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Welcome to ECON 2301
Macroeconomics
Dr. Jacobson
Mr. Stuckey
Today
• Start Chapter 7
Measuring a Nation’s
Income
MacroeconomicsIs the Study of the
Economy as a Whole. This
Includes the Factors of
Inflation, Unemployment,
and Economic Growth.
One Way to Measure or
to Evaluate What is
Going on Within a
Nation’s Economy is
Through its Gross
Domestic Product
(GDP).
Gross Domestic Product (GDP)-
Measures the Total Income of a
Nation.
The Market Value of All Final
Goods and Services Produced
Within a Country in a Given
Period of Time
Gross Domestic Product
(GDP)
Measures The Total
Income of Everyone in the
Economy and the Total
Expenditures On the
Economy’s Output of
Goods and Services.
For Any Economy as a
Whole, Income Must Equal
Expenditure. Therefore,
They Are the Same as For
Every Buyer There is a
Seller and What is an
Expenditure For One is
Income For the Other.
Important Note:
Gross Domestic
Product (GDP) is a
Measure of Only What
Goes On Within a
Nations Borders.
Circular-Flow Diagram
Revenue (=GDP)
Goods and
Markets For Goods
and Services
Spending
(= GDP)
Goods and
Services Sold
Services Bought
Firms
= Flow of Inputs and Outputs
= Flow of Dollars
Factors of
Production
Wages, Rent and
Profit (=GDP)
Households
Land, Labor
And Capital
Markets For Factors
of Production
Income (=GDP)
The Measurement of
Gross Domestic
Product (GDP)
Breaking Down the Definition
of Gross Domestic Product
(GDP)The Market Value of All Final
Goods and Services
Produced Within a Country In
a Given Period of Time.
GDP is the Market ValueThis Means the Market Price
Someone is Willing to Pay
For Those Goods or
Services. It is Measured By
the Currency of the Country.
i.e. U.S. $ Where $2 For an
Apple is Twice the GDP of $1
For an Orange.
“Of ALL”
This Includes All the Items
(Goods and Services)
Produced and Sold Legally in
Markets Within the Economy
(Country)
“Of All”
ExcludesMost Items Produced
and Sold Illicitly.
Items of Barter.
Items Produced and
Consumed At Home.
“Final”
Final Goods and Services
Are Distinguished From
Intermediate Goods As
They Are the Final Product
Purchased and Consumed
By the Purchaser.
“Goods and Services”
The GDP Includes Both
Tangible Goods (Food,
Clothing, Cars) and
Intangible Services
(Haircuts, Housecleaning,
Doctor Visits).
“Produced”
GDP Includes All Goods and
Services Currently Produced.
It Does Not Include
Transactions Involving Items
Produced In the Past or
Previously Counted. i.e. a
Used Car.
“Within A Country”
The GDP Only Measures The
Value of Production Within the
Geographic Confines of a
Country.
i.e. A German Working in the
U.S. His Production is Counted
as Part of the U.S. GDP.
“In a Given Period of
Time.”
GDP Measures the Value of
Production That Takes Place
Within a Specific Interval of
Time. Usually, That Interval
is a (Calendar) Year or
Quarter.
“In a Given Period of
Time”
When the Government
Reports Quarterly GDP It
Modifies the Results by a
Statistical Procedure
Called “A Seasonal
Adjustment.”
Other Measures of Income
Gross National Product
(GNP) is the Total Income
Earned By the Nation’s
Permanent Residents (and
Companies).
Other Measures of Income
Net National Product
(NNP) is the Total Income
of a Nation’s Residents
(GNP) Minus Losses From
Depreciation.
Other Measures of Income
National Income is the Total
Income earned By a Nation’s
Residents in the Production
of Goods and Services. It
Differs From Net National
Income By Excluding
Indirect Business Taxes
(Such as Sales Tax).
Other Measures of Income
Personal Income is the
Income That Households and
Noncorporate Businesses
Receive. Unlike National
Income, It Excludes Such
Items As Retained Earnings,
Corporate Income Taxes and
Social Security Taxes.
Other Measures of Income
Disposable Income is the
Income That Households
and Noncorporate
Businesses Have Left
After Satisfying All Their
Obligations to the
Government.
The Components of
GDP:
Consumption
Investment
Government Purchases
and Net Exports
Consumption
Consumption is Spending
By Households On Goods
and Services, With the
Exception of Purchases of
New Homes. Education is
Also Included in the
Consumption of Services.
Investment
Investment is the Purchase of
Goods That Will Be Used in the
Future to Produce More Goods
and Services. It is the Sum of
Purchases of Capital
Equipment, Inventories, and
Structures. It Also Includes the
Purchase of a New Home.
Government Purchases
Government Purchases
Include Spending on
Goods and Services By
Local, state and
Federal Governments.
