Measuring a Nation’s Income Chapter 10 or 23

The Economy’s 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. To have this number make sense, it is also best to look at income per person.

The Economy’s Income and Expenditure 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. Say’s Law-Supply creates it’s own demand This process can be seen using a Circular Flow Diagram.

Gross Domestic Product Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It is the total market value of all final goods and services produced within a country in a given period of time. How much is the current GDP? 236.62 $ Billion

The Circular-Flow Diagram 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

The Measurement of GDP GDP is: the market value of all final goods and services produced within a country in a given period of time.

The Measurement Of Gross Domestic Product GDP is the market value of all final goods and services produced within a country in a given period of time. GDP is the Market Value . . .” Output is valued at market prices. “. . . Of All Final . . .” It records only the value of final goods, not intermediate goods (the value is counted only once). “. . . Goods and Services . . . “ It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).

The Measurement Of Gross Domestic Product “. . . Produced . . .” It includes goods and services currently produced, not transactions involving goods produced in the past. “ . . . Within a Country . . .” It measures the value of production within the geographic confines of a country. In a Given Period of Time.” It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).

What Is Counted and Not Counted in GDP? GDP includes all items produced in the economy and sold legally in markets. GDP excludes services that are produced and consumed at home and that never enter the marketplace. Caring labor, the work that is normally produced by women. Because GDP does not count it, it diminishes its importance. GDP also excludes black market items, such as illegal drugs.

Other Measures of Income Gross National Product (GNP) Net National Product (NNP) National Income Personal Income Disposable Personal Income

Gross national product (GNP) Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. For example, when a Canadian citizen works temporarily in the United States, his production is part of U.S. GDP, but it is not part of U.S. GNP. (It is part of Canada’s GNP.) For most countries, including the United States, domestic residents are responsible for most domestic production, so GDP and GNP are quite close.

Net national product (NNP) Net national product (NNP) is the total income of a nation’s residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economy’s stock of equipment and structures, such as trucks rusting and lightbulbs burning out. In the national income accounts prepared by the Department of Commerce, depreciation is called the “consumption of fixed capital.”

National income National income is the total income earned by a nation’s residents in the production of goods and services. It differs from net national product by excluding indirect business taxes (such as sales taxes) and including business subsidies. NNP and national income also differ because of a “statistical discrepancy” that arises from problems in data collection.

Personal income Personal income is the income that households and noncorporate businesses receive. Unlike national income, it excludes retained earnings, which is income that corporations have earned but have not paid out to their owners. It also subtracts corporate income taxes and contributions for social insurance (mostly Social Security taxes). In addition, personal income includes the interest income that households receive from their holdings of government debt and the income that households receive from government transfer programs, such as welfare and Social Security.

Disposable personal income Disposable personal income is the income that households and non corporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes and certain nontax payments (such as traffic tickets).

Y = C + I + G + NX The Components of GDP GDP (Y ) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX

Government Purchases (G) The Components Of GDP GDP includes all items produced in the economy and sold legally in markets. What Is Not Counted in GDP? GDP excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs. GDP (Y) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX 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.

GDP and Its Components (1998) Total (Billions of Dollars) Per Person (In Dollars) % of Total GDP (Y) $8,511 $31,522 100% Consumption C 5,808 21,511 68% Investment I 1,367 5,507 16 Government G 1,487 18 Net Exports NX -151 -559 -2

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

Measuring Economic Growth We use real GDP to calculate the economic growth rate. The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next. We measure economic growth so we can make: Economic welfare comparisons International welfare comparisons Business cycle forecasts

Measuring Economic Growth Business Cycle Forecasts Real GDP is used to measure business cycle fluctuations. These fluctuations are probably accurately timed but the changes in real GDP probably overstate the changes in total production and people’s welfare caused by business cycles.

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.

Real GDP and the Price Level Deflating the GDP Balloon Nominal GDP increases because production—real GDP– increases.

Real GDP and the Price Level Nominal GDP also increases because prices rise. Deflating the GDP Balloon

Real GDP and the Price Level We use the GDP Deflator to take the air out of Nominal GDP.

