Measuring A Nation's Income: Principles: Chapter 20
Measuring A Nation's Income: Principles: Chapter 20
Measuring A Nation's Income: Principles: Chapter 20
Principles: Chapter 20
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Economics
• Microeconomics
– Study of how households and firms
• Make decisions
• Interact in markets
• Macroeconomics
– Study of economy-wide phenomena
• Including inflation, unemployment, and
economic growth
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Economy’s Income & Expenditure
• Gross Domestic Product (GDP)
– Measures the total income of everyone in
the economy
– Measures the total expenditure on the
economy’s output of goods and services
• For an economy as a whole
– Income must equal expenditure
– Why? Look at circular flow diagram
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Circular flow dagram
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The Measurement of GDP
• 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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The Measurement of GDP
• “… 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
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The Measurement of GDP
• “… final…”
– Value of intermediate goods is already
included in the prices of the final goods
• “… goods and services…”
– Tangible goods & intangible services
• “… produced…”
– Goods and services currently produced
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The Measurement of GDP
• “… 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
• Spending side of GDP:
• Y = GDP
• C = consumption
• I = investment
• G = government purchases
• NX = net exports
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The Components of GDP
• Consumption, C
– Spending by households on goods and
services
– Exception: purchases of new housing
• Investment, I
– Spending on capital equipment,
inventories, and structures
– Household purchases of new housing
– Inventory accumulation
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The Components of GDP
• Government purchases, G
– Government spending on goods and
services and capital (roads) at all levels
– Does not include transfer payments
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Table 2
Real and Nominal GDP
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Real versus Nominal GDP
• The GDP deflator (overall price level)
– Ratio of nominal GDP to real GDP times
100
– Is 100 for the base year
– Measures the current level of prices
relative to the level of prices in the base
year
– Can be used to take inflation out of
nominal GDP (“deflate” nominal GDP)
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Calculation
• Let’s now return to our numerical example.
• For year 2013, nominal GDP is €200, and real GDP is €200, so the
GDP deflator is 100.
• For the year 2014, nominal GDP is €600, and real GDP is €350, so
the GDP deflator is 171. Because the GDP deflator rose in year
2014 from 100 to 171, we can say that the price level increased by
71 per cent.
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Figure 2
Real GDP in the United States
This figure shows quarterly data on real GDP for the U.S. economy since 1965. Recessions—
periods of falling real GDP—are marked with the shaded vertical bars.
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GDP
• GDP – “the best single measure of the
economic well-being of a society”
– Economy’s total income
– Economy’s total expenditure
– Larger GDP
• Good life, better healthcare
• Better educational systems
– Measure our ability to obtain many of the
inputs into a worthwhile life
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GDP
• GDP – not a perfect measure of well-
being
– Doesn’t include
• Leisure
• Value of almost all activity that takes place
outside markets (at home for example)
• Quality of the environment
– Nothing about distribution of income
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International differences: GDP & quality of life
• Rich countries - higher GDP per person
– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries - lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
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certain product or service or otherwise on a password-protected website for classroom use.
Table 3
GDP and the Quality of Life
The table shows GDP per person and three other measures of the quality of life for
twelve major countries.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a 21
certain product or service or otherwise on a password-protected website for classroom use.
Review questions
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Review questions
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