Presentation is loading. Please wait.

Presentation is loading. Please wait.

III THE DATA OF MACROECONOMICS. 5 Measuring a Nation’s Income.

Similar presentations


Presentation on theme: "III THE DATA OF MACROECONOMICS. 5 Measuring a Nation’s Income."— Presentation transcript:

1 III THE DATA OF MACROECONOMICS

2 5 Measuring a Nation’s Income

3 Microeconomics and Macroeconomics Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets 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 CHAPTER 5 MEASURING A NATION’S INCOME

4 Macroeconomics Macroeconomics answers questions like these: 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? CHAPTER 5 MEASURING A NATION’S INCOME

5 The Importance of Data In macroeconomics, data is crucial 1.Data helps policy makers see what problems, if any, need to be addressed 2.Data helps macroeconomists identify the theories that make correct predictions and the theories that make incorrect predictions 3.Data often reveals interesting puzzles that macroeconomic theories need to solve CHAPTER 5 MEASURING A NATION’S INCOME

6 Total Income When judging whether an economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning CHAPTER 5 MEASURING A NATION’S INCOME

7 Total Income We can temporarily boost our standard of living by borrowing from others. But in the long run we can’t keep borrowing indefinitely This is why a nation’s standard of living depends heavily on its total income CHAPTER 5 MEASURING A NATION’S INCOME

8 Income = Expenditure We could measure either total income or total expenditure We will get the same number either way For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. CHAPTER 5 MEASURING A NATION’S INCOME

9 But what about saving? Q: People typically save part of what they earn. How then is income equal to expenditure for the economy as a whole? A: What people save tends to be loaned to businesses who then spend what they borrowed. CHAPTER 5 MEASURING A NATION’S INCOME

10 International Trade We buy foreign-made goods and foreigners buy goods made by us Q: In that case, how can our total income be equal to our total expenditure? A: Very good point! It is better to say that total income equals the total expenditure on domestically produced goods (GDP)

11 Gross Domestic Product Gross Domestic Product (GDP) is one measure of a country’s total income There are other measures GDP is the total market value of all final goods and services produced within a country in a given period of time. For example, the GDP of the United States was nearly seventeen trillion dollars in 2013 $16,803.0 billion, according to the U.S. Department of CommerceU.S. Department of Commerce CHAPTER 5 MEASURING A NATION’S INCOME

12 Gross Domestic Product We just saw that GDP is the total market value of all final goods and services produced Therefore, GDP is also the total expenditure on all final goods and services produced As expenditure is equal to income, GDP is also total income CHAPTER 5 MEASURING A NATION’S INCOME

13

14 GDP is the Market Value … In GDP, all output is valued at market prices. The market value of all sandwiches produced is both the total expenditure of the buyers of those sandwiches and the total income of the makers of those sandwiches As our goal is to measure total income, it therefore makes sense to measure the market values of the various produced goods and add them up CHAPTER 5 MEASURING A NATION’S INCOME

15 … Of All Final Goods … GDP records only the value of final goods, not intermediate goods Intermediate goods are those goods that disappear inside other goods that are produced for sale Final goods are goods that are not intermed iate goods This way, the value of intermediate goods is counted only once, not twice or thrice. CHAPTER 5 MEASURING A NATION’S INCOME

16 … Of All Final Goods … Intermediate goods are sold by their producers to producers of other goods Examples: milk sold by a dairy to an ice-cream company, grapes sold by a vineyard to a winemaker, printer paper sold to Kinko’s Final goods are goods that are sold to the final users of those goods Examples: milk you buy at the supermarket, table grapes you buy at the farmer’s market, printer paper you buy for your computer printer All goods made this year but not sold by year’s end are regarded as final goods (inventories) CHAPTER 5 MEASURING A NATION’S INCOME

17 … Of All Final Goods … Suppose a dairy farmer sells milk worth $50,000 to an ice- cream company. The farmer does not buy anything from any other firm. The total income of the dairy farmer and her employees is, therefore, $50,000 The ice-cream company uses the milk to produce ice-cream which it sells for $75,000. The ice-cream company does not buy anything from any firm other than the dairy. Therefore, the total income of the owners and employees of the ice-cream firm is $25,000. Therefore, the total income of this country is $75,000 This is accurately measured by the value of the ice-cream (the final good) alone Had we also counted milk, the intermediate good, we would have calculated total income to be $125,000, which would have been an exaggeration. CHAPTER 5 MEASURING A NATION’S INCOME

