chapter 23 - measuring a nation s income

7/31/2019 Chapter 23 - Measuring a Nation s Income

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Chapter

Measuring a Nations Income

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3


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The Economys Income and Expenditure

Gross Domestic Product (GDP)

Measures the total income of everyone in the

economy

Measures the total expenditure on the

economys output of goods and services

For an economy as a whole

Income must equal expenditure Circular-flow diagram assumptions:

All goods and services bought by households

Households - -spend all of their income 4


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Figure

The circular-flow diagram

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5

Households buy goodsand services from firms,and firms use theirrevenue from sales topay wages to workers,rent to landowners, and

profit to firm owners.GDP equals the totalamount spent byhouseholds in themarket for goods andservices. It also equals

the total wages, rent,and profit paid by firmsin the markets for thefactors of production.


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Measurement of Gross Domestic Product

Gross domestic product (GDP)

Market value of all final goods and services

Produced within a country

In a given period of time

GDP is the market value

Market prices - reflect the value of the goods

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Measurement of Gross Domestic Product of all

All items produced in the economy And sold legally in markets

Excludes most items

Produced and sold illicitly Produced and consumed at home

final

Value of intermediate goods is alreadyincluded in the prices of the final goods

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Measurement of Gross Domestic Product

goods and services

Tangible goods & intangible services

produced

Goods and services currently produced within a country

Goods and services produced domestically,

regardless of the nationality of the producer in a given period of time

A year or a quarter

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The Components of GDP

Y = C + I + G + NX

Identity

Y = GDP

C = consumption I = investment

G = government purchases

NX = net exports

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Consumption

Spending by households

On goods and services

Exception: purchases of new housing Investment

Spending on capital equipment, inventories,

and structures Including household purchases of new

housing

Inventory accumulation 10


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Government purchases

Government consumption expenditure and

gross investment

Spending on goods and services

By local, state, and federal governments

Does not include

transfer payments

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Net exports = Exports - Imports

Exports

Spending on domestically produced goods by

foreigners

Imports

Spending on foreign goods by domestic residents

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2007, GDP of the United States = $14 trillion

GDP per person = $45,838

Consumption = $32,225 per person

Investment = $7,061 per person

Government purchases = $8,912 per person

Net exports =$2,360 per person

The components of U.S. GDP

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Table

GDP and its components

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Total(in billions of dollars)

Per person(in dollars)

Percentof total

Gross domestic product, Y

Consumption, C

Investment, I

Government purchases, G

Net exports, NX

$13,843

9,732

2,132

2,691

712

$45,838

32,225

7,061

8,912

2,360

100%

70

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-5

This table shows total GDP for the U.S. economy in 2007 and the breakdown of GDP

among its four components.

When reading this table, recall the identity Y = C + I + G + NX.


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Real Versus Nominal GDP

Total spending rises from one year to the next

Economy - producing a larger output of goods

and services

And/or goods and services are being sold at

higher prices

Nominal GDP

Production of goods and servicesValued at current prices

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Real GDP

Production of goods and services

Valued at constant prices

Designate one year as base yearNot affected by changes in prices

For the base year

Nominal GDP = Real GDP

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Table

Real and Nominal GDP

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Prices and Quantities

Year

Price of

hot dogs

Quantity of

hot dogs

Price of

hamburgers

Quantity of

hamburgers

2008

2009

2010

$1

$2

$3

100

150

200

$2

$3

$4

50

100

150

Calculating Nominal GDP

2008

2009

2010

($1 per hot dog 100 hot dogs) + ($2 per hamburger 50 hamburgers) = $200


($3 per hot dog 200 hot dogs) + ($4 per hamburger 150 hamburgers) = $1,200

Calculating Real GDP (base year 2008)

20082009

2010

($1 per hot dog 100 hot dogs) + ($2 per hamburger 50 hamburgers) = $200($1 per hot dog 150 hot dogs) + ($2 per hamburger 100 hamburgers) = $350


Calculating the GDP Deflator

2008

2009

2010

($200 / $200) 100 = 100

($600 / $350) 100 = 171

($1,200 / $500) 100 = 240

This table shows how to calculate real GDP, nominal GDP,

and the GDP deflator for a hypothetical economy that

produces only hot dogs and hamburgers.


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The GDP deflator

Measure of the price level

Ratio of nominal GDP to real GDP times 100

=100 for the base yearMeasures the current level of prices relative to

the level of prices in the base year

InflationEconomys overall price level is rising

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Inflation rate

Percentage change in some measure of the

price level from one period to the next

The GDP deflator

Can be used to take inflation out of nominalGDP (deflate nominal GDP)

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1001yearindeflatorGDP

1yearindeflatorGDP-2yearindeflatorGDP2yearinInflation


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The GDP data

Real GDP grows over time

Growth is not steady

Recession

Real GDP declines

Lower income

Rising unemployment

Falling profits

Increased bankruptcies

Real GDP over recent history

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Fi 2


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Figure

Real GDP in the United States

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This figure shows quarterly data on real GDP for the U.S. economy since 1965.

Recessionsperiods of falling real GDPare marked with the shaded vertical bars.

Fi


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Figure

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0

1

2

3

4

5

6

7

8

9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011 (e)

Percentage %

Years

VIETNAMs GDP GROWTH


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GDP - Good Measure of Economic Well-being?

GDP single measure of the economic well-

being of a society

Economys total income

Economys total expenditure

Larger GDP

Good life

Better healthcare

Better educational systems

Measure - ability to obtain many of the inputs

into a worthwhile life23


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GDP - Good Measure of Economic Well-being?

GDP not a perfect measure of well-being

Doesnt include

Leisure

Value of almost all activity that takes place

outside markets

Quality of the environment

No distribution of income

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I t ti l diff i GDP


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Rich countries - Higher GDP per person

Better

Life expectancy

Literacy

Internet usage

Poor countries - Lower GDP per person

Worse

Life expectancy Literacy

Internet usage

International differences in GDP

and the quality of life

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I t ti l diff i GDP


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Low GDP per person

More infants with low birth weight

Higher rates of infant mortality

Higher rates of maternal mortality

Higher rates of child malnutrition

Less common access to safe drinking water

Fewer school-age children are actually in school

Fewer teachers per student

Fewer televisions; Fewer telephones

Fewer paved roads

Fewer households with electricity

International differences in GDP

and the quality of life

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Table 3


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Table

GDP and the quality of life

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Country

Real GDP per

person (2005)

Life

expectancy

Adult literacy

(% of population)

Internet usage

(% of population)

United States

Japan

Germany

Russia

MexicoBrazil

China

Indonesia

India

Pakistan

BangladeshNigeria

$41,890

31,267

29,461

10,845

10,7518,402

6,757

3,843

3,452

2,370

2,0531,128

78 years

82

79

65

7672

72

70

64

65

6347

99%

99

99

99

9289

91

90

61

50

4769

63 %

67

45

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1819

9

7

3

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0.34

The table shows GDP per person and three other measures of the quality of life for

twelve major countries.

chapter 23 - measuring a nation s income

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