Real GDP in the United States Billions of 1992 Dollars (Periods of falling real GDP) 8,000 7,000 6,000 5,000 4,000 3,000 1970 1975 1980 1985 1990 1995 2000

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 An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator. Year Price of good A Quantity of good A Price of good B Quantity of good B 2001 $1 100 $2 50 2002 2 150 3 2003 200 4

Real Versus Nominal GDP Calculating Nominal GDP Year Calculating Nominal GDP 2001 (1x100 + 2x50) = $200 2002 (2x150 + 3x100) = $600 2003 (3x200 + 4x150) = $1200 The GDP Deflator The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

Real Versus Nominal GDP The GDP deflator is calculated as follows: Converting Nominal GDP to Real GDP Nominal GDP is converted to real GDP as follows:

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. Higher GDP per person indicates a higher standard of living. GDP is not a perfect measure of the happiness or quality of life, however. 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. Measures of income

Measuring Income National Income NI represents the total income received by labor, capital and land. It is constructed by subtracting depreciation and indirect taxes from GDP. It can be calculated as NI = W + R + i + PR Where Labor Income (W) Rental Income (R) Interest Income (i) Profits (PR)

NDP= GDP - depreciation NNP= GNP-Depreciation Measuring Income Net domestic product NDP equals the total final output produced within a nation during a year, where output includes net investments or gross investments less depreciation. NDP= GDP - depreciation Net national product Net National Product at market prices is the net value of final goods and services evaluated at market prices in the course of one country. Net National Product at factor cost is the net output evaluated at factor price. It includes income earned by factors of production. It can be calculated as NNP= GNP-Depreciation

Measuring Income PI and DI Personal income is the total income received by the individuals of a country from all source prior to direct taxes in one year. Disposable income or personal disposable income refers to the actual income which can be spent on consumption by individuals and families.

Hawaii GSP (1997) This pie chart shows how Hawaii’s Gross State Product is broken down. Notice how the visitor industry is relatively high (21%). Refer to Time Series of Hawaii GSP. Refer to comparison of USA and Hawaii GDP and GSP.

GDP, Life Expectancy, and Literacy Country Real GDP Per Person (1997) Life Expectancy Adult Literacy USA $29,010 77 years 99% Japan 24,070 80 99 Germany 21,260 77 Mexico 8,370 72 90 Brazil 6,480 67 84 Russia 4,370 Indonesia 3,490 65 85 China 3,130 70 83 India 1,670 63 53 Pakistan 1,560 64 41 Bangladesh 1,050 58 39 Nigeria 920 50 59

Pakistan Statistics Statistics GDP $245 billion (nominal) (2014)[1] $835 billion (2014 est.)(PPP)[2] GDP rank 26th (PPP) 44th (nominal) GDP growth 3.7% (2012)[3] 3.3% (2013)[4] 4.7% est.[5] GDP per capita $1,307 (nominal; 143rd; 2013)[6] $4,699 (PPP; 140th; 2013)[6] GDP by sector agriculture: 25.3%, industry: 21.6%, services: 53.1% (2013 est.) Inflation (CPI) 5.8% (October 2014)[7] Population belowpoverty line 21% (2013)[8][9][10][11] Labour force 59.74 million (2012-13)[12] Labour force by occupation agriculture: 49.1%,construction: 15.2%,manufacturing: 13.3%,wholesale and retail: 9.2%,transport and communication: 7.3% (2012-13)[12] Unemployment 6.6% (2013 est.)[13]

Pakistan Statistics Exports $25.05 billion (2013 est.)[15][16] Export goods Linens (10%) Cotton and Yarn (9.2%) Rice (7.9%) Non-Knit Men's Suits (4.3%) Refined Petroleum (3.2%) Cement (2.3%)[17] Main export partners  United States 13.3%  China 10.9%  United Arab Emirates8.6%  Afghanistan 8.5%  Germany 5.1%[18] Imports $33 billion (2013 est.) [19] Import goods Refined Petroleum (21%) Crude Petroleum (11%) Palm Oil (4.8%) Cars (1.9%) Coal Briquettes (1.6%) Main import partners  China 17%  United Arab Emirates15%  Kuwait 8.8% (2012 est.)  Saudi Arabia 8.5%  Malaysia 4.8%

Pakistan Statistics Public finances Public debt 62% of GDP (2013 est.)[21] Revenues PKR 2.275 trillion ($22.75bn) (2013-14)[22] Expenses PKR 4.35tn ($42.3bn) (2014-15)[23] Credit rating Standard & Poor's:[24] B- (Domestic) B- (Foreign) B- (T&C Assessment) Outlook: Stable[25] Moody's:[25] Caa1 Outlook: Stable[26] Foreign reserves $15 billion (2014)[27]