1. 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

2. I. Introduction and definition of the GDP
National income can be defined in various ways. The GDP defintion is the most usual.
GDP =
market value
marketed goods vs. non-marketed goods:
final goods and services
produced
within a country:

3. II. 2 ways of measuring GDP:
expenditure method of calculating GDP:
GDP = Y =
C = consumption expenditure,
I = investment expenditure,
G = Government expenditure,
X = exports,
M = imports

4. 2. income method of calculating GDP
add “value-added” by all firms together;
value-added =
sum of value added by all firms =
Why?

5. Goods & Services bought
III.The Circular-Flow Diagram – equivalence of the 2 methods of measuring GDP
Spending
Revenue
Market for
Goods
and Services
Goods & Services sold
Goods & Services bought
Firms
Households
Wages, rent, and profit
Income
Labor, land, and capital
Inputs for production
Market for
Factors
of Production 7

6. III. Other ways of defining National Income
Gross National Product (GNP)
Net National Product (NNP)
National Income
Personal Income
Disposable Personal Income

7. Gross national product (GNP) is the total income
It differs from GDP by
Net National Product (NNP) is the total income of
Depreciation is the wear and tear on the economy’s
NNP is an useful measure because

8. National Income (NI) is the total income earned by a nation’s
It differs from NNP by excluding
this is excluded because
Personal income (PI) is the total earnings that
Unlike national income, it excludes
In addition, it includes

9. Disposable personal income (DI) is the income
It equals personal income minus

10. IV. Adjusting GDP for inflation
Recap: GDP is measured at market prices which fluctuate form period to period
Real GDP:
Nominal GDP:
GDP deflator =

11. Real and Nominal GDP

12. Real and Nominal GDP

13. Real and Nominal GDP

14. Real and Nominal GDP

15. V. Quality of life vs. GDP
GDP is positively correlated with but not identical to economic well-being.
Factors that creates a difference between the two:

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