18 … and Services … GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits, legal consultations). Trade in assets does not affect GDP. Such trade does not require new productive activity, it is merely the transfer of ownership of an asset from one person to another CHAPTER 5 MEASURING A NATION’S INCOME

19 … Produced Within a Country … GDP measures the value of all production within the geographic boundaries of a country. The citizenship of the owners of the resources used in production is not the key issue Production by foreigners living in a country is counted in the country’s GDP Production by a country’s citizens working in other countries is not counted CHAPTER 5 MEASURING A NATION’S INCOME

20 … In a given period of time GDP measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months). GDP includes goods and services currently produced, not transactions involving goods produced in the past. Transactions involving used cars or buildings that were constructed in the past are not counted CHAPTER 5 MEASURING A NATION’S INCOME

21 What’s not counted in GDP? GDP includes all items produced in the economy and sold legally in markets. It excludes items produced and sold illicitly, such as illegal drugs. GDP excludes most items that are produced and consumed at home and that never enter the marketplace. CHAPTER 5 MEASURING A NATION’S INCOME

22 Real Versus Nominal GDP Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices. CHAPTER 5 MEASURING A NATION’S INCOME

23

24 Real and Nominal GDP of USA CHAPTER 5 MEASURING A NATION’S INCOME

25 The GDP Deflator The GDP deflator is a measure of the overall level of the prices of the final goods and services produced within a country during a given period of time CHAPTER 5 MEASURING A NATION’S INCOME

26 The GDP Deflator It tells us what part of the rise in nominal GDP over a period of time is attributable to a rise in prices rather than a rise in the quantities produced. CHAPTER 5 MEASURING A NATION’S INCOME

27 The GDP Deflator CHAPTER 5 MEASURING A NATION’S INCOME

28 Example: 2013 US Nominal GDP was $16,803.0 billion US Real GDP was $15,767.1 billion (chained 2009 dollars) US GDP Deflator = (16,803.0/15,767.1) × 100 = This means that, roughly, final goods and services were on average 6.57% pricier in 2013 compared with 2009 CHAPTER 5 MEASURING A NATION’S INCOME

29 The GDP Deflator Why call it a deflator? Nominal GDP changes from one year to the next partly because of inflation Real GDP, on the other hand, changes because of changes in production alone The GDP Deflator can convert Nominal GDP to Real GDP by deflating the effect of inflation in Nominal GDP CHAPTER 5 MEASURING A NATION’S INCOME

30 Converting Nominal GDP to Real GDP CHAPTER 5 MEASURING A NATION’S INCOME

31 THE COMPONENTS OF GDP CHAPTER 5 MEASURING A NATION’S INCOME

32 The Components of GDP We have seen that GDP is the total expenditure on domestically-produced final goods and services Knowing the total expenditure is not enough, however We also need to know the components of the total expenditure CHAPTER 5 MEASURING A NATION’S INCOME

33 The Components of GDP If total expenditure falls, total income will fall too … … which is not good! To figure out why total expenditure is falling, policy makers need to find out whether some particular component of expenditure is chiefly responsible for the fall in total spending If the chief culprit is identified, policy makers would have a better chance of fixing the problem

34 Components of GDP GDP = Consumption Spending + Investment Spending + Government Spending + Exports – Imports Macroeconomists look not only at total spending (GDP), they also look at the above components of total spending CHAPTER 5 MEASURING A NATION’S INCOME

35 The Components Of GDP Consumption (C): The spending by households on goods and services, with the exception of purchases of new housing. Investment (I): The spending on capital equipment, inventories, and structures, including new housing. CHAPTER 5 MEASURING A NATION’S INCOME

36 The Components Of GDP Government Purchases (G): The spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services. Net Exports (NX): Exports minus imports. CHAPTER 5 MEASURING A NATION’S INCOME

