Chapter 23 - Measuring a nation_s income_2.ppt .pdf

8/11/2019 Chapter 23 - Measuring a nation_s income_2.ppt .pdf

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Chapter

Measuring a Nations Income

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Microeconomics vs. Macroeconomics

Microeconomics Study of how households and firms

Make decisions

Interact in markets Macroeconomics

Study of economy-wide phenomena

Including inflation, unemployment, and economicgrowth

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What Macroeconomics Is About

Macroeconomics:

The study of structure and performance of national economiesand government policies that affect economic performance.

Issues addressed by macroeconomists: Long-run economic growth Business cycles Unemployment

Inflation

The international economy Macroeconomic policy


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Gross Domestic Product

GDP (gross domestic product) is the market valueof final goods and services newly produced withina nation during a fixed period of time


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The Economys Income and Expenditure

Gross Domestic Product (GDP) Measures the total income of everyone in the economy Measures the total expenditure on the economys output of

goods and services

For an economy as a whole Income must equal expenditure

Circular-flow diagram assumptions: All goods and services bought by households Households - -spend all of their income

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Figure

The circular-flow diagram

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Households buy goods and services from firms, and firms use their revenue fromsales to pay wages to workers, rent to landowners, and profit to firm owners. GDPequals the total amount spent by households in the market for goods and services.It also equals the total wages, rent, and profit paid by firms in the markets for the

factors of production.


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Measurement of Gross Domestic Product

Gross domestic product (GDP) Market value of all final goods and services Produced within a country In a given period of time

GDP is the market value Market prices - reflect the value of the goods

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of all All items produced in the economy

And sold legally in markets

Excludes most items Produced and sold illicitly Produced and consumed at home

final

Value of intermediate goods is already included inthe prices of the final goods

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goods and services Tangible goods & intangible services

produced Goods and services currently produced

within a country Goods and services produced domestically,

regardless of the nationality of the producer

in a given period of time A year or a quarter

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The Components of GDP

Consumption (C):Spending by domestic households on final goodsand services (including those produced abroad)

Three categories Consumer durables (examples: cars, TV sets, furniture, major

appliances) Nondurable goods (examples: food, clothing, fuel) Services (examples: education, health care, financial services,

transportation)

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Investment (I):Spending for new capital goods (fixed ivestment) plusinventory investment

Three categories

Business (or nonresidential) fixed investment:Spending by businesses on structures and equipment and software

Residential fixed investment:Spending on the construction of houses and apartment buildings

Inventory investment: (increases in firms inventory holdings)

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Government purchases of goods and services (G):Spending by the government on goods or services Not all government expenditures are purchases of goods and

services Some are payments that are not made in exchange for current goods

and services : Social Security payments Welfare unemployment benefits interest payments on the government debt

Some government spending is for capital goods that add tothe nations capital stock, such as highways, airports, bridges,and water and sewer systems

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Net exports (NX): exports minus imports Exports: goods produced in the country that are

purchased by foreigners Imports: goods produced abroad that are purchased by

residents in the country

Imports are subtracted from GDP, as they representgoods produced abroad, and were included inconsumption, investment, and governmentpurchases

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GDP of the United States = $14 trillion GDP per person = $45,838

Consumption = $32,225 per person

Investment = $7,061 per person Government purchases = $8,912 per person Net exports = $2,360 per person

The components of U.S. GDP, 2007

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Real Versus Nominal GDP

Real GDP Production of goods and services Valued at constant prices Designate one year as base year Not affected by changes in prices

For the base year Nominal GDP = Real GDP

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Total spending rises from one year to the next Economy - producing a larger output of goods and

services And/or goods and services are being sold at higher

prices Nominal GDP

Production of goods and services

Valued at current prices

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Table

Real and Nominal GDP

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Prices and Quantities

YearPrice ofhot dogs

Quantity of hot dogs

Price ofhamburgers

Quantity ofhamburgers

200820092010

$1$2$3

100150200

$2$3$4

50100150

Calculating Nominal GDP

200820092010

($1 per hot dog 100 hot dogs) + ($2 per hamburger 50 hamburgers) = $200($2 per hot dog 150 hot dogs) + ($3 per hamburger 100 hamburgers) = $600($3 per hot dog 200 hot dogs) + ($4 per hamburger 150 hamburgers) = $1,200

Calculating Real GDP (base year 2008)

200820092010

($1 per hot dog 100 hot dogs) + ($2 per hamburger 50 hamburgers) = $200($1 per hot dog 150 hot dogs) + ($2 per hamburger 100 hamburgers) = $350($1 per hot dog 200 hot dogs) + ($2 per hamburger 150 hamburgers) = $500

Calculating the GDP Deflator

200820092010

($200 / $200) 100 = 100($600 / $350) 100 = 171($1,200 / $500) 100 = 240

This table shows how to calculate real GDP, nominal GDP,and the GDP deflator for a hypothetical economy thatproduces only hot dogs and hamburgers.


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The GDP deflator Measure of the price level Ratio of nominal GDP to real GDP times 100 =100 for the base year Measures the current level of prices relative to the

level of prices in the base year

Inflation

Economys overall price level is rising

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Inflation rate Percentage change in some measure of the price level

from one period to the next

The GDP deflator Can be used to take inflation out of nominal GDP

(deflate nominal GDP)

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Real Versus Nominal GDP in Vietnam


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The GDP data Real GDP grows over time Growth is not steady

Recession Real GDP declines Lower income Rising unemployment Falling profits Increased bankruptcies

Real GDP over recent history

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Figure

Economic growth rate of Vietnam

(1986- 2010)

Source: ADB


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GDP - Good Measure of Economic Well-being?

