Measuring a Nations Income

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Macroeconomic Statistics
Because the state of the overall economy affects all of
us, changes in economic conditions are widely
reported in the media (newspapers, television, online
news)
Often, these macroeconomic statistics provide
information on Gross Domestic Product (GDP),
prices and the rate of inflation, unemployment, the
trade deficit and exchange rates, the unemployment
rate, etc.
GDP is one of the more important statistic
2007 Thomson South-Western

GDP: THE ECONOMYS INCOME

AND EXPENDITURE
To judge how well a person is doing
economically, you look at his income
When judging whether the economy is doing
well or poorly, it is natural to look at the total
income that the country is earning
This is what GDP does

2007 Thomson South-Western

Economys Income & 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

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THE ECONOMYS 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.

The equality of income and expenditure

can be illustrated with the circular-flow
diagram.

Economys Income & Expenditure

Circular-flow diagram assumptions:
Markets
Goods and services
Factors of production

Households
Spend all of their income
Buy all goods and services

Firms
Produce and sell goods and services
Pay wages, rent, profit to resource owners
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Figure 1
The Circular-Flow Diagram
Households buy goods
and services from
firms, and firms use
their revenue from
sales to pay wages to
workers, rent to
landowners, and profit
to firm owners. GDP
equals 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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THE MEASUREMENT OF GROSS

DOMESTIC PRODUCT
Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
GDP is the total market value of all final goods
and services produced within a country in a
given period of time.

2007 Thomson South-Western

The Measurement of GDP

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; you cannot add apples and
oranges
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The Measurement of GDP

of all
All items produced in the economy
And sold legally in markets
Including the house you own

Excludes most items

Produced and sold illicitly
Produced and consumed at home

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Final
The term final goods and services in GDP refers to
goods and services produced for final use
Intermediate goods are goods produced by one firm as
inputs of other firms
Intermediate goods are excluded from GDP because of
double counting
Unsold stocks or inventory are included in the period
they were produced; if sold in the next period, it is
excluded from GDP because of double counting

2007 Thomson South-Western

The Measurement of GDP

goods and services
Tangible goods & intangible services

produced
GDP ignores all transactions in which
money or goods change hands but in
which no new goods and services are
produced.
Hence, it excludes the sale of used goods
and paper transactions such as the sale
of stocks and bonds.
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12

The Measurement of GDP

within a country
Goods and services produced within the
geographic confines of a country
Regardless of the nationality of the producer

Goods and services produced by a citizen

abroad is excluded from the GDP of his
country

in a given period of time

A year or a quarter
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13

Quarterly GDP
Compared with the previous year by
annualizing; multiply by 4 or by 3 or by 2
Need to de-seasonalize or adjust for the
seasonality of production; higher
spending during July and December

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14

Other Measures of Income

Gross National Product (GNP)- total
income earned by a countrys nationals
differs from GDP, includes income earned
by nationals abroad but excludes income
earned by foreigners locally
Disposable income - income that
households and non-corporate
businesses have left after they have paid
all their obligations (taxes) to the
government
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15

GDP can be computed in two ways:

The expenditure approach: A method of computing
GDP that measures the total amount spent on all final
goods during a given period.
The income approach: A method of computing GDP
that measures the incomewages, rents, interest, and
profitsreceived by all factors of production in
producing final goods.
The two should be almost equal; almost because of
stastistical discrepancy

2007 Thomson South-Western

THE COMPONENTS OF GDP: THE

EXPENDITURE APPROACH
GDP (Y) is the sum of the following:

Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)

Y = C + I + G + NX
2007 Thomson South-Western

THE EXPENDITURE COMPONENTS

OF GDP
Consumption (C):
The spending by households on goods and services, with
the exception of purchases of new housing.
Durable goods: Goods that last a relatively long time, such
as cars and appliances.
Nondurable goods: Goods that are used up fairly quickly,
such as food and clothing.
Services: Things that do not involve the production of
physical things, such as legal services, medical services,
and education.
2007 Thomson South-Western

Investment (I)
Nonresidential investment includes expenditures by
firms for machines, tools, plants, and so on.
Residential investment includes expenditures by
households and firms on new houses and apartment
buildings.
Change in inventories computes the amount by
which firms inventories change during a given
period. Inventories are the goods that firms produce
now but intend to sell later.
2007 Thomson South-Western

The Components of GDP

Government purchases, G
Government consumption expenditure
and gross investment
Spending on goods and services
By local, state, and federal governments
Does not include transfer payments
because they are not made in exchange
for currently produced goods or services.

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20

The Components of GDP

Net exports, NX = Exports - Imports
Exports
Spending on domestically produced goods by

foreigners

Imports
Spending on foreign goods by domestic

residents

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21

Table 1
GDP and Its Components

This table shows total GDP for the U.S. economy in 2009 and the breakdown of GDP
among its four components. When reading this table, recall the identity
Y = C + I + G + NX.

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22

Real versus Nominal GDP

Total spending rises from one year to the
next
Economy is 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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23

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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24

Table 2
Real and Nominal GDP

This table shows

how to calculate
real GDP,
nominal GDP,
and the GDP
deflator for a
hypothetical
economy that
produces only
hot dogs and
hamburgers.

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Real versus Nominal GDP

The GDP deflator
Ratio of nominal GDP to real GDP times
100
Is 100 for the base year
Measures the current level of prices
relative to the level of prices in the base
year (measure of change in prices or
inflation)
Can be used to take inflation out of
nominal GDP (deflate nominal GDP)
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Real versus Nominal GDP

Inflation
Economys overall price level is rising

Inflation rate
Percentage change in some measure of
the price level from one period to the next
Inflation in year 2
GDP deflator in year 2-GDP deflator in year 1

100
GDP deflator in year 1

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27

Example
Real GDP in 2011
= (nominal GDP x 100)/GDP
deflator
= (600 x 100)/ 171
= 60000/171
= 350

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28

Real GDP over recent history

The GDP data

Real GDP grows over time
Growth averaged 3% per year since 1965
Growth is not steady
GDP growth interrupted by recessions

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29

Real GDP over recent history

Recession
Two consecutive quarters of falling GDP
Real GDP declines
Lower income
Rising unemployment
Falling profits
Increased bankruptcies

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Figure 2
Real GDP in the United States

This figure shows quarterly data on real GDP for the U.S. economy since 1965. Recessions
periods of falling real GDPare marked with the shaded vertical bars.
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31

GDP
GDP the best single measure of the
economic well-being of a society
Economys total income
Economys total expenditure
Larger GDP
Good life, better healthcare
Better educational systems

Measure our ability to obtain many of the

inputs into a worthwhile life
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GDP
GDP not a perfect measure of wellbeing
Doesnt include
Leisure
Value of almost all activity that takes place

outside markets
Quality of the environment

Nothing about distribution of income

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33

International differences: GDP & quality of life

Rich countries - higher GDP per person

Better
Life expectancy
Literacy
Internet usage

Poor countries - lower GDP per person

Worse
Life expectancy
Literacy
Internet usage
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34

International differences: GDP & quality of life

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
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International differences: GDP & quality of life

Low GDP per person

Fewer teachers per student
Fewer televisions
Fewer telephones
Fewer paved roads
Fewer households with electricity

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36

Table 3
GDP and the Quality of Life

The table shows GDP per person and three other measures of the quality of life for
twelve major countries.
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37