Chapter 224

8/9/2019 Chapter 224

1/52

Measuring a Nations

Income

Chapter 22

Copyright 2001 by Harcourt, Inc.

All rights reserved. Requests for permission to make copies of any part of

the

work should be mailed to:Permissions Department, arcourt !ollege Publishers,

8/9/2019 Chapter 224

2/52

arcourt, +nc. items and derived items copyright #-- by arcourt, +nc.

Microeconomics

Microeconomicsis the study of how

individual households and firms maedecisions and how they interact with

one another in marets!

8/9/2019 Chapter 224

3/52


Macroeconomics

Macroeconomicsis the study of the

economy as a whole! Its goal is to e"plain the economic changes

that affect many households, firms, and

marets at once!

8/9/2019 Chapter 224

4/52


Macroeconomics

Macroeconomics answers #uestions lie

the following$ %hy is average income high in some countries

and low in others&

%hy do prices rise rapidly in some time periods

while they are more stable in others& %hy do production and employment e"pand in

some years and contract in others&

8/9/2019 Chapter 224

5/52


The Economys

Income and Expenditure

%hen 'udging whether the economy is

doing well or poorly, it is natural to

loo at the total income that everyone

in the economy is earning!

8/9/2019 Chapter 224

6/52


The Economys

Income and Expenditure

(or an economy as a whole, income

must equal expenditure because$)very transaction has a buyer and a

seller!

)very dollar of spending by some buyeris a dollar of income for some seller!

8/9/2019 Chapter 224

7/52


*ross domestic product +*-.is a

measure of the income and

e"penditures of an economy!

It is the total maret value of all final

goods and services produced within acountry in a given period of time!

Gross Domestic Product

8/9/2019 Chapter 224

8/52


The Circular-lo! Diagram

/he e#uality of income ande"penditure can be illustrated

with thecircularflow diagram!

8/9/2019 Chapter 224

9/52arcourt, +nc. items and derived items copyright #-- by arcourt, +nc.


(irmsHouseholds

Maret for

(actors

of -roduction

Maret for

*oods

and ervices

SpendingRevenue

Wages,rent, and

Income

Goods &Services

sold

Goods &Servicesbought

Labor, land,and capital

Inputs orproduction

8/9/2019 Chapter 224


The Measurement o" GDP

*-is the maret value of all

final goods and servicesproduced within a country in a

given period of time!

8/9/2019 Chapter 224



utput is valued at maret prices!

It records only the value of final goods,

not intermediate goods+the value is

counted only once.!

It includes both tangible goods+food,

clothing, cars. and intangible services

+haircuts, housecleaning, doctor visits.!

8/9/2019 Chapter 224



It includes goods and services currently

produced, not transactions involving

goods produced in the past! It measures the value of production

within the geographic confines of a

country!

8/9/2019 Chapter 224


It measures the value of production

that taes place within a specific

interval of time, usually a year or a#uarter +three months.!


8/9/2019 Chapter 224


#hat Is Counted in GDP$

*- includes all items

produced in the economy

and sold legally in marets!

8/9/2019 Chapter 224


#hat Is Not Counted in GDP$

*- e"cludes most items that are

produced and consumed at home and

that never enter the maretplace!

It e"cludes items produced and sold

illicitly, such as illegal drugs!

8/9/2019 Chapter 224


%ther Measures o" Income

*ross 3ational -roduct +*3-.

3et 3ational -roduct +33-.

3ational Income

-ersonal Income

isposable -ersonal Income

8/9/2019 Chapter 224


Gross National Product

*ross national product +*3-.is the total

income earned by a nation4s permanent

residents +called nationals.! It differs from *- by including income

that our citi5ens earn abroad and

e"cluding income that foreigners earn here!

8/9/2019 Chapter 224


Net National Product &NNP'

3et 3ational -roduct +33-.is the total

income of the nation4s residents +*3-.

minus losses from depreciation!

epreciationis the wear and tear on

the economy4s stoc of e#uipment and

structures!

8/9/2019 Chapter 224


National Income

3ational Incomeis the total income

earned by a nation4s residents in the

production of goods and services! It differs from 33- by e"cluding indirect

business ta"es+such as sales ta"es. and

including business subsidies!

8/9/2019 Chapter 224


Personal Income

-ersonal incomeis the income that

households and noncorporate businesses

receive!

6nlie national income, it e"cludes retained

earnings, which is income that corporations

have earned but have not paid out to their

owners! In addition, it includes household4s interest

incomeand government transfers!

8/9/2019 Chapter 224


Disposa(le Personal Income

isposable personal incomeis the income

that household and noncorporate

businesses have left after satisfying alltheir obligations to the government!

It e#uals personal income minus personal

ta"es and certain nonta" payments!

8/9/2019 Chapter 224


The Components o" GDP

*- +Y . is the sum of the following$

Consumption (C)

Investment (I)

*overnment -urchases (G)

3et )"ports (NX)

Y = ! I ! G ! "#

8/9/2019 Chapter 224



Consumption (C)$ /he spending by households on goods and

services, with the e"ception of purchases ofnew housing!

Investment (I)$

/he spending on capital e#uipment,inventories, and structures, including

new housing!

8/9/2019 Chapter 224



*overnment -urchases (G)$ /he spending on goods and services by local,

state, and federal governments! oes not include transfer payments because

they are not made in e"change for currently

produced goods or services!

3et )"ports(NX): )"ports minus imports!

