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MEASURING A NATION’S INCOME
ETP Economics 102
Lecturer: Jack Wu
RECENT HOT MACROECONOMIC
ISSUES
Sovereign Bond Crisis in Europe
 QE policy in America
 Fiscal Cliff in USA
 Depreciation of Japanese Yen (Abenomics)
 Soft Landing in China
 Taiwan’s recession

MAJOR MACROECONOMIC
CONCERNS
National Income: Low Economic Growth Rate
 Employment Opportunity: High Unemployment
Rate
 Cost of Living: High Inflation Rate
 Trade: High Trade Deficit
 Direct Investment: Low FDI (Foreign Direct
Investment)
 Income Distribution: High Gini Coefficient
 Foreign Reserve: Shortage of foreign reserve

MAJOR ECONOMIC INDICATOR OF
TAIWAN
Average
GDP
GDP
CPI
AverageCPI
Foreign
GDP Per
Unemployment
Gini
Year
Growth Growth
Growth
Growth
reserve(billion
Capita(US$)
Rate(%)
coefficient
Rate(%) Rate(10
Rate(%)
Rate(%)
US$)
year,%)
1970
393
11.40
9.4
1.70
3.60
3.4
0.294
1975
978
4.90
2.40
5.20
0.312
1980
2385
7.80
9.8
1.23
19.00
10.4
0.277
1985
3290
13.50
2.91
-0.20
0.290
225.6
1990
8124
3.80
7.7
1.67
4.10
3.1
0.312
724.4
1995
12918
6.38
1.79
3.70
0.317
903.1
2000
14704
5.80
6.2
2.99
1.30
2.6
0.326
1067.4
2001
13147
-1.65
4.57
-0.01
0.350
1222.1
2002
13404
5.26
5.17
-0.20
0.345
1616.6
2003
13773
3.67
4.99
-0.28
0.343
2066.3
2004
15012
6.19
4.44
1.62
0.338
2417.4
2005
16051
4.70
4.13
2.30
0.340
2532.9
2006
16491
5.44
3.91
0.60
0.339
2661.5
2007
17154
5.98
3.91
1.80
0.340
2703.0
2008
17399
0.73
4.14
3.53
0.341
2917.1
2009
16359
-1.87
3.2
5.85
-0.87
0.9
0.345
3482.0
2010
18503
4.72
5.21
-0.96
0.342
3820.1
2011
20006
4.07
5.39
1.42
0.342
3855.5
2012
20386
1.32
4.24
1.93
4031.7
Source: Directorate-General of Budget, Accounting and Statistics, Statistic Abstract of National Income,
Executive Yuan, Taiwan.
EXAMPLES OF MACROECONOMIC
QUESTIONS
 Macroeconomics
answers questions like
the following:
Why is average income high in some countries
and low in others?
 Why do prices rise rapidly in some time
periods while they are more stable in others?
 Why do production and employment expand in
some years and contract in others?

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.
 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.
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.
 The equality of income and expenditure can be
illustrated with the circular-flow diagram.

DEFINITION OF GDP
 “GDP

 “.

 “.

is the Market Value . . .”
Output is valued at market prices.
. . Of All Final . . .”
It records only the value of final goods, not
intermediate goods (the value is counted only
once).
. . Goods and Services . . . “
It includes both tangible goods (food, clothing,
cars) and intangible services (haircuts,
housecleaning, doctor visits).
DEFINITION OF GDP

“. . . Produced . . .”


“ . . . Within a Country . . .”


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. “. . .
“. . . In a Given Period of Time.”

It measures the value of production that takes place
within a specific interval of time, usually a year or a
quarter (three months).
COMPONENTS OF GDP
GDP includes all items produced in the economy
and sold legally in markets.
 What Is Not Counted in GDP?

GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
 It excludes items produced and sold illicitly, such as
illegal drugs.