Transfer Payments
Transfer Payments Are
Government Payments Made
to Persons or Companies For
Which No Good or Service is
Produced.
i.e. Social Security or
Welfare Payments.
Net Exports
Net Exports Equal the
Purchases of Domestically
Produced Goods by
Foreigners (Exports)
Minus the Domestic
Purchases of Foreign
Goods (Imports).
Net Exports
The Net in “Net
Exports” Refers to the
Fact That Imports Are
Subtracted From
Exports.
It is Important to Note
That This Has Usually
Been a Negative
Component Due to The
U.S. Importing More
Then it Exports.
U.S. GDP 2004
= $12 Trillion
$12,000,000,000,000
U.S. GDP 2013
= $15.5 Trillion
$15,500,000,000,000
Macroeconomic
Quantities Fluctuate
Together.
When Real GDP Falls in a
Recession So Does Personal
Income, Corporate Profits,
Consumer Spending,
Investment Spending,
Production, Home Sales, Auto
Sales and Other Items.
2004 GDP
Total
Per Person Percent
Billions (in Dollars) of Total
Total GDP
$11,728 $39,904 100%
Consumption $8,232
Investment
$1,922
Government $2,184
Net Exports
- $609
$28,009
$6,539
$7,431
- $2,072
70%
16%
19%
-5%
Real Versus Nominal GDP
Real GDP- The Production of
Goods and Services Valued At
Constant Prices
Nominal GDP- The Production of
Goods and Services Valued at
Current Prices.
Real Versus Nominal GDP
If Total Spending Rises From
One Year to the Next, One of
Two Things Must Be True.
1. The Economy is Producing a
Larger Output of Goods and
Services, or
2. Goods and Services Are
Being Sold At Higher Prices.
Economists Want to
Separate These Two
Items and Their Impact
For Obvious Reasons.
In Short Economists Want
to Measure the Total
Goods and Services the
Economy is Producing
That is Not Affected By
Changes in the Prices of
These Goods and
Services.
Real GDP
Real GDP is What the
Value of the Goods and
Services Would Be If We
Valued These Goods and
Services at the Prices
That Prevailed in Some
Specific Year in the Past.
By Evaluating Current
Production Using Prices
That Are Fixed at Past
Levels, Real GDP Shows
How the Economy’s
Overall Production of
Goods and Services
Changes Over Time.
How is This
Calculated?
First A Base Year is
Established (This Can
Be Any Year From the
Past). However, Base
Year Should Always Be
the Earliest Year.
Next the Nominal GDP for
the Base Year and the Year
(or Years) You Wish to
Compare it to Are Computed.
To Calculate This, the Price of
Each Item is Multiplied by the
Quantity of That Item Sold
During The Year(s). This is Then
Added to Product of Any Other
Items Sold During That Year.
This is Done for Both the Base
Year and The Year We Are
Going to Compare it to.
Nominal GDP Example:
Base Year
Item A (Price X Quantity Sold) +
Item B (Price X Quantity Sold) +
Item C (Price X Quantity Sold) + ….
Year (X)
Item A (Price X Quantity Sold) +
Item B (Price X Quantity Sold) +
Item C (Price X Quantity Sold) + ….
We Now Have the Nominal
GDP For Each Year.
To Calculate the Real GDP
for Those Same Years We
Multiply the Price of the
Items From the Base Year
Times the Quantity Sold
During the Year(s) That
We Are Comparing it
Against.
Real GDP Example:
Base Year (Will Be Same As Nominal
GDP)
Year(s) (X) ***
Item A (Base Year Price X Quantity For
Year (X)) +
Item B (Base Year Price X Quantity For
Year (X)) +
Item C (Base Year Price X Quantity
For Year (X)) + ……..
*** Additional Years Would Be Same
This Then Allows Us to
Make the Calculation of
What is Called the GDP
Deflator.
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.
Nominal GDP
GDP Deflator = ---------------------- X 100
Real GDP
The GDP Deflator Allows
Us to Measure the
Percentage Increase
(Decrease) In The Price
Level Between the Two
Years. This is Also Called
the Rate of Inflation.
Billions
$10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1965
1970
1975
1985
1990
1995
2000
2005
Is the GDP A Good
Measure of the
Economic Well-Being of
a Society or Nation?
Items Left Out:
Leisure (Quality of Life)
Environment
Items Done for Ourselves
Education
Health
Foreign Work
Distribution of Income
In All the GDP is a Good
Economic Measure For
What it Does. It is
Extremely Difficult to
Have a Consistent
Measurement in a
Dynamic Society.
Questions
?
Quick Write
Defense Spending Is A Major
Portion of Government
Purchases. Do You think
That it Should Be Eliminated
From Government Purchases
in Calculating GDP? Why?