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Measuring a Nation’s Income

Professor Chris AdamAustralian Graduate School of ManagementUniversity 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, domestic-produced 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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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 GDPNominal 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 non-market activities