Download Macro and the Circular Flow

MEASURING NATIONAL
INCOME
Unit 2.1: The Level of Overall Economic Activity
Section 2 – Measuring National Income
2.1 Circular Flow Model
Quick Review: In the circular flow of income model, what is the…
•Flow of goods & services, and FoP’s: ___Real Flow____
•Flow of revenues, income, & household expenditures: _Money__
•Total gained from the sale of all Factors of Production: _Income__
•Total amount spent by all households: ___Expenditure_____
•Total of the value of of all goods and services: _Output____
And…
•What is the relationship among, Income, Expenditure, and Value?
They equal each other
2.1 Leakages and Injections
Quick Review: Complete the diagram
Households
(Consumers)
Factor Incomes
Consumer
Expenditure
Firms
(Businesses)
Summarize
• As we see in our first model:
•E=O=Y
• (Expenditure = Output = Income)
• And from the second (more realistic) model:
• Leakages must = Injections, but…
• T ≠ G, S ≠ I, M ≠ X
• Transfer Payments (unemployment benefits, disability
payments, welfare payments) are not counted in GDP!
Measuring National Income (IB Syllabus)
• Distinguish between GDP and GNP/GNI
• Distinguish between nominal/real values of GDP, GNP/GNI
• Distinguish between total and per capita measures
• Examine the output approach, the income approach and
the expenditure approach when measuring national income
• Evaluate the use of national income statistics:
• Their use for making comparisons over time, and
• Their use for making comparisons between countries, and
• Their use for making conclusions about standards of living
All of which…
• Will help us devise policies to enable us to meet economic objectives
• Explain the meaning and significance of “green GDP”, a
measure of GDP that accounts for environmental destruction.
Measuring National Income
Income from the
sale of all F’s of P
=
Expenditures by
households on
goods & services
AND
Value of
Goods and Services
or Total Output
• Expenditure Method: Spending on Final Goods and Services
• Income Method: All Income Earned by Factors of Production
• Output Method: Value of all Final Goods and Services
Income Method => N.I.
• All Income earned by the Factors of Production of a
country in a given time period (typically a year)
• Labor/Wages
• Land/Rent
• Capital/Interest
• Entrepreneurship/Profits
• Total = National Income
• Not as common a measure of overall economic activity as
GDP (which is expenditure-based)
Output Method => N.O.
• Value of all final Goods and Services produced in a
•
•
•
•
country in a specified period (typically a year)
Measures the value-added from each step of the
production process
Allows for measuring each sector of the economy
(banking, agriculture, transportation, etc) by looking at the
value added from each step of a multi-step production
process.
Total = National Output
Not as common a measure of overall economic activity as
GDP (which is expenditure-based)
Expenditure Method => NE => GDP
• Total amount of spending on final goods and services in a country in a
specified period (typically a year)
• Four components:
• Consumption Spending (C; consumer durables, consumer nondurables, services)
• Investment Spending (I; capital goods, new construction)
• Includes inventories (built but unsold goods)
• I = Gross investment (includes depreciation)
• Government Purchases (G; all spending by all governments—
excludes transfer payments)
• Net Exports (X-M; value of Exports less value of Imports)
And now, a “Top Ten Moment in Economics”…wait for it…
Gross Domestic Product (GDP) = C + I + G + (X-M)
Test Your Understanding
• With a partner…
• Answer the TYU questions 7.2 on Page 187 (notes below)
1.Why is it useful to know the value of aggregate output?
____________________________________________
____________________________________________
____________________________________________
2.Explain why:
1. We measure aggregate output in terms of value
__________________________________________
2. We only count final goods and services
__________________________________________
3.What are the four expenditure components of GDP?
____________________________________________
4.Three ways GDP can be measured: _______________
____________________________________________
Definitions and Concepts
• Nominal vs. Real: Think about Inflation
• Nominal Value is “money value,” based on prevailing prices
• Real Value takes into account changing prices
• Calculating Real Value requires reference to a Base Year
• Nominal GDP vs. Real GDP
• See example on Page 189 of text
Definitions and Concepts
• Gross vs. Net: One word – Depreciation
• Gross Investment = Depreciation
+
Net Investment
(discarded capital goods) (additions of new capital)
OR
• Gross Investment – Depreciation = Net Investment
• Total vs. Per Capita – Important to note:
• Comparing different countries
• Comparing changes in a country over time
National Income measures are either expressed in
aggregate (did our economy grow?) or per capita (did the
standard of living change on an individual level?)