Measuring a Nation

1
Chapter 10

• Measuring a Nations Income

2
Macroeconomics

• Macroeconomics is the study of the economy as a
  whole. Its goal is to explain the economic
  changes that affect many households, firms, and
  markets at once.
• Microeconomics is the study of how individual
  households and firms make decisions and how they
  interact with one another in markets.

3
Understanding the Economy

• Identify the important areas
• Total output (and income)
• The average of prices
• Resource employment
• Measure the important areas using
• Real Gross Domestic Product
• Consumer Price Index
• Monthly unemployment rate

4
The Circular-Flow Diagram
Product Market


Businesses
Households


Market for Factors of Production
5
Two Methods of Computing An Economys Income

• Expenditure Approach
• Sum the total expenditures by households (from
  the top portion of the circular flow).
• Resource Cost or Income Approach
• Sum the total wages and profit paid by firms for
  resources (from the bottom portion of the
  circular flow).

6
The Economys Income and Expenditure

• When judging whether the economy is doing well or
  poorly, it is natural to look at the total income
  that everyone in the economy is earning.
• For an economy as a whole, income must equal
  expenditure.
• The forces of supply and demand determine the
  market equilibrium price and quantity that is
  produced and exchanged.

7
The Economys Income and Expenditure

• A measure of the income and expenditures of an
  economy is Gross Domestic Product (GDP).
• Gross Domestic Product 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
Gross Domestic Product

• The total market value of all final goods and
  services produced during a given period of time
  within a country, region, or state.

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Important Features of GDP

• Output is valued at market determined prices.
• Output is measured in dollar terms.
• GDP records only the output of final goods. We
  want to count production only once.
• Represents the amount of money one would need to
  purchase a years worth of the economys
  production of all final goods (7,000,000,000,000
  ).

10
What Is and What Is Not Counted in GDP?

• GDP includes all items produced in the economy
  and sold legally in markets.
• GDP does not include items produced and consumed
  at home and never enter the marketplace. It does
  not include items produced and sold illicitly,
  such as illegal drugs.

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Gross National Product

• The total market value of all final goods and
  services produced during a given period of time
  by the nations residents, regardless of the
  place produced.

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Quick Quiz!

• Which contributes more to GDP the production of
  a pound of hamburger or the production of a pound
  of caviar? Why?

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Three Other Measures of Income

• Net National Product (NNP)
• Total income of residents of a nation after
  subtracting capital consumption allowances.
• Personal Income
• The income that households and non-corporate
  businesses receive.
• Disposable Personal Income
• The income that household and non-corporate
  businesses have left after taxes.

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The Components of GDP

• GDP (Y) is the sum of
• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (NX)
• Y C I G NX

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The Four Components of GDP

• Consumption (C)
• Is the spending by households on goods and
  services
• e.g. buying clothing, food, movie tickets
• Investment (I)
• Is the purchases of capital equipment and
  structures
• e.g. factory, houses, etc.

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The Four Components of GDP

• Government Purchases (G)
• Includes spending on goods and services by local,
  state and federal governments (e.g. roads,
  police, etc.).
• Does not include transfer payments, because it is
  not made in exchange for currently produced goods
  or services.
• Net Exports (NX)
• Exports minus imports.

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GDP Components of Measurement
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GDP Components of Measurement
Consumption 69
19
GDP Components of Measurement
Investment 13
Consumption 69
20
GDP Components of Measurement
Government Spending 19
Investment 13
Consumption 69
21
GDP Components of Measurement
Government Spending 19
Investment 13
Net Exports -1
Consumption 69
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The Income Approach

• Components
• Wages (73.0)
• Interest (9.5)
• Rents (.5)
• Profits (17.0)
• We must also include taxes and depreciation for
  accurate accounting

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Quick Quiz!

• List the four components of expenditure.
• Which is the largest?

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Real versus Nominal GDP

• GDP is the market value of the economys current
  production, referred to as Nominal GDP.
• Real GDP measures any given years total output
  in constant prices.
• An accurate view of the economy requires
  adjusting nominal to real GDP, using the GDP
  Price Deflator.

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Our Example of Real vs. Nominal
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Nominal GDP

• Calculated as the sum of Prices in a year times
  quantities in a year
• 1999 1x102x520
• 2000 2X104x540
• 2001 3x56x1075
• Question Is this an accurate measure of how much
  we produce?
• Compare 1999 and 2000 to see!

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Real GDP

• Calculated as sum of base year prices times
  quantities each year
• Lets make 1999 the base year
• 1999 1x102x520
• 2000 1x102x520
• 20011x52x1025
• Is this a more accurate measure of output?

28
GDP Deflator

• Just the ratio of nomimal GDP to real GDP times
  100
• 199920/20 x 100 100
• This is an index, always 100 for the base year
• 200040/20 x 100 200
• 200175/25 x 100 300
• What does it mean?

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GDP Price Deflator

• The GDP Price Deflator is a price index that uses
  a bundle of all final goods and services.
• It tells us the rise in nominal GDP that is
  attributable to a rise in prices.
• Converting Nominal GDP to Real GDP
• Real GDP19xx
• (Nominal GDP19xx ) (GDP deflator19xx)X100

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Quick Quiz!

• Define Real and Nominal GDP.
• Which is a better measure of economic well-being?
  Why?

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GDP and Economic Well-Being

• GDP Per Person tells us the income and
  expenditure of the average person in the economy.
• It is a good measure of the material well-being
  of the economy as a whole.
• More Real GDP means we have a higher material
  standard of living by being able to consume more
  goods and services.
• It is NOT intended to be a measure of happiness
  or quality of life.

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GDP and Economic Well-Being

• Some factors and issues not in GDP that lead to
  the well-being of the economy
• Factors that contribute to a good life such as
  leisure.
• Factors that lead to a quality environment.
• The value of almost all activity that takes place
  outside of the markets, e.g. volunteer work and
  child-rearing.