1. measuring national income

*For the economy as a whole, income must equal expenditure. GDP measures the flow of dollars in this economy.

Principles of Macroeconomics: Ch 10 Second Canadian Edition

The Circular-Flow DiagramHouseholdsBusinessesMarket for Factors of ProductionProduct Market$$$$


Two Approaches to Measuring GDPExpenditure Approach:Sum the total expenditures by households (from the top portion of the circular flow).Resource Cost or Income Approach:Sum the total wages and profit paid by firms for resources (from the bottom portion of the circular flow).


The Economys Income and ExpenditureWhen judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.For an economy as a whole, income must equal expenditure. The forces of supply and demand determine the market equilibrium price and quantity that is produced and exchanged.

*1) To compute the total value of different goods and services, the national income accounts use market prices. Thus, if GDP = (Price of apples Quantity of apples) + (Price of oranges Quantity of oranges) = ($0.50 4) + ($1.00 3)GDP = $5.002) Used goods are not included in the calculation of GDP.3) The treatment of inventories depends on if the goods are stored orif they spoil. If the goods are stored, their value is included in GDP.If they spoil, GDP remains unchanged. When the goods are finally soldout of inventory, they are considered used goods (and are not counted).

*4) Intermediate goods are not counted in GDP only the value offinal goods. Reason: the value of intermediate goods is already included in the market price. Value added of a firm equals the value of the firms output less the value of the intermediate goodsthe firm purchases.

5) Some goods are not sold in the marketplace and therefore donthave market prices. We must use their imputed value as an estimateof their value. For example, home ownership and government services.

* value of goods and services measured at current prices is the nominal GDP.The value of goods and services measured at constant prices (a base-year) is the real GDP.Real GDP is the better measure of economic well-beingIn calculating real GDP, we use a base-year price of commodities.Because the prices are held constant, real GDP varies from year to year only if the quantities produced vary.Because a societys ability to provide economic satisfaction for its members ultimately depends on the quantities of goods and services produced, real GDP provides a better measure of economic well-being.GDP Deflator It is defined as the ratio of nominal GDP to real GDP: GDP deflator: (Nominal GDP/Real GDP)100The GDP deflator reflects whats happening to the overall level of prices in the economy

*For example, if we wanted to compare output in 2002 and output in 2003, we would obtain base-year prices, such as 2002 prices.

Real GDP in 2002 would be: (2002 Price of Apples 2002 Quantity of Apples) +(2002 Price of Oranges 2002 Quantity of Oranges).Real GDP in 2003 would be:(2002 Price of Apples 2003 Quantity of Apples) +(2002 Price of Oranges 2003 Quantity of Oranges).Real GDP in 2004 would be:(2002 Price of Apples 2004 Quantity of Apples) +(2002 Price of Oranges 2004 Quantity of Oranges).


*


*GDP calculationValue added method GDP is also the total value added of all firms in the economy. The value added of a firm equals the value of the firms output minus the value of the intermediate goods that the firm purchases


*Value added method (Table) Value Added in Bread ProductionEach stage of production adds valueBut if we add up the total sales made at all stages of production we will double count intermediate inputsValue of final sales = the total value added at all stages of productionGDP sums up value added at each stage of production.


*Value added methodThe market value of a firms product or service minus the cost of inputs purchased from other firmsThe summing of the value added by all firms in the economy yields the total value of final goods and services


Real versus Nominal GDPGDP is the market value of the economys current production, referred to as Nominal GDP.Real GDP measures any given years total output in constant prices.An accurate view of the economy requires adjusting nominal to real GDP, using the GDP Price Deflator.


GDP Price DeflatorThe GDP Price Deflator is a price index that uses a bundle of all final goods and services. It tells us the rise in nominal GDP that is attributable to a rise in prices.Converting Nominal GDP to Real GDP:Real GDP20xx = (Nominal GDP20xx ) (GDP deflator20xx)X100

*Y = C + I + G + NXThis is the called the national income accounts identity.


The Four Components of GDP Consumption (C):Is the spending by households on goods and services e.g. buying clothing, food, movie ticketsInvestment (I):Is the purchases of capital equipment and structurese.g. factory, houses, etc.


The Four Components of GDPGovernment Purchases (G):Includes spending on goods and services by local, provincial and federal governments (e.g. roads, police, etc.).Does not include transfer payments, because it is not made in exchange for currently produced goods or services.Net Exports (NX):Exports minus imports.


Principles of Macroeconomics: Ch 10 First Canadian EditionOther Measures of IncomeGross National Product This measures the total income earned by nationals (residents of a nation).Net National ProductTotal income of residents of a nation after subtracting capital consumption allowances.Personal Income:The income that households and non-corporate businesses receive. Disposable Personal Income:The income that households and non-corporate businesses have left after taxes.

*To see how the alternative measures of income relate to one another, we start with GDP and add or subtract various quantities.To obtain gross national product (GNP), we add receipts of factorincome (wages, profit, and rent) from the rest of the world andsubtract payments of factor income to the rest of the world.

GNP = GDP+Factor Payments from Abroad -Factor Payments to Abroad

Whereas GDP measures the total income produced domestically, GNPmeasures the total income earned by nationals (residents of a nation).

To obtain net national product (NNP), we subtract the depreciation ofcapital-- the amount of the economys stock of plants, equipment, andresidential structures that wears out during the year:NNP = GNP - Depreciation


GDP and Economic Well-BeingGDP Per Person tells us the income and expenditure of the average person in the economy.It is a good measure of the material well-being of the economy as a whole.More Real GDP means we have a higher material standard of living by being able to consume more goods and services.It is NOT intended to be a measure of happiness or quality of life.


What Is and What Is Not Counted in GDP?GDP includes all items produced in the economy and sold legally in markets.GDP does not include items produced and consumed at home that never enter the marketplace. It does not include items produced and sold illicitly, such as illegal drugs.


GDP and Economic Well-BeingSome factors and issues not in GDP that lead to the well-being of the economy:Factors that contribute to a good life such as leisure.Factors that lead to a quality environment.The value of almost all activity that takes place outside of the markets, e.g. volunteer work and child-rearing.

12115672728181915301231

1. measuring national income

Documents

value of goods

calculation of gdp

value of intermediate

value offinal goods

ratio of nominal gdp

quantities of goods

used goods

total value of different