GDP single measure of the economic well-beingof a society Economys total income Economys total expenditure Larger GDP

Good life Better healthcare Better educational systems

Measure - ability to obtain many of the inputs into aworthwhile life

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GDP - Good Measure of Economic Well-being?

GDP not a perfect measure of well-being Doesnt include

Leisure Value of almost all activity that takes place outside

markets Quality of the environment

No distribution of income

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Rich countries - Higher GDP per person Better

Life expectancy Literacy Internet usage

Poor countries - Lower GDP per person Worse

Life expectancy Literacy

Internet usage

International differences in GDPand the quality of life

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Low GDP per person More infants with low birth weight Higher rates of infant mortality Higher rates of maternal mortality

Higher rates of child malnutrition Less common access to safe drinking water Fewer school-age children are actually in school Fewer teachers per student

Fewer televisions; Fewer telephones Fewer paved roads Fewer households with electricity

International differences in GDPand the quality of life

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Table

GDP and the quality of life

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CountryReal GDP perperson (2005)

Lifeexpectancy

Adult literacy(% of population)

Internet usage(% of population)

United StatesJapanGermanyRussiaMexicoBrazilChinaIndonesiaIndiaPakistan

BangladeshNigeria

$41,89031,26729,46110,84510,7518,4026,7573,8433,4522,370

2,0531,128

78 years827965767272706465

6347

99%999999928991906150

4769

63 %67451518199737

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The table shows GDP per person and three other measures of the quality of life fortwelve major countries.


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TableGNP vs. GDP

GNP (gross national product) = output produced bydomestically owned factors of production

GDP = output produced within a nationGDP = GNP NFP (2.2)

NFP = net factor payments from abroad= payments to domestically owned factors located abroad minuspayments to foreign factors located domestically


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Table

GNP vs. GDP

Example: Engineering revenues for a road built by a U.S.company in Vietnam:

part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP part of Vietnam GDP (built in Vietnam), not Vietnam GNP

Difference between GNP and GDP is small for the UnitedStates, about 0.2%, but higher for countries that havemany citizens working abroad


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Other Measures of Income Gross National Product (GNP) is the total income earned by a

nations permanent residents. Net National Product (NNP)

NNP = GNP- Depreciation (Dp)

National Income (NI) is the total income earned by a nationsresidents in the production of goods and services

NI= NNP- Indirect business taxes+ Business subsidies+ statistical discrepancy


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Other measures of income Personal Income (PI): is the income that households and

noncorporate business receive.PI= NI retained earning

corporate income taxescontributions for social insurance

+interest income +government transfers Disposable Personal Income (Pi d) is the income thatshouseholds and noncorporate business have left aftersatisfying all their obligations to the government.

PId = PI- Personal taxes- Nontax payments


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The Consumer Price Index

Consumer price index (CPI) Measure of the overall cost of goods & services

bought by a typical consumer

How the consumer price index is calculated1.Fix the basket2.Find the prices3.Compute the baskets cost

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5. Compute the inflation rate Percentage change in the price index from the

preceding period


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Table

Calculating the CPI and the inflation rate: an example

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Step 1: Survey consumers to determine a fixed basket of goodsBasket = 4 hot dogs, 2 hamburgers

Step 2: Find the price of each good in each year

Year Price of hot dogs Price of hamburgers

2008

20092010

$1

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$2

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Step 3: Compute the cost of the basket of goods in each year

200820092010

($1 per hot dog 4 hot dogs) + ($2 per hamburger 2 hamburgers) = $8 per basket($2 per hot dog 4 hot dogs) + ($3 per hamburger 2 hamburgers) = $14 per basket($3 per hot dog 4 hot dogs) + ($4 per hamburger 2 hamburgers) = $20 per basket

Step 4: Choose one year as a base year (2008) and compute the CPI in each year200820092010

($8 / $8) 100 = 100($14 / $8) 100 = 175($20 / $8) 100 = 250

Step 5: Use the consumer price index to compute the inflation rate from previous year

2009

2010

(175 100) / 100 100 = 75%

(250 175) / 175 100 = 43%


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Figure

The typical basket of goods and services

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This figure shows how thetypical consumer dividesspending among variouscategories of goods andservices. The Bureau ofLabor Statistics calls eachpercentage the relativeimportance of the category.


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FigureThe basket of goods and services in

calculating CPI in Vietnam (2010)


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Producer price index (PPI) Measure of the cost of a basket of goods and

services bought by firms

Problems in measuring the cost of living Substitution bias Introduction of new goods Unmeasured quality change

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Figure

Two measures of inflation

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This figure shows the inflation ratethe percentage change in the level of pricesas measured by the GDP deflator and the consumer price index using annual data

since 1965. Notice that the two measures of inflation generally move together.


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Real and nominal interest rates Nominal interest rate (i)

Interest rate as usually reported without a

correction for the effects of inflation Real interest rate (r)

Interest rate corrected for the effects ofinflation

r= i Inflation rate

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Nominal interest rate Always exceeds the real interest rate U.S. economy has experienced rising consumer

prices in every year

Inflation is variable Real and nominal interest rates do not always move

together

Periods of deflation Real interest rate exceeds the nominal interest rate

Interest rates in the U.S. Economy

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Figure

Real and nominal interest rates

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This figure shows nominal and real interest rates using annual data since 1965. The nominalinterest rate is the rate on a 3-month Treasury bill. The real interest rate is the nominalinterest rate minus the inflation rate as measured by the consumer price index. Notice that

nominal and real interest rates often do not move together

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Chapter 23 - Measuring a nation_s income_2.ppt .pdf