lecture+1.ch5
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Macroeconomics Lecture SlidesTRANSCRIPT
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Macroeconomics 1B
Lecture 1*
Measuring A Nation’s Income
*Mankiw, N. Gregory and Mark P. Taylor. 2014. Macroeconomics. UK: Cengage Learning EMEA, Ch5
Understand◦ Why an economy’s total income equals its total
expenditure◦ How GDP is defined and measured◦ The components of GDP◦ The distinction between real GDP and nominal
GDP◦ Whether GDP is a good measure of economic well-
being
Purpose of Lecture
For an economy as a whole income equals expenditure because:◦ Every transaction has a buyer and a seller.
Every rand of spending by some buyer is a dollar of income for some seller
The Economy’s Income and Expenditure
Gross Domestic Product (GDP) Is the market value of all final goods and services
produced within a country in a given period of time
The Measurement of Gross Domestic Product
Three Types of GDPGross value added at factor cost+ other taxes on production*- other subsidies on production**Gross value added at basic prices+ taxes on production#- subsidies on production##GDP at market prices
The Measurement of Gross Domestic Product
*Taxes on factors of production: property, capital and payroll taxes, etc.**Subsidies on factors of production: job creation and training subsidies, etc.#Taxes on products: general sales taxes, VAT, fuel levy, duties and taxes on imports, etc.##Subsidies paid on agricultural commodities, transportation services and energy, etc.
“…Of All Final…”◦ Avoid double counting
Intermediate goods versus Final goods Value added
The Measurement of Gross Domestic Product
“…Goods and Services…” It includes both
tangible goods: food, clothing, cars and intangible goods: haircuts, house cleaning, doctor visits
The Measurement of Gross Domestic Product
“…Produced…”◦ It includes goods and services produced in the
period we’re considering, not transactions involving goods produced in the past.
◦ E.g. do not include second hand goods, i.e, used cars, used houses, second hand cellphone etc.
◦ No unilateral transfers between individual or form government.
The Measurement of Gross Domestic Product
“…Within a Country…”◦ It measures the value of production within the
geographic confines of a country. Ownership is not important.
“…In a Given Period of Time.”◦ It measures the value of production that takes
place within a specific interval of time, usually a year or a quarter. GDP is a flow & not a stock.
The Measurement of Gross Domestic Product
Expenditure Approach◦ Money spent on final goods and services
Income Approach◦ Incomes of the factors of production
Production Approach◦ Sum of the value added during each phase of the
production process
Three Approaches to GDP
GDP (Y) is the sum of the following:◦ Consumption (C)◦ Investment (I)◦ Government Purchases (G)◦ Net exports (NX)
Y = C + I + G + NX
The Components of GDP: The Expenditure Approach
Consumption:◦ The spending by households on goods and services,
with the exception of purchases of new housingSpending includes:◦ Durable goods (with over 3 years of life span)
Cars, washing machines, fridges, ovens◦ Non-durable goods (with no more than 3 years life
span Food and clothing
◦ Services (intangible items) Haircuts and medical care
The Components of GDP: The Expenditure Approach
Investment◦ The spending on capital equipment, inventories,
and structures, including new housing
The Components of GDP: The Expenditure Approach
Government Purchases◦ The spending on goods and services and gross
investment in highways, bridges, and so on.
◦ Does not include transfer payments because they are not made in exchange for currently produced goods and services
The Components of GDP: The Expenditure Approach
Net exports◦ Exports minus imports
◦ Exports The purchase of domestically-produced goods and
services by foreign residents, firms and governments◦ Imports
The purchase of foreign-produced goods and services by domestic residents, firms and governments
The Components of GDP: The Expenditure Approach
From GDP to GNP GNP (gross national product) is the total income earned by a country’s
nationals. It is equal to GDP + Factor income of domestic residents from abroad less the Factor income accruing to foreigners employed domestically.
From GNP to NNP Total income of a nation’s residents minus losses from depreciation (i.e.
consumption of fixed capital or the replacement cost of fixed capital)
From NNP to NI National Income (NI) differs from NNP in that it is calculated by subtracting
indirect business taxes & adding business subsidies.
From NI to PI personal income (PI) is the measure of income received by households, i.e.
NI plus transfer payments (social security benefits, unemployment benefits, welfare benefits, disability benefits) less payroll taxes (social security contributions), corporate profit taxes & undistributed corporate profits)
From PI to DI disposable income (DI) is PI less personal taxes (personal income, personal
property & inheritance taxes)
Compensation of Employees◦ Wages and salaries paid to employees◦ Employers’ contributions to social security and employee benefit plans◦ Monetary value of fringe benefits, tips, and paid vacations
Proprietors’ Income◦ All forms of income earned by self-employed individuals
Corporate profits◦ All the income earned by stockholders of corporations
Rental Income (of persons)◦ Income received by individuals for the use of their nonmonetary assets (land,
houses, offices).
