chap15 measuring nations income

Upload: joebob1230

Post on 02-Jun-2018

227 views

Category:

Documents


0 download

TRANSCRIPT

  • 8/10/2019 Chap15 Measuring Nations Income

    1/33

    6THE DATA OF MACROECONOMICS

  • 8/10/2019 Chap15 Measuring Nations Income

    2/33

    15Measuring a NationsIncome

  • 8/10/2019 Chap15 Measuring Nations Income

    3/33

    Distinction between Microeconomics andMacroeconomics

    Microeconomics

    Microeconomics is the study of how individual

    households and firms make decisionsand how they

    interact with one anotherin markets.

    Macroeconomics

    Macroeconomics is the study of the economy as a

    whole.

    Its goal is to explain the economic changes thataffect many households, firms, and markets at once.

  • 8/10/2019 Chap15 Measuring Nations Income

    4/33

    Macroeconomics

    Macroeconomics answers the followingquestions:

    Why is average income high in some countries and

    low in others?

    Why do prices rise rapidly in some time periods

    while they are more stable in others?

    Why do production and employment expand in some

    years and contract in others?

  • 8/10/2019 Chap15 Measuring Nations Income

    5/33

    THE ECONOMYS INCOME AND

    EXPENDITURE

    How do we know whether the economy as awholeis doing well or poorly?

    One measure is the total incomethat everyone in the

    economy is earning.

    For an economy as a whole, income must equal

    expenditurebecause:

    Every transaction has a buyer and a seller.

    Every dollar of spending by some buyer is a dollar of

    income for some seller.

  • 8/10/2019 Chap15 Measuring Nations Income

    6/33

    THE MEASUREMENT OF GROSSDOMESTIC PRODUCT

    Gross domestic product (GDP) is a measure ofthe income andexpenditures 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.

    If someone pays someone else $100 to mow a lawn,

    the expenditure on the lawn service ($100)

    is exactly equal to the income earned from the productionof the lawn service ($100).

    The equality of income and expenditure can be

    illustrated with the circular-flow diagram.

  • 8/10/2019 Chap15 Measuring Nations Income

    7/33

    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 ofproduction

    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

    MARKETSFOR

    GOODS AND SERVICES

  • 8/10/2019 Chap15 Measuring Nations Income

    8/33

    THE MEASUREMENT OF GROSSDOMESTIC PRODUCT

    GDP is the market value of all final goods andservices produced within a country in a given

    period of time.

    What does it mean?

  • 8/10/2019 Chap15 Measuring Nations Income

    9/33

    MORE ON THE DEFINITION OF THE GDP

    GDP IS THE MARKET VALUE . . . To add together different items, market values are used. Market values are calculated by using market prices.

    . . . OF ALL. . . GDP includes all items produced and sold legally in the

    economy. The value of housing services is somewhat difficult to

    measure. If housing is rented, the value of the rent is used to measure the value

    of the housing services.

    For housing that is owned (or mortgaged), the government estimatesthe rental value and uses this figure to value the housing services.

    GDP does not include illegal goods or services or items thatare not sold in markets. When you hire someone to mow your lawn, that production is included

    in GDP.

    If you mow your own lawn, that production is not included in GDP.

  • 8/10/2019 Chap15 Measuring Nations Income

    10/33

    MORE ON THE DEFINITION OF THE GDP

    . . . FINAL . . .

    Intermediate goods are not included in GDP (the value is counted onlyonce).

    The value of intermediate goods is already included as part of the value of

    the final good.

    Investment goods (such as structures and vehicles used in production) are not

    intermediate goods.

    Investment goods represent products purchased for final use by business firms.

    Exception: Intermediate Goods that are placed into inventory are

    considered to be final and included in GDP as a firms inventory

    investment.

    Goods that are sold out of inventory are counted as a decrease in inventory

    investment.

    The goal is to count the production when the good is finished, which is not

    necessarily the same time that the product is sold.

    . . . GOODS AND SERVICES . . .

    It includes both tangible goods (food, clothing, cars) and intangibleservices (haircuts, housecleaning, doctor visits).

  • 8/10/2019 Chap15 Measuring Nations Income

    11/33

    MORE ON THE DEFINITION OF THE GDP

    . . . PRODUCED . . .

    It includes goods and services currently produced, not transactions

    involving goods produced in the past.

    . . . WITHIN A COUNTRY . . .

    GDP measures the production that takes place within thegeographical boundaries of a particular country.

