Measuring a Nations Income

1
Chapter 10

• Measuring a Nations Income

2
Ch 10 Outline

• Economys Income Expenditure
• Measuring GDP
• Components of GDP
• Real vs Nominal GDP
• GDP Economic Well-being

3
Three Key Stats

• Real Gross Domestic Product
• - total output
• Consumer Price Index
• The average of prices
• Unemployment Rate
• Measure of Joblessness

4
The Circular-Flow Diagram
Product Market


Businesses
Households


Market for Factors of Production
5
2 Ways Computing Economys Output

• Expenditure Approach
• Income Approach

6
Income and Expenditure

• Income generated a measure of economic health.
• Economys income equals expenditure.

7
Gross Domestic Product

• - market value
• - final goods services
• - within a country, region, or state.
• - during a given period

8
What Is NOT Counted in GDP?

• Illegal activities
• Homemakers services
• Overseas production of US firms
• Intermediate Goods
• Used Goods

9
Included in 1999 GDP?

• 10 Bill
• 100 shares of IBM
• 1957 Chevy
• Cannabis
• Uncle Gs numbers racket
• Househusbands services

10
Gross National Product

• - output of nations residents firms
• - regardless of the place produced.

11
Included in GDP and/or GNP?

• McDonald sells burgers in Moscow
• Toyota produced in Kentucky plant
• Moms home cooking
• GM car produced in US

12
Components of GDP

• GDP (Y) is sum of
• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (NX)
• Y C I G NX

13
The Four Components of GDP

• Consumption (C)
• Is spending by households on goods and services
• e.g. buying clothing, food, movie tickets
• Investment (I)
• Is purchases of capital equipment and structures
• e.g. factory, houses, etc.

14
The Four Components of GDP

• Government Purchases (G)
• Includes spending on goods services by
  government (e.g. roads, police, etc.).
• Does not include transfer payments these not
  made for currently produced goods or services.
• Net Exports (NX)
• Exports minus imports.

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GDP Components of Measurement
16
GDP Components of Measurement
Consumption 69
17
GDP Components of Measurement
Investment 13
Consumption 69
18
GDP Components of Measurement
Government Spending 19
Investment 13
Consumption 69
19
GDP Components of Measurement
Government Spending 19
Investment 13
Net Exports -1
Consumption 69
20
Which Component of GDP?

• Services of Military
• GM produces a car sells it
• New tool die equipment
• Newly produced GM car NOT sold
• Someone buys a New House
• Unemployment benefit
• Coke sold in China by Coca Cola

21
Real versus Nominal GDP

• Nominal GDP.
• Measures output in with buying power of year
  output produced
• Real GDP
• measures output in dollars with buying power of
  base year.
• GDP Price Deflator.
• Price Index that converts nominal to real GDP

22
Impact of Inflation on Dollars Buying Power

• Year 1 Year 2 Year 3
• Base Year
• Dollar Buys Twice Dollar Buys Half
• as much as 1 in B.Y. As 1 in B.Y.

1
1
1
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Real vs Nominal Income
YEAR 2 GDP8
YEAR 3 GDP8 in nominal or current
YEAR 3 GDP4 in real or base year
800
1
1
1
1
1
400
1
400
1
1
1
1
1
1
1
1
1
1
1
1
1
1
24
GDP Deflator
Year 1 50 Year 2
100 Year 3 200

25
Key Formula
Real GDP Nominal GDP GDP Deflator

• X 100

26
Key Formula
Real GDP 8 200

• X 100

27
Key Formula
4 8 200

• X 100

28
GDP DeflatorValues Output at Base Year Prices

• 1990 93.6
• 1991 97.3
• 1992 100.0
• 1993 102.6

1
1
1
1
29
Key Formula
Oh, no Anne Heche isnt gonna remake Hitchcocks
The Birds, too?!?
Real GDP Nominal GDP GDP Deflator

• X 100

Subsdatootin 1990 data intada formula.
Real GDP 5,744b 93.57
X 100
Real GDP 6,139b
30
Recent Business Cycles

Real GDP Actual
Real GDP Trend
Real GDP
1970 1975 1980 1985 1990 1995 2000
Years
31
GDP and Economic Well-Being

• GDP Per Person
• average income
• material well-being
• NOT happiness

32
REAL GDP VS. NOMINAL GDP
Hes trying to hide these figures from us right
now

• Year Nominal GDP Real
• GDP Deflator GDP
• --------------------------------------------------
  -
• 1990 5,744b 93.6 6,139b
• 1991 5,917b 97.3 6,079b
• 1992 6,244b 100.0 6,144b
• 1993 6,550b 102.6 6,384b

33
REAL GDP VS. NOMINAL GDP

• Year Nominal GDP Real
• GDP Deflator GDP
• --------------------------------------------------
  -
• 1990 5,744b 93.6 6,139b
• 1991 5,917b 97.3 6,079b
• 1992 6,244b 100.0 6,144b
• 1993 6,550b 102.6 6,384b

34
GDP and Economic Well-Being

• Factors not in GDP
• Leisure.
• Quality environment.
• Activities outside marketplace (I.e. volunteer
  work)
• Personal Freedom
• Stress Level
• Spiritual Well-being