The Data of Macroeconomics Measuring a Nation’s Income

Micro and 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. Macroeconomics concerns the workings of the entire economy. Microeconomics and macroeconomics are closely linked.

The Circular-Flow Diagram Product Market $ $ Businesses Households $ $ Market for Factors of Production 5

Measuring the nation’s income Gross Domestic Product is the total market value of all final goods and services produced during a given period of time within a country, region, or province. Gross National Product is the total market value of all final goods and services produced during a given period of time by the nation’s residents, regardless of the place produced.

Measuring the nation’s income 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. Represents the amount of money one would need to purchase a year’s worth of the economy’s production of all final goods. GDP includes all items produced in the economy and sold legally in markets. GDP does not include items produced and consumed at home that never enter the marketplace.

Measuring the Income of an Economy GDP can be measured using any of the three approaches: Expenditure Method Income Method Value added Method Total production=Total expenditure= Total income is an identity

Expenditure Method GDP for a given year is calculated by adding up the expenditures needed to purchase the final output of goods and services (final demand) produced in that year Consumption exp Investment exp Govt purchases of goods and services Net exports

Income Method GDP for a given year is calculated by adding up the factor incomes and other claims generated by the act of production All of the value produced is owned by someone. Therefore value of production= value of income claims generated by that production Factor payments (Wages, rent, interest, and profits) Nonfactor payments Indirect taxes net of subsidies Depreciation

Value Added Method GDP for a given year is calculated by summing all values added in the economy. Value added is a measure of each firm’s contribution to total output, ie., the amount of market value produced (added) by that firm. VA by a firm= Value of the firm’s output- Value of inputs purchased from other firms It avoids the statistical problem of double counting.

Measuring the nation’s income GDP (Y) is the sum of: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX GDP Per Person tells us the income and expenditure of the average person in the economy.

Real versus Nominal GDP Nominal GDP is the market value of the economy’s current production Real GDP measures any given year’s total output in “constant” prices. An accurate view of the economy requires adjusting nominal to real GDP, using the GDP Price Deflator.

GDP Components of Measurement Government Purchases 21% Net Exports 5% Investment 17% Consumption 57% 24

Measuring the nation’s income 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 households and non-corporate businesses have left after taxes.

Economic Indicators for Canada General indicators Most recent period Change from previous period Change from previous year   percent Gross domestic product at market prices (SAAR, $ billion) 3rd quarter 2003 1,216.30 1.1 4.4 Real Gross domestic product at market prices (SAAR, $ billion chained, 1997) 1,090.40 0.3 1 Business investment: Machinery and equipment (SAAR $ billion chained, 1997) 88.9 5.4 Personal expenditure on consumer goods and services (SAAR, $ billion chained, 1997) 628.1 1.2 4.3 Personal disposable income (SAAR, $ billion) 722.5 0.8 3.1 Gross domestic product at basic prices (SAAR, $ billion, 1997) Oct-03 1,020.70 0.2 1.8 Composite index (SA, 1992=100) Nov-03 186.9 4.2 Operating profits of enterprises (SA, $billion) 41.6 3.7 11.3 percentage points Personal savings rate (SAAR, percent) 1.3 -0.9 -2.5 Source: Statistics Canada, CANSIM, tables 187-0002, 377-0003, 379-0006, 379-0019, 379-0022, 380-0001, 380-0002 and 380-0004. SAAR= Seasonally Adjusted Annual Rate

GDP and Economic Well-Being It is a good measure of the material well-being of the economy as a whole as it is a good measure of the economic activity and economic opportunities. There is an association between higher income and better standards of living. GDP does not measure quality of life such as leisure, quality environment, and the value of activity that takes place outside of the markets International comparisons of a countries’ living standards using GDP should be treated cautiously (unreported and non-marketed activities in poor countries is high)

Growth in Canada's Real GDP