Presentation on theme: "Measuring a Nation’s Income"— Presentation transcript:
1 Measuring a Nation’s Income 10Measuring a Nation’s Income
2 Microeconomics vs. Macroeconomics Study of how households and firmsMake decisionsInteract in marketsMacroeconomicsStudy of economy-wide phenomenaIncluding inflation, unemployment, and economic growth
3 The Economy’s Income and Expenditure Gross Domestic Product (GDP)Measures the total income of everyone in the economyMeasures the total expenditure on the economy’s output of goods and servicesFor an economy as a wholeIncome must equal expenditureCircular-flow diagram – assumptions:All goods and services – bought by householdsHouseholds - -spend all of their income
4 The circular-flow diagram 1The circular-flow diagramHouseholds buy goods and services from firms, and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners. GDP equals the total amount spent by households in the market for goods and services. It also equals the total wages, rent, and profit paid by firms in the markets for the factors of production.
5 Measurement of Gross Domestic Product Gross domestic product (GDP)Market value of all final goods and servicesProduced within a countryIn a given period of time“GDP is the market value…”Market prices - reflect the value of the goods
6 Measurement of Gross Domestic Product “… of all…”All items produced in the economyAnd sold legally in marketsExcludes most itemsProduced and sold illicitlyProduced and consumed at home“… final…”Value of intermediate goods is already included in the prices of the final goods
7 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
8 The Components of GDP Y = C + I + G + NX Identity Y = GDP C = consumptionI = investmentG = government purchasesNX = net exports
9 The Components of GDP Consumption Investment Spending by households On goods and servicesException: purchases of new housingInvestmentSpending on capital equipment, inventories, and structuresIncluding household purchases of new housingInventory accumulation
10 The Components of GDP Government purchases Government consumption expenditure and gross investmentSpending on goods and servicesBy local, state, and federal governmentsDoes not include transfer payments
11 The Components of GDP Net exports = Exports - Imports Exports Imports Spending on domestically produced goods by foreignersImportsSpending on foreign goods by domestic residents
12 Real Versus Nominal GDP Total spending rises from one year to the nextEconomy - producing a larger output of goods and servicesAnd/or goods and services are being sold at higher pricesNominal GDPProduction of goods and servicesValued at current prices
13 Real Versus Nominal GDP Real GDPProduction of goods and servicesValued at constant pricesDesignate one year as base yearNot affected by changes in pricesFor the base yearNominal GDP = Real GDP
14 2 Real and Nominal GDP Prices and Quantities Year Price of hot dogs Quantity ofhamburgers200820092010$1$2$3100150200$450Calculating Nominal GDP($1 per hot dog × 100 hot dogs) + ($2 per hamburger × 50 hamburgers) = $200($2 per hot dog × 150 hot dogs) + ($3 per hamburger × 100 hamburgers) = $600($3 per hot dog × 200 hot dogs) + ($4 per hamburger × 150 hamburgers) = $1,200Calculating Real GDP (base year 2008)($1 per hot dog × 150 hot dogs) + ($2 per hamburger × 100 hamburgers) = $350($1 per hot dog × 200 hot dogs) + ($2 per hamburger × 150 hamburgers) = $500Calculating the GDP Deflator($200 / $200) × 100 = 100($600 / $350) × 100 = 171($1,200 / $500) × 100 = 240This table shows how to calculate real GDP, nominal GDP, and the GDP deflator for a hypothetical economy that produces only hot dogs and hamburgers.
15 Real Versus Nominal GDP The GDP deflatorMeasure of the price levelRatio 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 yearInflationEconomy’s overall price level is rising
16 Real Versus Nominal GDP Inflation ratePercentage change in some measure of the price level from one period to the nextThe GDP deflatorCan be used to take inflation out of nominal GDP (“deflate” nominal GDP)
17 Real GDP over recent history The GDP dataReal GDP grows over timeGrowth is not steadyRecessionReal GDP declinesLower incomeRising unemploymentFalling profitsIncreased bankruptcies
18 GDP - Good Measure of Economic Well-being? GDP – “single measure of the economic well-being of a society”Economy’s total incomeEconomy’s total expenditureLarger GDPGood lifeBetter healthcareBetter educational systemsMeasure - ability to obtain many of the inputs into a worthwhile life
19 GDP - Good Measure of Economic Well-being? GDP – not a perfect measure of well-beingDoesn’t includeLeisureValue of almost all activity that takes place outside marketsQuality of the environmentNo distribution of income
20 International differences in GDP and the quality of life Rich countries - Higher GDP per personBetterLife expectancyLiteracyInternet usagePoor countries - Lower GDP per personWorse
21 International differences in GDP and the quality of life Low GDP per personMore infants with low birth weightHigher rates of infant mortalityHigher rates of maternal mortalityHigher rates of child malnutritionLess common access to safe drinking waterFewer school-age children are actually in schoolFewer teachers per studentFewer televisions; Fewer telephonesFewer paved roadsFewer households with electricity
22 GDP and the quality of life 3GDP and the quality of lifeCountryReal GDP perperson (2005)LifeexpectancyAdult literacy(% of population)Internet usageUnited StatesJapanGermanyRussiaMexicoBrazilChinaIndonesiaIndiaPakistanBangladeshNigeria$41,89031,26729,46110,84510,7518,4026,7573,8433,4522,3702,0531,12878 years82796576727064634799%999289919061506963 %67451518199730.34The table shows GDP per person and three other measures of the quality of life for twelve major countries.