1. Measuring a Nation’s Income
Chapter 10 or 23

2. 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.

3. 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.

4. 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?
$ Billion

5. 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

6. 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.

7. 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).

8. 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).

9. 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.

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

11. 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.

12. 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.”

13. 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.

14. 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.

15. 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).

16. 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

17. 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.

18. 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

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

20. 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

21. 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.

22. 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.

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

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

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

26. 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

27. 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

28. Real Versus Nominal GDP
Calculating Nominal GDP
Year Calculating Nominal GDP
(1x x50) = $200
(2x x100) = $600
(3x x150) = $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.

29. 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:

30. 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

31. 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)

32. 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

33. 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.

34. 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.

35. 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

36. 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 ( )[12]
Labour force by occupation
agriculture: 49.1%,construction: 15.2%,manufacturing: 13.3%,wholesale and retail: 9.2%,transport and communication: 7.3% ( )[12]
Unemployment
6.6% (2013 est.)[13]

37. 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%

38. Pakistan Statistics Public finances Public debt
62% of GDP (2013 est.)[21]
Revenues
PKR trillion ($22.75bn) ( )[22]
Expenses
PKR 4.35tn ($42.3bn) ( )[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]