3. measuring nation

7/30/2019 3. Measuring Nation

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33Measuring a Nations Income

Tapas PaulDepartment of Economics

Definition of Economics

All economic questions arise because we want morethan we can get.

Our inability to satisfy all our wants is called

scarcity.

Because we face scarcity, we must makechoices.

The choices we make depend on the incentives we

face.Anincentiveis a reward that encourages an actionor a penalty that discourages an action.


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Economics is the social science that studies the choices

that individuals, businesses, governments, and entire

societies makeas theycopewith scarcityandthe incentives

that influenceandreconcilethosechoices.

Economicsdividesin tomainparts:


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Measuring a Nations Income

Macroeconomics answers questions like thefollowing:

Why is average income high in some countries andlow in others?

Why do prices rise rapidly in some time periods whilethey are more stable in others?

Why do production and employment expand in someyears and contract in others?

THE ECONOMYS INCOME ANDEXPENDITURE

When judging whether the economy is doing wellor poorly, it is natural to look at the total incomethat everyone in the economy is earning.


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THE ECONOMYS INCOME ANDEXPENDITURE

For an economy as a whole, income must equalexpenditurebecause:

Every transaction has a buyer and a seller.

Every dollar of spending by some buyer is a dollar ofincome for some seller.

THE MEASUREMENT OF GROSSDOMESTIC PRODUCT

Gross dom estic product (G D P) is a measure of

the income and expenditures of an economy.

It is the total market value of all final goods and

services produced within a country in a given

period of time.


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The equality of income and expenditure can beillustrated with the circular-flow diagram.

Figure 1 The Circular-Flow Diagram

Spending

Goods and

services

bought

Revenue

Goods

and services

sold

Labor, land,

and capital

Income

=Flow of inputs

and outputs

=Flow of dollars

Factors of

production

Wages, rent,

and profit

FIRMS

Produce and sell

goods and services

Hire and use factors

of production

Buy and consume

goods and services

Own and sell factors

of production

HOUSEHOLDS

Households sell

Firms buy

MARKETS

FOR

FACTORS OF PRODUCTION

Firms sell

Households buy

MARKETS

FOR

GOODS AND SERVICES

Copyrigh t 2004 South-West ern


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GDP is the market value of all final goods andservices produced within a country in a givenperiod of time.


GDP is the Market Value . . .

Output is valued at market prices.

. . . Of All Final . . .

It records only the value of final goods, notintermediate 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).


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. . . 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 thegeographic confines of a country.


. . . In a Given Period of Time.

It measures the value of production that takes placewithin a specific interval of time, usually a year or aquarter (three months).


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THE COMPONENTS OF GDP

GDP includes all items produced in the economyand sold legallyin markets.


What Is Not Counted in GDP?

GDP excludes most items that are produced andconsumed at home and that never enter themarketplace.

It excludes items produced and sold illicitly, such asillegal drugs.


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GDP (Y) is the sum of the following:

Consumption(C)

Investment (I)

Government Purchases (G)

Net Exports (NX)

Y = C + I + G + NX


Consumption(C):

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

Investment(I):

The spending on capital equipment, inventories, andstructures, including new housing.


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Government Purchases(G):

The spending on goods and services by local, state,and federal governments.

Doesnotinclude transfer payments because they arenot made in exchange for currently produced goodsor services.

Net Exports(NX):

Exports minus imports.

Table 1 GDP and Its Components, USA

Copyright2004 South-Western

Tk in billion

FY2006

GDP at current price 4590

Consumption (C) 3316

Investment (I) 1025

Government Expenditure (G) 611

Net Export (NX) -362

Table 1GDP and Its Components, Bangladesh, FY2006


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GDP and Its Components, USA (2001)

Consumption

69%

Government Purchases

18%Net Exports

-3 %Investment

16%

GDP and Its Components, Bangladesh(FY2006)


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MEASURING GDP (different approaches)

(i) Wheat Industry:

Expenditure Receipts

Wages 40

50Dividends 0

Interest 10


Wages 30

110Purchaseof Wheat 50

Dividends 15

Interest 15


Wages 60

200Purchaseof Flour 110

Dividends 30

Interest 0

Calculate GDP using different approaches:1. Final Good Approach: Tk 2002. Value added approach:Value added in Wheat: 50

Value added in Flour: 110-50 = 60

Value added in Bread: 200-110 = 90

Total value added/GDP = 200

3. Income Approach:Total wage income in economy: 40+30+60 = 130

Total Dividends income: 0+15+30 = 45

Total interest income: 10+15+0 = 25

Total income/GDP = 130+45+25 = 200

(ii) Flour Industry: (iii) Bread Industry

Two Approaches to GDP

Income ApproachWagesRental IncomesInterest IncomesProfits

Expenditure Approach

Final-Product or Value-AddedThe Sum of the Money Spent to Buy

the Output


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Two Approaches to GDP

ExpenditureApproach

IncomeApproach

GDP

= =

+

Consumption byHouseholds

Investment byBusinesses

Government

Purchases

ExpendituresBy Foreigners

+

+

+

+

+

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

GDP Approaches Compared

Compensation

Rents

Interest

Proprietors Income

Corporate Profits

Taxes on Production and

Imports

National Income

Net Foreign Factor Income

Statistical Discrepancy

Consumption of Fixed Capital

Gross Domestic Product

$ 7125

73

498

939

1352

917

$10,904

-34

43

1574

$ 12,487

Personal Consumption (C)

Gross Private Domestic

Investment (Ig)

Government Purchases (G)

Net Exports (Xn)

Gross Domestic Product

Accounting Statement for the U.S. Economy, 2005, in Billions

ReceiptsExpenditures Approach

AllocationsIncome Approach

$ 8746

2105

2363

-727

$ 12,487


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Figure: Sectoral Contribution in Bangladesh (FY1973 FY2012)

Sectoral Contribution

What do you think from this trend?

