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Measuring a Nation’s Income
Professor Chris Adam
Australian Graduate School of Management
University of Sydney and University of New
South Wales
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INTRODUCTION
• Macroeconomics – study of economy as a
whole
– Explain economic changes that affect many
households, firms and markets at once
• Consider data that are used to monitor
overall economy
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GROSS DOMESTIC
PRODUCT
• GDP
– Total income of everyone working in economy
– Total expenditure on economy’s output of
goods and services
• For economy as a whole, income must
equal expenditure
• Circular flow diagram
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GROSS DOMESTIC
PRODUCT
• GDP is
… the market value …
use of prices
… of all …
external sales; imputation
… final …
vs intermediate
… goods and services …
tangibles and intangibles
… produced …
current production
… within a country …
vs Gross National Product
… in a given period of time.
quarterly; annually
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COMPONENTS OF GROSS
DOMESTIC PRODUCT
• Algebra!
Y = C + I + G + NX
Y is GDP
C is consumption: household spending
I is investment: spending that creates future income
G is government: spending by government
NX is net exports: exports (foreign-purchased, domesticproduced g&s) minus imports (domestic-purchased,
foreign-produced g&s)
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MEASURING GDP
• Three methods:
– GDP expenditure: method described above
– GDP income: sum of factor incomes,
consumption of fixed capital, net indirect taxes
– GDP production: market value of g&s produced
minus cost of g&s used (“intermediate
production”); also called “value added”
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DATA
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DATA
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DATA
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DATA
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DATA
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DATA
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REAL vs NOMINAL GDP
• Increase of GDP(E) over time
– We produced more g&s at the same prices?
– We paid more for the same g&s?
– Some combination?
• Nominal GDP: value of g&s produced
now using current prices
• Real GDP: value of g&s produced now
using previous (unchanging) prices
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REAL vs NOMINAL GDP
Nominal GDP
GDP deflator
=
x 100
Real GDP
• Real GDP has grown over time but not
constantly
• GDP not measure “beauty of our poetry”,
but can tell us if we can afford poetry
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WHAT GDP MISSES
• Leisure reduction increases GDP but may
reduce well-being
• Removal of environmental regulation may
increase GDP but reduce quality of
environment
• Use of market prices excludes nonmarket activities
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