    If a Mexican citizen works temporarily in the United States, the value of his

    output is included in GDP for the United States.

    If an American owns a firm in Mexico, the value of the production of that

    firm is not includedin U.S. GDP. The production of a German firm operating in the United States is part of

    U.S. GDP.

    Even though it is a foreign firm, the firms workers are living in the United States

    and buying clothes, groceries, and other goods in the United States.

    Thus, the workers in the foreign firm operating in the United States are fuelingthe domestic economy.

  • 8/10/2019 Chap15 Measuring Nations Income

    12/33

    MORE ON THE DEFINITION OF THE GDP

    . . . IN A GIVEN PERIOD OF TIME. The usual interval of time used to measure GDP is a

    quarter (three months).

    When the government reports GDP, the data is

    generally reported on an annual basis.

    In addition, data are generally adjusted for regular

    seasonal changes (such as Christmas).

  • 8/10/2019 Chap15 Measuring Nations Income

    13/33

    Other Measures of Income Gross National Product (GNP)is the total income earned by a nations permanent

    residents.

    GNP includes income that American citizens earn abroad.

    GNP excludes income that foreigners earn in the United States.

    Net National Product (NNP)is the total income of a nations residents (GNP) minus losses

    from depreciation (wear and tear on an economys stock of equipment and structures).

    National incomeis the total income earned by a nations residents in the production of

    goods and services. National income differs from NNP by excluding indirect business taxes and including business

    subsidies.

    NNP and national income also differ due to statistical discrepancy.

    Personal incomeis the income that households and noncorporate businesses receive.

    Unlike National Income, PI excludes retained earnings, corporate income taxes andcontribution to social insurance.

    But includes the interest income of households from their holding of government debt and

    from government transfers.

    Disposable personal incomeis the income that households and noncorporate businesses

    have left after taxes and other obligations to the government.

  • 8/10/2019 Chap15 Measuring Nations Income

    14/33

    Example One day Barry the Barber, Inc. collects $400 for haircuts. Over this

    day, his equipment depreciates in value by $50. Of the remaining$350, Barry sends $30 to the government in sales taxes, takes home$320 in wages, and retains $100 in his business to add new equipmentin the future. From the $220 that Barry takes home he pays $70 inincome taxes. Based on this information, compute Barryscontribution to the following measures of income.

    Gross domestic product GDP equals the dollar amount Barry collects, which is $400.

    Net national product NNP = GDPdepreciation = $400 - $50 = $350.

    National Income National income = NNP - sales taxes = $350 - $30 = $320.

    Personal Income Personal income = national income - retained earnings = $320 - $100 = $220.

    Disposable personal income.

    Disposable personal income = personal income - personal income tax = $220 -$70 = $150.

  • 8/10/2019 Chap15 Measuring Nations Income

    15/33

    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 the

    marketplace.

    Products created and consumed within households

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

  • 8/10/2019 Chap15 Measuring Nations Income

    16/33

    THE COMPONENTS OF GDP

    GDP (Y) is the sum of the following:

    Y = C + I + G + NX Consumption (C):

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

    Investment (I): The spending on capital equipment, inventories, and

    structures, including new housing.

    Government Purchases (G):

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

    Does notinclude transfer payments because they are not madein exchange for currently produced goods or services.

    Net Exports (NX):

    Exports minus imports.

  • 8/10/2019 Chap15 Measuring Nations Income

    17/33

    US GDP and Its Components in 2009

    This table shows total GDP for the U.S. economy in 2009 and

    the breakdown of GDP among its four components. When

    reading this table, recall the identityY = C + I + G + NX.

    What do the negative numbers in the net exports column

    mean?

  • 8/10/2019 Chap15 Measuring Nations Income

    18/33

    The components of U.S. GDP

    2009, GDP of the U.S. = $14 trillion GDP per person = $46,372

    Consumption = $32,823 per person

    Investment = $5,278 per person Government purchases = $9,540 per person

    Net exports =$1,269 per person

    19

  • 8/10/2019 Chap15 Measuring Nations Income

    19/33

    GDP and Its Components (2011)

    Consumption69%

    Government Purchases

    18%Net Exports

    -3 %Investment

    16%

  • 8/10/2019 Chap15 Measuring Nations Income

    20/33

    REAL VERSUS NOMINAL GDP

    Nominal GDP values the production of goods andservices at current prices.

