at the finest restaurant in district 1.

B. Mr. Trung spends 15mil VND on a new laptop to use in

his publishing business. The laptop was built in China.

C. Ms. Trang spends 3.7mil VND on a REETECH air

conditioner to use in her office. She got last years model onsale for a great price from the local manufacturer REE.

D. Honda Vietnam builds 500 bil VND worth of motorbikes,

but consumers only buy 470 bil VND worth of them.


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Quiz 1: What is/is not included in thecalculation of Vietnam GDP?

1. Money you spent at restaurants while touring Europe.

2. The cost of your newly purchased motorbike Honda.

3. The cost of tires purchased by Honda Vietnam to put on

your new motorbike.

4. Purchase of your first house from a contractor.

5. Purchase of your first house from the previous owner.

6. Wages earned by VN citizens while working in Malaysia.

7. Ms. Lan living in Thu Duc spends a day cleaning her

house, saving herself 100,000VND doing it herself instead

of hiring it out.

8. A Vietnamese businessman opens a restaurant in Sydney.

9. A Vietnamese businessman produces shoes in Long An

and sells these shoes to consumers in US.


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Real vs. Nominal GDP

Nom inal GDP

The GDP measured in current dollars (VND, EURO), theprices paid for goods and services today. But... prices maygo up without changing production.

Nominal GDP values the production of goods and servicesat current prices

Real GDP

Real GDPvalues the production of goods and services atconstant prices.

The Nominal GDP adjusted for changes in the price level.


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Example: Nominal GDP vs. Real GDP(Assume we are producing only two goods)

Compute nom inal GDPin each year:

2008: $10 x 400 + $2 x 1000 = $6,000

2009: $11 x 500 + $2.50 x 1100 = $8,2502010: $12 x 600 + $3 x 1200 = $10,800

Pizza Coffee

year P Q P Q

2008 $10 400 $2.00 1000

2009 $11 500 $2.50 1100

2010 $12 600 $3.00 1200

37.5%

% Change:

30.9%

Note: 30.9% = (10,800 / 8,250) 1 * 100


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Example (Continued):

Compute real GDPin each year,using 2008 as the base year:

Pizza Coffeeyear P Q P Q

2008 $10 400 $2.00 1000

2009 $11 500 $2.50 1100

2010 $12 600 $3.00 1200

20.0%

% Change:

16.7%

$10 $2.00

2008: $10 x 400 + $2 x 1000 = $6,0002009: $10 x 500 + $2 x 1100 = $7,200

2010: $10 x 600 + $2 x 1200 = $8,400


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Example (Continued)

How much would GDP (and hence everyones

income) have grown if there had been zero

change in the price level?

Again, the grow th rate of real GDPfrom one yearto the next is the answer to this question, and this

is why real GDPis corrected for changes in theprice level.


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Real vs. nominal GDP - The GDPdeflator

Nom inal GDPis total output measured at current prices. Real GDPis total output measured at constant prices

(2008 in this example).

Real GDPisNom inal GDPadjusted for changes in the price

level, using theGDP defl ator.

GDP deflator =Nominal GDP

Real GDP100

The GDP deflatormeasures the overall price level in aneconomy compared to some previous year.

Ittells us the rise in nominal GDP that is attributable to arise in prices rather than a rise in the quantities produced

It is the tool to convert Nominalinto Real GDP.


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Example (continued)

Compu te the GDP def lator in each year:

YearNominal

GDPRealGDP

GDPDeflator

2008 $6000 $6000 100.02009 $8250 $7200

2010 $10,800 $8400

2009: 100 x (8250/7200) = 114.6

114.6

2010: 100 x (10,800/8400) = 128.6

128.6

14.6%

12.2%

N i l d l GDP i Vi t 1995


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Nominal and real GDP in Vietnam 19952010

Bill dongs

Nominal GDP Real GDP atconstant price

1994

0

400000

800000

1200000

1600000

2000000

2400000


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GDP and Economic Well-being GDP is the best single measure of the economic

well-being of a society.

Real GDP per capitais the main indicator of the

average persons standard of living. Most economists, policymakers, social scientists, and

businesspersons use a countrys real GDP per capitaas the main indicator of the average persons

standard of living in that country.

But GDP is not a perfect measure of well-being


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GDP is not a perfect measure of well-being

Higher GDP per person indicates a higher standard ofliving.

GDP is not a perfect measure of the happiness or qualityof life. Why?

GDP does not value the quality of the environment.

GDP does not value leisure time.

GDP does not value non-market activity, such as thechild care a parent provides his/her child at home.

GDP does not value an equitable distribution ofincome.


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Then Why Do We Care About GDP?

Having a large GDP enables a country to affordbetter schools, a cleaner environment, healthcare, etc.

In short, GDP does not directly measure thosethings that make life worthwhile, but it does

measure our ability to obtain the inputs into a

worthwhile life.

Many indicators of the quality of life are positivelycorrelated with GDP. For example


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GDP and life satisfaction (Deaton, 2008)


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Summary Gross Domestic Product (GDP) measures a

countrys total income and expenditure.

The four spending components of GDP include:Consumption, Investment, Government

Purchases, and Net Exports. Nominal GDP is measured using current prices.

Real GDP is measured using the prices of aconstant base year, and is corrected for inflation.

GDP is the main indicator of a countrys economicwell-being, even though it is not perfect.

1 measuring nation income c10

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