8/9/2019 Chapter 224


GDP and Its Components &)**+'

$otal%in billions o dollars

'er 'erson%in dollars ( of $otal

Gross domestic product, Y $8,511 $31,522 100 percent

Consumption, C 5,808 21,511 68

Investment, I 1,367 5,063 16

Government purchases, G 1,487 5,507 18

et e!ports, " #151 #55 #2

8/9/2019 Chapter 224



8/9/2019 Chapter 224



Consumption 78 9

8/9/2019 Chapter 224

28/52


Investment)*(


Consumption 78 9

8/9/2019 Chapter 224

29/52


Consumption 78 9

Government'urchases

)+(


Investment)*(

8/9/2019 Chapter 224

30/52


3et )"ports2 9


Consumption 78 9

Investment)*(

Government'urchases

)+(

8/9/2019 Chapter 224

31/52


,eal ersus Nominal GDP

3ominal *-values the production of

goods and services at current prices!

:eal *-values the production of

goods and services at constant prices!

8/9/2019 Chapter 224

32/52


,eal ersus Nominal GDP

;n accurate view of the economy

re#uires ad'usting nominal to real

*- by using the *- deflator!

8/9/2019 Chapter 224

33/52


GDP De"lator

/he *-deflatormeasures the current

level of prices relative to the level of

prices in the base year! It tells us the rise in nominal *- that is

attributable to a rise in prices rather

than a rise in the #uantities produced!

8/9/2019 Chapter 224

34/52


GDP De"lator

),,G-'Real

G-'"ominal=de.atorG-'

/he *- deflator is calculated as follows$

8/9/2019 Chapter 224

35/52


),,#

&de.ator%G-'

&G-'%"ominal=G-'Real

/,00

/,00/,00

Conerting Nominal GDP to ,eal

GDP

3ominal *- is converted to real

*-as follows$

8/9/2019 Chapter 224

36/52


,eal and Nominal GDP

Year

'rice of

1ot dogs

2uantit3 of

1ot dogs

'rice of

1amburgers

2uantit3 of

1amburgers2001 $1 100 $2 50

2002 $2 150 $3 100

2003 $3 200 $4 150

8/9/2019 Chapter 224

37/52



alculating "ominal G-'4

2001 %$1 per hot do& ! 100 hot do&s' ( %$2 per ham)ur&er ! 50 ham)ur&ers' *5/,,

2002 %$2 per hot do& ! 150 hot do&s' ( %$3 per ham)ur&er ! 100 ham)ur&ers' * 5*,,

2003 %$3 per hot do& ! 200 hot do&s' ( %$4 per ham)ur&er ! 150 ham)ur&ers' * 5)/,,

8/9/2019 Chapter 224

38/52



alculating Real G-' %base 3ear /,,)&4

2001 %$1 per hot do& ! 100 hot do&s' ( %$2 per ham)ur&er ! 50 ham)ur&ers' *5/,,

2002 %$1 per hot do& ! 150 hot do&s' ( %$2 per ham)ur&er ! 100 ham)ur&ers' *567,

2003 %$1 per hot do& ! 200 hot do&s' ( %$2 per ham)ur&er ! 150 ham)ur&ers' * 57,,

8/9/2019 Chapter 224

39/52



alculating the G-' -e.ator4

2001 %$200+$200' ! 100 *),,

2002 %$600+$350' ! 100 *)8)

2003 %$1200+$500' ! 100 */9,

8/9/2019 Chapter 224

40/52


(Periods of falling realGDP)

,eal GDP in the .nited /tates

):8 ):87 ):+ ):+7 ):: )::76,

9,

7,

*,

8,

;illions o)::/ -ollars

/

+,

8/9/2019 Chapter 224

41/52


GDP and Economic

#ell-0eing

*- is the best single measure of the

economic wellbeing of a society!

*- per persontells us the income and

e"penditure of the average person in

the economy!

8/9/2019 Chapter 224

42/52


GDP and Economic

#ell-0eing

Higher *- per person indicates a

higher standard of living! *- is not a perfect measure of the

happiness or #uality of life, however!

8/9/2019 Chapter 224

43/52


GDP and Economic

#ell-0eing

ome things that contribute to wellbeing are

not included in *-!

/he value of leisure! /he value of a clean environment!

/he value of almost all activity that taes place

outside of marets, such as the value of the timeparents spend with their children and the value of

volunteer wor!

8/9/2019 Chapter 224

44/52


GDP1 i"e Expectancy1 and iteracy

ountr3 Real G-' per'erson %)::8& Life

8/9/2019 Chapter 224

45/52


/ummary

8/9/2019 Chapter 224

46/52


/ummary

*- is the maret value of all final goods

and services produced within a country

in a given period of time! *- is divided among four components

of e"penditure$ consumption, investment,

government purchases, and net e"ports!

8/9/2019 Chapter 224

47/52


/ummary

3ominal *- uses current prices to

value the economy4s production! :eal

*- uses constant baseyear prices to

value the economy4s production of goods

and services!

/he *- deflatorcalculated from the

ratio of nominal to real *-measures

the level of prices in the economy!

8/9/2019 Chapter 224

48/52


/ummary

*- is a good measure of economic well

being because people prefer higher to

lower incomes!

It is not a perfect measure of wellbeing

because some things, such as leisure time

and a clean environment, aren4t

measured by *-!

8/9/2019 Chapter 224

49/52


*raphical:eview

8/9/2019 Chapter 224

50/52



(irmsHouseholds

Maret for

(actors

of -roduction

Maret for*oods

and ervices

SpendingRevenue

Wages,

rent, and

Income

Goods &Services

sold

Goods &Servicesbought

Labor, land,and capital

Inputs orproduction

8/9/2019 Chapter 224

51/52



3et )"ports2 9

Consumption 78 9

Investment)*(

Government'urchases

)+(

8/9/2019 Chapter 224

52/52

,eal GDP in the .nited /tates

(Periods of falling realGDP)

):8 ):87 ):+ ):+7 ):: )::76,

9,

7,

*,

8,

;illions o)::/ -ollars

/

+,

Documents

Chapter 224