REAL VERSUS NOMINAL GDP

Nominal GDPvalues the production of goods andservices at current prices.

Real GDPvalues the production of goods andservices at constant prices.


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REAL VERSUS NOMINAL GDP

An accurate view of the economy requiresadjusting nominal to real GDP by using the GDPdeflator.

Table 2 Real and Nominal GDP



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The GDP Deflator

TheGDP deflatoris a measure of the price levelcalculated as the ratio of nominal GDP to realGDP times 100.

It tells us the rise in nominal GDP that isattributable to a rise in prices rather than a rise inthe quantities produced.

The GDP Deflator

The GDP deflator is calculated as follows:

GDP deflator =Nominal GDP

Real GDP 100


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The GDP Deflator

Converting Nominal GDP to Real GDP

Nominal GDP is converted to real GDP as follows:

Real GDPNominal GDP

GDP deflator20XX

20XX

20XX

= 100

Table 2 Real and Nominal GDP



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Figure 2 Real GDP in the United States

Billions of

1996 Dollars

$10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,0001970 1975 1980 1985 1990 20001995


Figure 3: Real GDP in the Bangladesh



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Figure 4:Real GDP inBangladesh


GDP CalculationinBangladesh, atconstantprice, croretkFY07 FY08 FY09

Agricultural Sector 62580 64585.2 67605.1

1. Agriculture& Forestry 48730 50156.7 52568.4

A) Crops 35133 36071.7 37883.8B) Livestock 8447 8653.2 8952.5C) Forestry 5150 5431.8 5732.1

2. Fisheries 13850 14428.5 15036.7I ndustry 86219 92065.1 97520.5

3. Mining& Quarrying 3443 3750.9 4102.4Gas& non-refined oil 2106 2279.7 2500.5Other mining 1337 1471.2 1601.9

4. Manufacturing 51372 55077.2 58339.3

A) Large& MediumScale 36507 39157.2 41370.2B) Small Scale 14865 15920 16969.1

5. Electric, Gas& Water Supply 4608 4919.3 5141.6

electricity 3813 4068 4216.1Gas 545 587.1 637.7Water 249 264.2 287.7

6. Construction 26796 28317.7 29937.2

Service Sector 143995 153342.3 162931.3

7. Wholesale& retail trade 41700 44543.4 47371.3

8. Hotel & restaurants 2023 2175.6 2340.5

9. Transport & Communication 29809 32356.6 34817.6

10. Financial intermediaries 5139 5596 6043.5

Bank 3846 4168.1 4468.9Insuarance 1089 1198.8 1317.2Others 204 229.1 257.4

11. Real estate& Housing 22381 23220.5 24106.2

12. Public administration& defense 8044 8543.2 9143.2

13. Education 7433 8012.9 8657.1

14. Health& Social Works 6693 7162.7 7703.5

15. Community, Social & Personal Services 20773 21731.4 22748.4

Import duty 10179 11733.4 12595.5T otal 302973 321726 340652.4Real Growth Rate 6.43 6.19 5.88

GDP AND ECONOMIC WELL-BEING

GDP is the best single measure of the economicwell-being of a society.

GDP per persontells us the income andexpenditure of the average person in theeconomy.


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GDP AND ECONOMIC WELL-BEING

Higher GDP per person indicates a higherstandard of living.

GDP is not a perfect measure of the happiness orquality of life, however.

GDP AND ECONOMICWELL-BEING

Some things that contribute to well-being are notincluded in GDP.

The value of leisure.

The value of a clean environment.

The value of almost all activity that takes placeoutside of markets, such as the value of the time

parents spend with their children and the value ofvolunteer work.


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Table 3 GDP, Life Expectancy, and Literacy


Summary

Because every transaction has a buyer and aseller, the total expenditure in the economy mustequal the total income in the economy.

Gross Domestic Product (GDP) measures aneconomys total expenditure on newly producedgoods and services and the total income earned

from the production of these goods and services.


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Summary

GDP is the market value of all final goods andservices produced within a country in a givenperiod of time.

GDP is divided among four components ofexpenditure: consumption, investment,government purchases, and net exports.

Summary

Nominal GDP uses current prices to value theeconomys production. Real GDP uses constantbase-year prices to value the economysproduction of goods and services.

The GDP deflatorcalculated from the ratio ofnominal to real GDPmeasures the level of

prices in the economy.


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Summary

GDP is a good measure of economic well-beingbecause people prefer higher to lower incomes.

It is not a perfect measure of well-being becausesome things, such as leisure time and a cleanenvironment, arent measured by GDP.

3. measuring nation

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