Download - Chapter 23 - Measuring a Nation s Income
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Chapter
Measuring a Nations Income
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The Economys Income and Expenditure
Gross Domestic Product (GDP)
Measures the total income of everyone in the
economy
Measures the total expenditure on the
economys output of goods and services
For an economy as a whole
Income must equal expenditure Circular-flow diagram assumptions:
All goods and services bought by households
Households - -spend all of their income 4
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Figure
The circular-flow diagram
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Households buy goodsand services from firms,and firms use theirrevenue from sales topay wages to workers,rent to landowners, and
profit to firm owners.GDP equals the totalamount spent byhouseholds in themarket for goods andservices. It also equals
the total wages, rent,and profit paid by firmsin the markets for thefactors of production.
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Measurement of Gross Domestic Product
Gross domestic product (GDP)
Market value of all final goods and services
Produced within a country
In a given period of time
GDP is the market value
Market prices - reflect the value of the goods
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Measurement of Gross Domestic Product of all
All items produced in the economy And sold legally in markets
Excludes most items
Produced and sold illicitly Produced and consumed at home
final
Value of intermediate goods is alreadyincluded in the prices of the final goods
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Measurement of Gross Domestic Product
goods and services
Tangible goods & intangible services
produced
Goods and services currently produced within a country
Goods and services produced domestically,
regardless of the nationality of the producer in a given period of time
A year or a quarter
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The Components of GDP
Y = C + I + G + NX
Identity
Y = GDP
C = consumption I = investment
G = government purchases
NX = net exports
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The Components of GDP
Consumption
Spending by households
On goods and services
Exception: purchases of new housing Investment
Spending on capital equipment, inventories,
and structures Including household purchases of new
housing
Inventory accumulation 10
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The Components of GDP
Government purchases
Government consumption expenditure and
gross investment
Spending on goods and services
By local, state, and federal governments
Does not include
transfer payments
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The Components of GDP
Net exports = Exports - Imports
Exports
Spending on domestically produced goods by
foreigners
Imports
Spending on foreign goods by domestic residents
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2007, GDP of the United States = $14 trillion
GDP per person = $45,838
Consumption = $32,225 per person
Investment = $7,061 per person
Government purchases = $8,912 per person
Net exports =$2,360 per person
The components of U.S. GDP
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Table
GDP and its components
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Total(in billions of dollars)
Per person(in dollars)
Percentof total
Gross domestic product, Y
Consumption, C
Investment, I
Government purchases, G
Net exports, NX
$13,843
9,732
2,132
2,691
712
$45,838
32,225
7,061
8,912
2,360
100%
70
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19
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This table shows total GDP for the U.S. economy in 2007 and the breakdown of GDP
among its four components.
When reading this table, recall the identity Y = C + I + G + NX.
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Real Versus Nominal GDP
Total spending rises from one year to the next
Economy - producing a larger output of goods
and services
And/or goods and services are being sold at
higher prices
Nominal GDP
Production of goods and servicesValued at current prices
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Real Versus Nominal GDP
Real GDP
Production of goods and services
Valued at constant prices
Designate one year as base yearNot affected by changes in prices
For the base year
Nominal GDP = Real GDP
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Table
Real and Nominal GDP
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Prices and Quantities
Year
Price of
hot dogs
Quantity of
hot dogs
Price of
hamburgers
Quantity of
hamburgers
2008
2009
2010
$1
$2
$3
100
150
200
$2
$3
$4
50
100
150
Calculating Nominal GDP
2008
2009
2010
($1 per hot dog 100 hot dogs) + ($2 per hamburger 50 hamburgers) = $200
($2 per hot dog 150 hot dogs) + ($3 per hamburger 100 hamburgers) = $600
($3 per hot dog 200 hot dogs) + ($4 per hamburger 150 hamburgers) = $1,200
Calculating Real GDP (base year 2008)
20082009
2010
($1 per hot dog 100 hot dogs) + ($2 per hamburger 50 hamburgers) = $200($1 per hot dog 150 hot dogs) + ($2 per hamburger 100 hamburgers) = $350
($1 per hot dog 200 hot dogs) + ($2 per hamburger 150 hamburgers) = $500
Calculating the GDP Deflator
2008
2009
2010
($200 / $200) 100 = 100
($600 / $350) 100 = 171
($1,200 / $500) 100 = 240
This table shows how to calculate real GDP, nominal GDP,
and the GDP deflator for a hypothetical economy that
produces only hot dogs and hamburgers.
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Real Versus Nominal GDP
The GDP deflator
Measure of the price level
Ratio of nominal GDP to real GDP times 100
=100 for the base yearMeasures the current level of prices relative to
the level of prices in the base year
InflationEconomys overall price level is rising
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Real Versus Nominal GDP
Inflation rate
Percentage change in some measure of the
price level from one period to the next
The GDP deflator
Can be used to take inflation out of nominalGDP (deflate nominal GDP)
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1001yearindeflatorGDP
1yearindeflatorGDP-2yearindeflatorGDP2yearinInflation
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The GDP data
Real GDP grows over time
Growth is not steady
Recession
Real GDP declines
Lower income
Rising unemployment
Falling profits
Increased bankruptcies
Real GDP over recent history
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Figure
Real GDP in the United States
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This figure shows quarterly data on real GDP for the U.S. economy since 1965.
Recessionsperiods of falling real GDPare marked with the shaded vertical bars.
Fi
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Figure
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0
1
2
3
4
5
6
7
8
9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011 (e)
Percentage %
Years
VIETNAMs GDP GROWTH
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GDP - Good Measure of Economic Well-being?
GDP single measure of the economic well-
being of a society
Economys total income
Economys total expenditure
Larger GDP
Good life
Better healthcare
Better educational systems
Measure - ability to obtain many of the inputs
into a worthwhile life23
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GDP - Good Measure of Economic Well-being?
GDP not a perfect measure of well-being
Doesnt include
Leisure
Value of almost all activity that takes place
outside markets
Quality of the environment
No distribution of income
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I t ti l diff i GDP
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Rich countries - Higher GDP per person
Better
Life expectancy
Literacy
Internet usage
Poor countries - Lower GDP per person
Worse
Life expectancy Literacy
Internet usage
International differences in GDP
and the quality of life
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I t ti l diff i GDP
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Low GDP per person
More infants with low birth weight
Higher rates of infant mortality
Higher rates of maternal mortality
Higher rates of child malnutrition
Less common access to safe drinking water
Fewer school-age children are actually in school
Fewer teachers per student
Fewer televisions; Fewer telephones
Fewer paved roads
Fewer households with electricity
International differences in GDP
and the quality of life
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Table 3
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Table
GDP and the quality of life
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Country
Real GDP per
person (2005)
Life
expectancy
Adult literacy
(% of population)
Internet usage
(% of population)
United States
Japan
Germany
Russia
MexicoBrazil
China
Indonesia
India
Pakistan
BangladeshNigeria
$41,890
31,267
29,461
10,845
10,7518,402
6,757
3,843
3,452
2,370
2,0531,128
78 years
82
79
65
7672
72
70
64
65
6347
99%
99
99
99
9289
91
90
61
50
4769
63 %
67
45
15
1819
9
7
3
7
0.34
The table shows GDP per person and three other measures of the quality of life for
twelve major countries.