Chapter 5 Measuring a Nations Income

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Chapter 5Measuring a Nations Income
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Content of this chapter

• A nations income and expenditure
• The measurement of Gross Domestic Product (GDP)
• Real GDP vs. Nominal GDP
• Evaluation of GDP

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The Economys Income and Expenditure

• How to measure a countrys economic wellbeing and
  living standard?
• GDP
• Should we measure total income?
• Should we measure total expenditure?

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Measure income?How about a drug mafia?
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Measure Expenditure?

• Does expenditure tell us a countrys total
  income?
• Yes, every expenditure has two parties buyers
  spend money and sellers earn money
• Whats the exact relationship between expenditure
  and income?

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Relationship between expenditure and income
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Conclusion

• They are the same for a country
• Expenditure Income

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The Measurement of Gross Domestic Product

• GDP is the market value of all final goods and
  services produced within a country in a given
  period of time.

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• Market value
• Of all
• Homeowner
• Drug smuggling
• Services produced at home (Annual salary for a
  stay-home housewife)

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• Final
• Intermediate goods dont count except

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• Goods and services
• Produced
• Goods produced in the past dont count
• used car

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• Within a country
• GM sales in China dont count
• In a given period of time

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The Components of GDP

• GDP (Y)
• Y C I G NX

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• Consumption
• Spending by households on goods and services. But
  not your house

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• Investment
• Purchase of goods that will be used in the future
  to produce more goods and servics.
• inventory

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• Government purchase
• Not your social security check

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• Government spending

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• Net Export
• Export Import, Why?

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Real vs. Nominal

• GDP measure the total spending gt wellbeing of
  this countrys economy
• So, if GDP has increased, what does this increase
  imply?

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• Two possibilities
• We work hard
• Prices have increased

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• We have to separate the price effect from real
  GDP number.
• Real GDP the production of goods and services
  valued at constant price.
• Nominal GDP the production of goods and services
  valued at current price.

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• GDP deflator
• Reflect the prices of goods and services but not
  the quantities produced.
• GDP deflator Nominal GDP/Real GDP ()
• Base year deflator 100

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Real GDP of U.S.
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• In the rest of this semester
• Study the long-term trend of GDP
• Study the short-term fluctuations of GDP