Download Measuring a Nation’s Income

Macroeconomic Issues
AMBA Managerial
Economics
Macroeconomics I
Recent Hot Macroeconomic
Issues
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Sovereign Bond Crisis in Europe
Recession and QE policy in America
Inflation and Soft Landing in China
Taiwan’s No Pay Holiday Nightmare
Earthquake and Long-Term Recession
in Japan
Major Macroeconomic
Concerns
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National Income: Low Economic
Growth Rate
Employment Opportunity: High
Unemployment Rate
Cost of Living: High Inflation Rate
Trade Surplus: Low Exchange
Rate(Depreciation)
Direct Investment: High Interest Rate
How to Measure National
Income?

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Gross Domestic Product (GDP)
Gross National Product (GNP)
GDP (Purchasing Power Parity)
Economy’s Income and
Expenditure

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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.
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Copyright © 2004 South-Western
Gross Domestic Product

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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”.
Components of GDP

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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:

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

Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Y = C + I + G + NX
Components: C and I

Consumption (C):

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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 Purchases (G):


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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 Exports (NX):

Exports minus imports.
Nominal Versus Real GDP

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Nominal GDP values the production of
goods and services at current prices.
Real GDP values the production of
goods and services at constant prices.
GDP deflator

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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

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 WellBeing
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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 WellBeing
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Some things that contribute to wellbeing are not included in GDP.
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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.
GDP(PPP)

Gross Domestic Product (GDP) at
Purchasing Power Parity (PPP)
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.
Green GDP

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Green GDP is an index of economic
growth with the environmental
consequences of that growth factored
in.
Green GDP=Traditional GDPenvironmental/ecological costs
GDP Per Capita Ranking
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http://en.wikipedia.org/wiki/List_of_cou
ntries_by_GDP_%28nominal%29_per
_capita
http://en.wikipedia.org/wiki/List_of_cou
ntries_by_GDP_(PPP)_per_capita
Consumer Price Index
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The consumer price index (CPI) is a
measure of the overall cost of the goods and
services bought by a typical consumer.
It is used to monitor changes in the cost of
living over time.
When the CPI rises, the typical family has to
spend more dollars to maintain the same
standard of living.
Calculating CPI: steps
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Fix the Basket
Find the Prices
Compute the Basket’s Cost
Choose a Base Year and Compute the
Index
Calculating Inflation Rate
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Compute the inflation rate: The inflation
rate is the percentage change in the price
index from the preceding period.
CPI in Year 2-CPI in Year 1
Inflation Rate in Year 2=
100
CPI in Year 1
GDP deflator and CPI
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Economists and policymakers monitor both the
GDP deflator and the consumer price index to
gauge how quickly prices are rising.
There are two important differences between the
indexes that can cause them to diverge.
The GDP deflator reflects the prices of all goods
and services produced domestically, whereas...
…the consumer price index reflects the prices of all
goods and services bought by consumers.
GDP deflator and CPI
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The consumer price index compares the
price of a fixed basket of goods and services
to the price of the basket in the base year
…whereas the GDP deflator compares the
price of currently produced goods and
services to the price of the same goods and
services in the base year.
Correcting Economic Variables for
Effects of Inflation

Price indexes are used to correct for the
effects of inflation when comparing dollar
figures from different times.
Example
Salary 2001
Price level in 2001
 Salary1931 
Price level in 1931
177
 $80,000 
15.2
 $931,579
Indexation

When some dollar amount is
automatically corrected for inflation by
law or contract, the amount is said to
be indexed for inflation.
Business Cycle I
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The term business cycle or economic
cycle refers to the fluctuations of
economic activity (business
fluctuations) around its long-term
growth trend.
Business Cycle II
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The cycle involves shifts over time
between periods of relatively rapid
growth of output (recovery and
prosperity), and periods of relative
stagnation or decline (contraction or
recession).
Business Cycle III
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These fluctuations are often measured
using the real GDP. Despite being
termed cycles, these fluctuations in
economic growth and decline do not
follow a purely mechanical or
predictable periodic pattern.
Types of Business Cycle
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A number of types of business cycles,
in the traditional sense of a fluctuation
within a regular period have been
proposed. The main types of business
cycles enumerated by Joseph
Schumpeter.
Juglar Cycle
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In 1860, French economist Clement
Juglar identified the presence of 8 to
11 year cycles. In Business Cycles,
Schumpeter suggested this cycle be
named after Juglar. These cycles are
made up of four stages, each linked to
the variation in prices, production and
interest rates.
Four stages
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expansion = increase in production and
prices , and low interests rates.
crisis = stock exchanges crash and
bankruptcies of several companies occur.
recession = decrease in price and in output,
high interests rates.
recovery= stocks recover thanks to the fall
in prices and incomes.
Recession
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A recession is a contraction phase of
the business cycle, or "a period of
reduced economic activity.
Recession and Depression
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The U.S. based NBER defines a
recession more specifically as "a
significant decline in economic activity
spread across the economy, lasting
more than a few months. A sustained
recession may become a depression.
Attributes of Recession
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A recession has many attributes that
can occur simultaneously and can
include declines in coincident
measures of overall economic activity
such as employment, investment, and
corporate profits.
Causes of Recession
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Recessions are the result of falling
demand and may be associated with
falling prices (deflation), or sharply
rising prices (inflation) or a
combination of rising prices and
stagnant economic growth
(stagflation). A severe or prolonged
recession is referred to as an
economic depression.
Possible Predictors of
Recession
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A significant stock market drop has
often preceded the beginning of a
recession.
The three-month change in the
unemployment rate.
Index of Leading Indicators
Index of Leading Indicators
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The Index of Leading Indicators is
an economic index intended to
estimate future economic activity. The
index is calculated based on ten key
variables that have historically turned
downward before a recession and
upward before an expansion.
Recession’s Warning System
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The index of leading indicators can
provide an early warning system so
that policymakers can shift toward
macroeconomic stimulus when the
index fails.
Ten key variables
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Average number of initial applications for unemployment
insurance
Number of manufacturers' new orders for consumer goods
and materials
Speed of delivery of new merchandise to vendors from
suppliers
Amount of new orders for capital goods unrelated to defense
Amount of new building permits for residential buildings
The S&P 500 stock index
Inflation-adjusted money supply (M2)
Spread between long and short interest rates
Consumer sentiment
Average weekly hours worked by manufacturing workers
Monitoring Indicators
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Red Light: Very hot
Yellow Red light: hot
Green light: stable
Yellow blue light: cool/poor
Blue light: very cool/poor