FORMULA 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
COMPONENTS: C AND I

Consumption (C):


The spending by households on goods and services,
with the exception of purchases of new housing.
Investment (I):

The spending on capital equipment, inventories, and
structures, including new housing.
COMPONENTS: G AND NX
 Government


The 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.
 Net

Purchases (G):
Exports (NX):
Exports minus imports.
TAIWAN’S GDP (2012)
Consumption
8465030 (Million)
Investment
2795080 (Million)
Government Purchase
1746482 (Million)
Export
10325648 (Million)
Import
9254141 (Million)
GDP
14077099 (Million)
Net Income from Abroad
454191 (Million)
GNP
14531290 (Million)
NOMINAL VERSUS REAL 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.

EXAMPLE
Copyright©2004 South-Western
EXAMPLE: CONTINUED
Copyright©2004 South-Western
EXAMPLE: CONTINUED
Copyright©2004 South-Western
GDP DEFLATOR
An accurate view of the economy requires
adjusting nominal to real GDP by using the GDP
deflator.
 The GDP deflator is a measure of the price level
calculated as the ratio of nominal GDP to real
GDP times 100.
 It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a rise
in the quantities produced.

THE GDP DEFLATOR

The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
EXAMPLE: CONTINUED
Copyright©2004 South-Western
THE GDP DEFLATOR

Converting Nominal GDP to Real GDP

Nominal GDP is converted to real GDP as follows:
Real GDP20XX
Nominal GDP20XX

 100
GDP deflator20XX
GDP AND ECONOMIC WELL-BEING
 GDP
is the best single measure of the
economic well-being of a society.
 GDP per person tells us the income and
expenditure of the average person in the
economy.
 Higher GDP per person indicates a higher
standard of living.
 GDP is not a perfect measure of the
happiness or quality of life, however.
GDP AND ECONOMIC WELL-BEING

Some things that contribute to well-being are not
included in GDP.
The value of leisure.
 The value of a clean environment.
 The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.

OTHER MEASURES OF INCOME
Gross National Product (GNP)
 Net National Product (NNP)
 National Income (NI)
 Personal Income (PI)
 Disposable Personal Income (DPI)

GROSS NATIONAL PRODUCT

GNP is the total income earned by a nation’s
permanent residents. It differs from GDP by
including income that citizens earn abroad and
excluding income that foreigners earn here.
NET NATIONAL PRODUCT

NNP is the total income of a nation’s residents
(GNP) minus losses from depreciation
(“consumption of fixed capital).
NATIONAL INCOME
NI is the total income earned by a nation’s
residents in the production of goods and services.
 It differs from NNP by excluding indirect
business taxes (such as sales taxes) and including
business subsidy.

PERSONAL INCOME
 PI
is the income that households and noncorporate businesses receive.
 Unlike NI, it excludes retained earnings
and subtracts corporate income taxes and
contributions for social insurance. It also
includes interest incomes from holding
government bonds and government
transfer payments.
DISPOSABLE PERSONAL INCOME

DPI is the income that households and noncorporate businesses have left after satisfying all
their obligations to the government (such as
personal taxes).
GREEN GDP
Green GDP is an index of economic growth with
the environmental consequences of that growth
factored in.
 Green GDP=Traditional GDPenvironmental/ecological costs

GDP(PPP)

Gross Domestic Product (GDP) at Purchasing
Power Parity (PPP)
GDP PER CAPITA 2012
GDP per capita
(nominal)
GDP per capita
(Purchasing Power
Parity)
Singapore
51162
60410
Japan
46736
36266
Hong Kong
36667
51494
South Korea
23113
32272
Taiwan
20328
38749
Malaysia
10304
16922
China
6076
9162
Thailand
5678
10126
GDP PER CAPITA (PPP) WORLD
RANKING
Ranking
GDP (PPP)
Ranking
GDP(PPP)
3. Singapore
60410
19. Taiwan
38749
5. Hong Kong
51494
20. Belgium
37883
6. USA
49922
21. Denmark
37657
8. Switzerland
45418
22. UK
36941
9. Canada
42734
23. Finland
36395
10. Australia
42640
24. Japan
36266
11. Austria
42409
25. France
35548
15. Sweden
41191
26. Israel
32312
18. Germany
39028
27. Korea
32272
DISCUSSION QUESTIONS




Identify the immediate effect of each of the
following circumstances on U.S. GDP and its
components.
a. James receives a unemployment
compensation check.
b. John buys an Italian sports car.
c. Henry buys domestically produced tools
for his construction company.