    Real GDP values the production of goods and servicesat constant prices. There are two possible reasons for total spending to rise from

    one year to the next. The economy may be producing a larger outputof goods and

    services.

    Goods and services could be selling at higher prices.

    When studying GDP over time, economists would like toknow if output has changed (not prices).

    =>economists measure real GDP by valuing output using afixed set of prices. An accurate view of the economy requires adjusting nominal to real

    GDP by using the GDP deflator.

  • 8/10/2019 Chap15 Measuring Nations Income

    21/33

    Table 2 Real and Nominal GDP

    Nominal GDP values the production of goods and services atcurrent prices.

  • 8/10/2019 Chap15 Measuring Nations Income

    22/33

    Table 2 Real and Nominal GDP

    Real GDP values the production of goods and services at constant prices.

    Lets assume that the base year is 2010.

    Because real GDP is unaffected by changes in prices over time, changes in real GDP

    reflect changes in the amount of goods and services produced.

    When there is inflation, nominal GDP can increase while real GDP actually declines.

  • 8/10/2019 Chap15 Measuring Nations Income

    23/33

    The GDP Deflator

    The GDP deflator is a measure of the price levelcalculated as the ratio of nominal GDP to real

    GDP times 100.

    It tells us the rise in nominal GDP that is attributable

    to a rise in prices rather than a rise in the quantities

    produced.

    The GDP deflator is calculated as follows:

    GDP deflator =Nominal GDP

    Real GDP100

  • 8/10/2019 Chap15 Measuring Nations Income

    24/33

    Converting Nominal GDP to Real GDP

    Nominal GDP is converted to real GDP as follows:

    Real GDP Nominal GD PGDP deflator

    20062006

    2006

    = 100

  • 8/10/2019 Chap15 Measuring Nations Income

    25/33

    Table 2 Real and Nominal GDP

    Nominal GDP and real GDP will be equal in the base year.

    Therefore GDP deflator for the base year will always be

    equal to 100.

  • 8/10/2019 Chap15 Measuring Nations Income

    26/33

    Figure 2 Real GDP in the United States

    1. Figure 2 shows quarterly data on real GDP for the United States since

    1970.

    2. Notice that real GDP has increased over time.

    3. Notice also that there are times (shaded bars) when real GDPdeclines. These eriods are called recessions.

  • 8/10/2019 Chap15 Measuring Nations Income

    27/33

    GDP AND ECONOMIC WELL-BEING

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

    GDP per persontells us the income and

    expenditure of the average person in the

    economy.

    Higher GDP per person indicates a higher

    standard of living.

    However, GDP is not a perfect measure of the

    happiness or quality of life.

  • 8/10/2019 Chap15 Measuring Nations Income

    28/33

    GDP AND ECONOMIC WELL-BEING

    Some things that contribute to well-beingare not included in GDP.

    The value of leisure.

    The value of a clean environment. The value of almost all activity that takes

    place outside of markets, such as the value of

    the time parents spend with their children andthe value of volunteer work.

  • 8/10/2019 Chap15 Measuring Nations Income

    29/33

    GDP, Life Expectancy, and Literacy

    The Table shows real GDP per person, life expectancy, and adult literacy rates for

    12 countries.

    In rich countries, life expectancy is higher and adult literacy rates are also high.

    In poor countries, people typically live only into their 50s and only about half of

    the adult population is literate.

  • 8/10/2019 Chap15 Measuring Nations Income

    30/33

    Summary

    Because every transaction has a buyer and aseller, the total expenditure in the economy must

    equal the total income in the economy.

    Gross Domestic Product (GDP) measures an

    economys total expenditure on newly produced

    goods and services and the total income earned

    from the production of these goods and services.

  • 8/10/2019 Chap15 Measuring Nations Income

    31/33

    Summary

    GDP is the market value of all final goods andservices produced within a country in a given

    period of time.

    GDP is divided among four components of

    expenditure: consumption, investment,

    government purchases, and net exports.

  • 8/10/2019 Chap15 Measuring Nations Income

    32/33

    Summary

    Nominal GDP uses current prices to value theeconomys production. Real GDP uses constant

    base-year prices to value the economys

    production of goods and services.

    The GDP deflatorcalculated from the ratio of

    nominal to real GDPmeasures the level of

    prices in the economy.

  • 8/10/2019 Chap15 Measuring Nations Income

    33/33

    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 because

    some things, such as leisure time and a clean

    environment, arent measured by GDP.