37 The Components Of Real GDP: 2013 Billions of Chained 2009 DollarsPercent of GDP Gross Domestic Product (Y)15, Personal consumption expenditures (C)10, Gross private domestic investment (I)2, Government consumption expenditures and gross investment (G)2, Net exports of goods and services (NX) CHAPTER 5 MEASURING A NATION’S INCOME

38 The Components Of Nominal GDP: 2013 Billions of DollarsPercent of GDP Gross Domestic Product (Y)16, Personal consumption expenditures (C)11, Gross private domestic investment (I)2, Government consumption expenditures and gross investment (G)3, Net exports of goods and services (NX) CHAPTER 5 MEASURING A NATION’S INCOME

39 Components of GDP GDP = Consumption Spending + Investment Spending + Government Spending + Exports – Imports Q: Why do we subtract imports? CHAPTER 5 MEASURING A NATION’S INCOME

40 Components of GDP: Why do we subtract imports? GDP is the total spending on all final “Made in USA” goods. But consumption, investment, and government spending all include spending on foreign goods. Therefore, to make the two sides of the equation the same, we must take out all spending on imported goods lurking inside consumption, investment, and government spending CHAPTER 5 MEASURING A NATION’S INCOME

41 Table 1 GDP and Its Components (2004) CHAPTER 5 MEASURING A NATION’S INCOME

42 GDP and Its Components (2004) Consumption 70% Government Purchases 15% Net Exports -5 % Investment 16%

43 CHAPTER 5 MEASURING A NATION’S INCOME

44

45

46 U.S. Exports and Imports, as a percentage of real GDP

47 CHAPTER 5 MEASURING A NATION’S INCOME

48 Growth Rates Nominal GDP (Billions of Dollars) Growth Rate (%) [( )/ ]✕100 = [( )/ ]✕100 = 3.44

49 CHAPTER 5 MEASURING A NATION’S INCOME

50 Where to find US data Bureau of Economic Analysis, U.S. Department of Commerce: Federal Reserve Bank of St. Louis: /18 /18 CHAPTER 5 MEASURING A NATION’S INCOME

51 International Comparisons When the GDP numbers for various countries’ are being compared, the same currency units must be used for all countries There are two ways of converting from national countries to the US dollar (or some other common currency) Use market exchange rates Use a common set of prices (PPP) CHAPTER 5 MEASURING A NATION’S INCOME

52 GDP per capita, in US dollars PPPMarket Exchange Rates United States United Kingdom Japan Uruguay Ukraine Albania China India Bangladesh Ethiopia Liberia Source: World Economic Outlook 2008 database, IMF CHAPTER 5 MEASURING A NATION’S INCOME

53 GDP And Economic Well-being GDP is the best single measure of the economic well-being of a society. GDP per person tells us the income and expenditure of the average person in the economy. CHAPTER 5 MEASURING A NATION’S INCOME

54 Table 3 GDP, Life Expectancy, and Literacy CHAPTER 5 MEASURING A NATION’S INCOME

55 GDP And Economic Well-being Some things that contribute to well-being are 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 and the value of volunteer work. CHAPTER 5 MEASURING A NATION’S INCOME

56 Robert Kennedy on GDP [Gross Domestic Product] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans. CHAPTER 5 MEASURING A NATION’S INCOME

57 Any questions?

58 Summary Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. Gross Domestic Product (GDP) measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. CHAPTER 5 MEASURING A NATION’S INCOME

59 Summary GDP is the market value of all final goods and services 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. CHAPTER 5 MEASURING A NATION’S INCOME

60 Summary Nominal GDP uses current prices to value the economy’s production. Real GDP uses constant base-year prices to value the economy’s production of goods and services. The GDP deflator—calculated from the ratio of nominal to real GDP—measures the level of prices in the economy. CHAPTER 5 MEASURING A NATION’S INCOME

61 Summary GDP is a good measure of economic well-being because 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, aren’t measured by GDP. CHAPTER 5 MEASURING A NATION’S INCOME


Download ppt "III THE DATA OF MACROECONOMICS. 5 Measuring a Nation’s Income."

Similar presentations


Ads by Google