Download Measuring a Nation’s Income

Measuring a Nation’s
Income
The 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.
•To have this number make sense, it
is also best to look at income per
person.
The Economy’s
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.



Say’s Law-Supply creates it’s own demand
This process can be seen using a Circular Flow Diagram.
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.
How much is the current GDP?
The Circular-Flow Diagram
Revenue
Goods &
Services sold
Market for
Goods
and Services
Firms
Inputs for
production
Wages, rent,
and profit
Spending
Goods &
Services
bought
Households
Market for
Factors
of Production
Labor, land,
and capital
Income
The Measurement of GDP
GDP is:
•the market value
•of all final goods and services
•produced within a country
•in a given period of time.
What Is Counted and Not
Counted in GDP?
•GDP includes all items produced in the economy and
sold legally in markets.
•GDP excludes services that are produced and
consumed at home and that never enter the marketplace.
–Caring labor, the work that is normally produced by
women.
–Because GDP does not count it, it diminishes its
importance.
•GDP also excludes black market items, such as illegal
drugs.
Other Measures of Income
•
•
•
•
•
Gross National Product (GNP)
Net National Product (NNP)
National Income
Personal Income
Disposable Personal Income
The Components 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
GDP and Its Components (1998)
Total (Billions
of Dollars)
Per Person (In
Dollars)
% of Total
$8,511
$31,522
100%
Consumption C 5,808
21,511
68%
Investment I
1,367
5,507
16
Government G
1,487
5,507
18
-559
-2
GDP (Y)
Net Exports NX -151
GDP and Its Components (1998)
Government Purchases
Investment
Net Exports
18%
16%
-2 %
Consumption
68 %
Measuring Economic Growth
– We use real GDP to calculate the economic growth
rate.
– The economic growth rate is the percentage change
in the quantity of goods and services produced from
one year to the next.
– We measure economic growth so we can make:
– Economic welfare comparisons
– International welfare comparisons
– Business cycle forecasts
Measuring Economic Growth
• Business Cycle Forecasts
– Real GDP is used to measure business cycle
fluctuations.
– These fluctuations are probably accurately
timed but the changes in real GDP probably
overstate the changes in total production and
people’s welfare caused by business cycles.
Real versus Nominal 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.
Real GDP and the Price Level
•Deflating the GDP Balloon
–Nominal GDP increases because production—real
GDP– increases.
Real GDP and the Price Level
– Nominal GDP also increases because prices
rise.
• Deflating the GDP Balloon
Real GDP and the Price Level
• We use the GDP Deflator to take the air out of
Nominal GDP.
Real GDP in the United States
Billions of
1992 Dollars
8,000
(Periods of falling real GDP)
7,000
6,000
5,000
4,000
3,000
1970
1975
1980
1985
1990
1995
2000
Hawaii GSP (1997)
• This pie chart shows how
Hawaii’s Gross State
Product is broken down.
• Notice how the visitor
industry is relatively high
(21%).
• Refer to Time Series of
Hawaii GSP.
• Refer to comparison of
USA and Hawaii GDP
and GSP.
GDP, Life Expectancy, and
Literacy
Country
Real GDP Per
Person (1997)
Life Expectancy
Adult Literacy
USA
$29,010
77 years
99%
Japan
24,070
80
99
Germany
21,260
77
99
Mexico
8,370
72
90
Brazil
6,480
67
84
Russia
4,370
67
99
Indonesia
3,490
65
85
China
3,130
70
83
India
1,670
63
53
Pakistan
1,560
64
41
Bangladesh
1,050
58
39
Nigeria
920
50
59