Chap 10, Mankiw Measurement of national income

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Chap 10, Mankiw Measurement of national income

• Introduction and definition of the GDP
• Gross domestic product meaning of the term
• Circular flow diagram and the methods of
  calculating GDP
• Other measures of national income
• Quality of life and GDP

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• Introduction and definition of the GDP
• Several definition of national income are
  possible. We shall use the GDP defintion.
• GDP definition market value of all final goods
  and services produced within a country in a given
  period of time.
• 2 ways of measuring GDP
• the expenditure method
• the income method
• The equivalence of the 2 methods can be shown by
  the circular flow diagram. The diagram implies
  that for the economy as a whole, income must
  equal expenditure.

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II. GDP what is included and what is not GDP
market value of all final goods and services
produced within a country in a given period of
time. market value market prices are used to
evaluate goods because they reflect the value to
the buyers and the cost to the sellers at the
same time only marketed goods are included
although we also benefit from non-marketed goods
ex final goods and services not
intermediate goods are included ex produced
only goods produced in the current year are
included not goods which are resold ex within a
country domestic production not national
production in a given period of time an
accounting period
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III.The Circular-Flow Diagram methods of
estimating GDP
Market for Goods and Services
Firms
Households
Market for Factors of Production
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expenditure method add different categories of
expenditures by households, firms and government
together Y C I G (X M) Y GDP, C
consumption expenditure, I investment
expenditure, G Government expenditure, X
exports, M imports income method add
value-added by all firms together value-added
value of the output produced by a firm value
of the intermediate goods used to produce it. sum
of value added by all firms wages rents
interests profits.
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IV. Other ways of defining Income

• Gross National Product (GNP)
• Net National Product (NNP)
• National Income
• Personal Income
• Disposable Personal Income

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• Gross national product (GNP) is the total income
  earned by a nations permanent residents (called
  nationals).
• It differs from GDP by including income that our
  citizens earn abroad and excluding income that
  foreigners earn here.
• Net National Product (NNP) is the total income of
  the nations residents (GNP) minus losses from
  depreciation.
• Depreciation is the wear and tear on the
  economys stock of equipment and structures.

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• National Income is the total income earned by a
  nations residents in the production of goods and
  services.
• It differs from NNP by excluding indirect
  business taxes (such as sales taxes) and
  including business subsidies.
• Personal income is the income that households and
  non-corporate businesses receive.
• Unlike national income, it excludes retained
  earnings, which is income that corporations have
  earned but have not paid out to their owners.
• In addition, it includes households interest
  income and government transfers.

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• Disposable personal income is the income that
  household and noncorporate businesses have left
  after satisfying all their obligations to the
  government.
• It equals personal income minus personal taxes
  and certain nontax payments.

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Real GDP goods are evaluated at constant (base
year) prices Nominal GDP goods are evaluated at
current year prices GDP deflator (nominal
GDP/real GDP) 100, measures price movement over
time. long run trend in GDP vs. short run
fluctuations recessions or slumps expansions or
booms
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Real and Nominal GDP
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Real and Nominal GDP
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Real and Nominal GDP
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Real and Nominal GDP
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Real GDP in the United States
Billions of 1992 Dollars
8,000
7,000
6,000
5,000
4,000
3,000
1970
1975
1980
1985
1990
1995
2000
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• V. Quality of life vs. GDP
• GDP has a positive correlation with but is not
  the same thing as economic welfare Why?

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GDP and Its Components (1998)
Government Purchases 18
Net Exports -2
Investment 16
Consumption 68