Download Measuring A nation`s income

PowerPoint Presentations for
Principles of Macroeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa
MEASURING A
NATION’S INCOME
Chapter 5
Copyright © 2014 by Nelson Education Ltd.
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MEASURING A NATION’S INCOME
Microeconomics: the study of how
individuals and how firms make decisions
and how they interact in markets
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MEASURING A NATION’S INCOME
Macroeconomics: the study of economywide phenomena, including inflation,
unemployment, and economic growth
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MEASURING A NATION’S INCOME
Copyright © 2014 by Nelson Education Ltd.
Thinkstock
Gross domestic product
(GDP): measures the total
income of a nation; the
most closely watched
economic statistic
because it is the best
measure of a society’s
economic well-being
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THE ECONOMY’S INCOME
AND EXPENDITURE
For an economy as a whole,
income must equal expenditure.
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FIGURE 5.1:
The Circular-Flow Diagram
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QuickQuiz
What two things does gross domestic product
measure?
How can you measure two things at once?
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THE MEASUREMENT OF
GROSS DOMESTIC PRODUCT
GDP: the market value of all final goods and
services produced within a country in a
given period of time
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“GDP Is the Market Value . . .”
GDP adds together many different kinds of
products into a single measure of the value
of economic activity.
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“. . . Of All . . .”
It includes all items produced in the
economy and sold legally in markets.
GDP also includes the market value of the
housing services provided by the
economy’s stock of housing.
There are some products, however, that
GDP excludes because measuring them is
so difficult.
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“. . . Final . . .”
GDP includes only the value of final goods.
The reason is that the value of intermediate
goods is already included in the prices of
the final goods.
An important exception to this principle
arises when an intermediate good is
produced and is added to a firm’s
inventory of goods to be used or sold at a
later date.
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“. . . Goods and Services . . .”
GDP includes both tangible goods (food,
clothing, cars) and intangible services
(haircuts, housecleaning, dentist visits).
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“. . . Produced . . .”
GDP includes goods and services currently
produced.
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“. . . Within a Country . . .”
GDP measures the value of production
within the geographic confines of a
country.
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“. . . In a Given Period of Time”
GDP measures the value of production that
takes place within a specific interval of
time.
Usually that interval is a year or a quarter.
GDP measures the economy’s flow of
income and expenditure during that
interval.
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FYI:
Other Measures of Income
• Gross national product
• Net national product
• National income
• Personal income
• Disposable personal income
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QuickQuiz
Which contributes more to the GDP: the
production of a kilogram of hamburger or
the production of a kilogram of caviar?
Why?
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Active Learning
GDP and Its Components
In each of the following cases, determine how much GDP and each of
its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner at the finest
restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her publishing
business.
C. Jane spends $1200 on a computer to use in her editing business.
She got last year’s model on sale for a great price from a local
manufacturer.
D. General Motors builds $500 million worth of cars, but consumers only
buy $470 million worth of them.
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Active Learning
Answers
A. Debbie spends $200 to buy her husband dinner at the
finest restaurant in Toronto.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall by $1800,
GDP is unchanged.
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Active Learning
Answers
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
Current GDP and investment do not change because the
computer was built last year.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million of them.
Consumption rises by $470 million, inventory investment
rises by $30 million, and GDP rises by $500 million.
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THE COMPONENTS OF GDP
Y = C + I + G + NX
Y
: GDP
C
: Consumption
I
: Investment
G
: Government purchases
NX : Net exports
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Consumption
Consumption: spending by households in
goods and services, with the exception of
purchases of new housing
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Investment
Investment: spending in capital-equipment,
inventories, and structures, including
household spending on new housing
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Government Purchases
Government purchases: spending in goods
and services by local, territorial, provincial,
and federal governments
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Net Exports
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Stuart Miles/Shutterstock
Net exports: the
value of a nation’s
exports minus the
value of its imports;
also called the trade
balance
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Case Study:
The Components of Canadian GDP
 Table 5.1:
GDP: Total Expenditure and Its Components
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Case Study:
The Components of Canadian GDP
 Table 5.2:
GDP: Total Income and Its Components
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QuickQuiz
What are the four components of
expenditure?
What does it mean when net exports have
a negative value?
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REAL VERSUS NOMINAL GDP
 If total spending rises from one year to the next,
one of two things must be true:
1. The economy is producing a larger output of
goods and services.
2. Goods and services are being sold at higher
prices.
 When studying changes in the economy over
time, economists want to separate these two
effects.
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A Numerical Example
 Table 5.3 shows some data for an economy that
produces only two goods:
 Hot dogs
 Hamburgers
 The table shows the quantities of the two goods
produced and their prices in the years 2010,
2011, and 2012.
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TABLE 5.3:
Real and Nominal GDP
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The GDP Deflator
GDP deflator: a measure of the price level
calculated as the ratio of nominal GDP to
real GDP times 100
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The GDP Deflator
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QuickQuiz
Define real and nominal GDP.
Which is a better measure of economic wellbeing?
Why?
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Case Study:
Real GDP over Recent History
 Figure 5.2
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Case Study:
GDP, GNP, and Foreign Ownership
 Figure 5.3:
Foreign Ownership
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GDP AND ECONOMIC WELL-BEING
“GDP does not allow for the health of our children, the quality
of their education, or the joy of their play. It does not include
the beauty of our poetry or the strength of our marriages; the
intelligence of our public debate or the integrity of our public
officials. It measures neither our wit nor our courage; neither
our wisdom nor our learning; neither our compassion nor our
devotion to our country; it measures everything, in short,
except that which makes life worthwhile. And it tells us
everything about America except why we are proud that we
are Americans.”
Robert Kennedy (1968)
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Case Study:
Measuring Economic Well-Being in Canada
 Figure 5.4:
Economic Well-Being in Canada
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Case Study:
International Differences in GDP and the Quality of Life
 Table 5.4:
GDP, Life Expectancy, and Literacy
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Classroom Activity
GDP and Economic Well-Being
1. If GDP is a good measure of economic wellbeing, why is Switzerland’s gross domestic
product so much lower than India’s GDP or
China’s GDP?
2. What measures would be better to compare the
well-being of different countries?
3. How do you expect these direct measures to
correlate with per capita GDP?
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THE END
Chapter 5
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