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

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:

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

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

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

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

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

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

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

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

Real and Nominal GDP

Real and Nominal GDP

Real and Nominal GDP

Real and Nominal GDP

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:

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