Download Chapter 8

Chapter 8
Measuring the
Economy’s
Performance
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Chapter Outline
•
•
•
•
The Simple Circular Flow
National Income Accounting
Two Main Methods of Measuring GDP
Other Components of National Income
Accounting
• Distinguishing Between Nominal and Real
Values
• Comparing GDP Throughout the World
8-2
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Figure 8-1 The Circular Flow of
Income and Product
8-3
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The Simple Circular Flow
(cont'd)
• Product Markets
– Transactions in which households buy goods
8-4
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The Simple Circular Flow
(cont'd)
• Factor Markets
– Transactions in which businesses buy resources
8-5
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The Simple Circular Flow
(cont'd)
• Question
– Why must total income be
identical to the dollar value
of total output?
• Answer
– Every transaction
simultaneously involves an
expenditure and a receipt.
8-6
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The Simple Circular Flow
The concept of the circular flow of income
involves two principles:
1. In every economic exchange, the seller receives
exactly the same amount that the buyer
spends.
2. Goods and services flow in one direction and
money payments flow in the other.
8-7
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National Income Accounting
• National Income Accounting
– A measurement system used to estimate
national income and its components
• Total Income
– The yearly amount earned by the nation’s
resources (factors of production)
– Equals Total Spending (why?)
8-8
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National Income Accounting
(cont'd)
• Gross Domestic Product (GDP)
– The total market value of all final goods and
services produced by factors of production
located within a nation’s borders
8-9
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National Income Accounting
(cont'd)
• Stress on final output
– What is a final good?
• Wheat?
• Steel?
• Oil?
• Bread?
• Automobile?
• Gasoline?
– Hint: Some are intermediate goods.
8-10
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National Income Accounting
(cont'd)
• Intermediate Goods
– Goods used up entirely in the production of final
goods
• Value Added
– The dollar value of an industry’s sales minus the
value of intermediate goods (for example, raw
materials and parts) used in production
– Value Added (not $ sales) is your contribution to
the economy
8-11
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Table 8-1 Sales Value and Value Added
at Each Stage of Donut Production
8-12
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Cost Breakdown for a pair of Nike
shoes from Indonesia (1995)
Production labour
Materials
Rent, equipment
Supplier's operating profit
Duties
Shipping
Cost to Nike
Cost
$2.75
$9.00
$3.00
$1.75
$3.00
$0.50
Research and development
Promotion and advertising
Sales, distribution, admin.
Nike's operating profit
Cost to retailer
$0.25
$4.00
$5.00
$6.23
Retailer's rent
Personnel
Other
Retailer's operating profit
Cost to consumer
$9.00
$9.50
$7.00
$9.00
Total
$20.00
$35.50
$70.00
www-personal.umich.edu/~lormand/poli/nike/nike101-8.htm
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8-13
National Income Accounting
(cont'd)
Transactions that have nothing to do with
final goods and services being produced:
• Financial transactions (stocks, bonds, loans)
• Transfer Payments (social security tax/benefit,
unemployment benefits)
• Secondhand Goods
• Pure gifts
8-14
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Two Main Methods of Measuring
GDP (cont'd)
Presenting the Expenditure Approach
– Where
• C = consumption expenditures
•I
= investment expenditures
• G = government expenditures
• X = net exports (exports – imports)
GDP = C + I + G + X
8-15
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Two Main Methods of Measuring
GDP (cont'd)
Deriving GDP by the Income Approach
• Gross Domestic Income (GDI)
– Wages: salaries and labor income
– Rent: farms, houses, stores
– Interest: savings accounts
– Profits: sole proprietorships, partnerships,
corporations
8-16
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Figure 8-3 Gross Domestic Product and Gross
Domestic Income, 2009 (in billions of 2009
dollars per year)
Sources: U.S. Department of Commerce and author’s estimates.
8-17
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Distinguishing Between Nominal
and Real Values
• Nominal Values
– Measurements in terms of the actual market
prices at which goods are sold; expressed in
current dollars, also called money values
• Real Values
– Measurements after adjustments have been
made for changes in the average of prices
between years; expressed in constant dollars
– This price-corrected GDP is the real GDP.
8-18
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Example: Correcting GDP for
Price Index Changes
• Correcting GDP for price index changes
– Nominal (current) dollars GDP
– Real (constant) dollars GDP
Nominal GDP
x 100
Real GDP =
Price index*
*Price index: measured by the GDP deflator
8-19
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Table 8-3 Correcting GDP for Price
Index Changes
8-20
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Distinguishing Between Nominal
and Real Values (cont'd)
• Per capita GDP
– Adjusting for population growth
Real GDP
Per capita real GDP =
Population
8-21
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Figure 8-4 Nominal and Real GDP
Source: U.S. Department of Commerce
8-22
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Table 8-4 Comparing GDP
Internationally
8-23
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National Income Accounting
(cont'd)
• GDP’s limitations
– Excludes non-market
production
– It is not necessarily a good
measure of the well-being of
a nation.
– Does money buy happiness?
– OK, can you tell me which country
do you want to live in?
8-24
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Myth #8: Money is everything
• Money is everything up to a point
• Get a real job and you are there
8-25
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