Net Interest◦ The interest income received by households and government minus the interest
they paid out
The Income Approach: National Income*
*Reading 1: Principles of Macroeconomics
GDP = National Income◦ - Income earned from the rest of the world◦ +Income earned by the rest of the world◦ +Indirect business taxes◦ +Capital consumption allowance (depreciation)◦ +Statistical discrepancy
The Income Approach: Making Some Adjustments*
*Reading 1: Principles of Macroeconomics
The Production ApproachStages of Production
Sales Value
Firm A: Sheep Farm
R0 – R120
Firm B: Wool processor
R120 – R180
Firm C: Suit Manufacturer
R180 – R220
Firm D: Clothing wholesaler
R220 -R270
Firm E: Retail Clothier
R270- R350
Total Sales Value R1140
van Rensburg, J. J., C. R. McConnell and S. L. Brue. 2011. Macroeconomis. New York: McGraw Hill, Table 15.4.
The Production ApproachStages of Production
Sales Value Value Added
Firm A: Sheep Farm
R0 – R120 R120
Firm B: Wool processor
R120 – R180 R60
Firm C: Suit Manufacturer
R180 – R220 40
Firm D: Clothing wholesaler
R220 -R270 R50
Firm E: Retail Clothier
R270- R350 R80
Total Sales Value R1140
Value Added R350
van Rensburg, J. J., C. R. McConnell and S. L. Brue. 2011. Macroeconomis. New York: McGraw Hill, Table 15.4.
Net Domestic Product (NDP)◦ NDP = GDP – Capital Consumption Allowance (Deprcn)
Personal Income◦ Personal income = National Income
- Undistributed corporate profits - Social insurance taxes - Corporate profit taxes +Transfer payments
Disposable Income ◦ Disposable Income = Personal Income – Personal Taxes
Other National Income Accounting Measurements
Nominal GDP◦ Values the production of goods and services at
current prices Real GDP
◦ Values the production of goods and services at constant prices
An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator
Real GDP, Nominal GDP and GDP Deflator
The GDP Deflator
◦ It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced
Converting Nominal GDP to Real GDP
Real GDP, Nominal GDP and GDP Deflator
G D P d efla to r =N o m in a l G D P
R ea l G D P 1 0 0
R eal G D PN o m in a l G D P
G D P d efla to r2 0 X X2 0 X X
2 0 X X
1 0 0
Year (1)Units of Output
(2)Price of Pizza per Unit
(3)Unadjusted or Nominal GDP,
(4)GDP Deflator(Year 1 = 100)
(5)Adjusted or Real GDP
1 5 10 50 100 50
2 7 20 140 200 70
3 8 25 200 250 80
4 10 30 ? ? ?
Real GDP, Nominal GDP and GDP Deflator
van Rensburg, J. J., C. R. McConnell and S. L. Brue. 2011. Macroeconomis. New York: McGraw Hill, Table 15.5.
Year (1)Units of Output
(2)Price of Pizza per Unit
(3)Unadjusted or Nominal GDP, (1)x(2)
(4)GDP deflator,(Year 1 = 100)
(5)Adjusted or Real GDP
1 5 10 50 100 50
2 7 20 140 200 70
3 8 25 200 250 80
4 10 30 300 ? ?
Real GDP, Nominal GDP and GDP Deflator
van Rensburg, J. J., C. R. McConnell and S. L. Brue. 2011. Macroeconomis. New York: McGraw Hill, Table 15.5.
Year (1)Units of Output
(2)Price of Pizza per Unit
(3)Unadjusted or Nominal GDP, (1)x(2)
(4)GDP deflator,(Year 1 = 100)
(5)Adjusted or Real GDP,(1)x base year price
1 5 10 50 100 50
2 7 20 140 200 70
3 8 25 200 250 80
4 10 30 300 ? 100
Real GDP, Nominal GDP and GDP Deflator
van Rensburg, J. J., C. R. McConnell and S. L. Brue. 2011. Macroeconomis. New York: McGraw Hill, Table 15.5.
Note: Also (5) = ((3)/(4))x100
Year (1)Units of Output
(2)Price of Pizza per Unit
(3)Unadjusted or Nominal GDP, (1)x(2)
(4)GDP deflator,((3)/(5))x100(Year 1 = 100)
(5)Adjusted or Real GDP, (1)x base year price
1 5 10 50 100 50
2 7 20 140 200 70
3 8 25 200 250 80
4 10 30 300 300 100
Real GDP, Nominal GDP and GDP Deflator
van Rensburg, J. J., C. R. McConnell and S. L. Brue. 2011. Macroeconomis. New York: McGraw Hill, Table 15.5.
Note: Also (5) = ((3)/(4))x100
Higher GDP per person indicates a higher standard of living
GDP is not a perfect measure of the happiness or quality of life, however.
GDP and Economic Well-Being