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? ◆ The Circular-Flow Diagram Revenue Goods & Services sold Market for Goods and Services Firms Inputs for production Wages, rent, and profit Spending Goods & Services bought Households Market for Factors of Production Labor, land, and capital Income 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 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 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 GDP and Its Components (1998) Total (Billions of Dollars) Per Person (In Dollars) % of Total $8,511 $31,522 100% Consumption C 5,808 21,511 68% Investment I 1,367 5,507 16 Government G 1,487 5,507 18 -559 -2 GDP (Y) Net Exports NX -151 GDP and Its Components (1998) Investment 16% Consumption 68 % Government Purchases 18% Net Exports -2 % 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 8,000 (Periods of falling real GDP) 7,000 6,000 5,000 4,000 3,000 1970 1975 1980 1985 1990 1995 2000 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 Hawaii GSP (1997) Other Exp 5% Visitor 21% Consumption Consumption 46% Investment Government Visitor Other Exp Government 22% Investment 6% 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 99 Mexico 8,370 72 90 Brazil 6,480 67 84 Russia 4,370 67 99 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 Link [...]... 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... 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... Nominal GDP Real GDP in the United States Billions of 1992 Dollars 8,000 (Periods of falling real GDP) 7,000 6,000 5,000 4,000 3,000 1970 1975 1980 1985 1990 1995 2000 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.. .GDP and Its Components (1998) Investment 16% Consumption 68 % Government Purchases 18% Net Exports -2 % 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... and GSP Hawaii GSP (1997) Other Exp 5% Visitor 21% Consumption Consumption 46% Investment Government Visitor Other Exp Government 22% Investment 6% 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 99 Mexico 8,370 72 90 Brazil 6,480 67 84 Russia 4,370 67 99 Indonesia 3,490 65 85 China 3,130... Literacy USA $29,010 77 years 99% Japan 24,070 80 99 Germany 21,260 77 99 Mexico 8,370 72 90 Brazil 6,480 67 84 Russia 4,370 67 99 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 Link