copyright © 2004 south-western mods 2, 10-11, 37-40 intro to macro, measuring a nation’s income

Copyright © 2004 South-Western

Mods 2, Mods 2, 10-11, 10-11, 37-4037-40Intro to Macro,

Measuring a Nation’s Income

The Circular-Flow Diagram

Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,and capital

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,and profit

FIRMS•Produce and sellgoods and services

•Hire and use factorsof production

•Buy and consumegoods and services

•Own and sell factorsof production

HOUSEHOLDS

•Households sell•Firms buy

MARKETSFOR

FACTORS OF PRODUCTION

•Firms sell•Households buy

MARKETSFOR

GOODS AND SERVICES



The Expanded Circular-Flow The Expanded Circular-Flow DiagramDiagram


Circular Flow Worksheet Flows

1. Households spend $ on goods and services.

2. Businesses produce goods and services for households to buy.

3. Businesses pay wages/rents/income $ to households for resources.

4. Households provide resources for businesses to use in production.

5. Government spends $ to buy resources.

6. Government receives resources from Resource Market.

7. Government spends $ to buy Goods & Services.

8. Government receives Goods & Services from Product Market.

9. Government provides Goods & Services to Households.

10.Households pay tax $ to Government.

11.Government provides Goods & Services to Businesses.

12.Businesses pay Tax $ to Government.


Circular Flow Worksheet Answers

______1. David pays $9.99 for a CD at the local store.

______2. The Massachusetts Dept of Education pays Ms Holm to grade MCAS essays.

______3. Maria pays her federal income tax.

______4. Jorge receives $15,000 in income from his half-ownership of a coffee shop.

______5. The City of Boston pays for an order of three new cars for restaurant inspectors to use.

______6. Mammoth Toys Inc. hires 100 new employees.

______7. The National Park Service opens two new campgrounds in Yellowstone National Park.

______8. As a small business owner, Keisha makes decorative pillows that she sells for $30.00

______9. Jordan’s Furniture submits its quarterly sales tax receipts to the state of Massachusetts.

_____10. Emily earns $6.50 per hour entering data at the music conservatory.


Circular Flow MC Problems

Answers:

26.A

27.D

28.D

29.A


Test of Macroeconomic Thinking

• Take T/F Quiz

• Answers?• All False!!


Intro to Macroeconomics

• Macroeconomics• Macroeconomics is the study of the economy as a

whole.• Its goal is to explain the economic changes that

affect many households, firms, and markets at once.• It utilizes aggregate data on various measures.


Macro Issues

• Macroeconomics answers questions like the following:• Why is average income high in some countries and

low in others?—Macro measure is GDP • Why do production and employment expand in

some years and contract in others?—Macro measure is unemployment rate

• Why do prices rise rapidly in some time periods while they are more stable in others?—Macro measure is inflation rate


The Business Cycle—a Macro Model of the Economy

Real GDP in the United States

Billions of1996 Dollars

$10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,0001970 1975 1980 1985 1990 20001995



Evidence for a Recession?


The First Macro Measure—National Accounts—GDP

• When judging whether the macro economy is doing well or poorly, we need some measure of its overall productivity


National Accounts—THE ECONOMY’S INCOME AND EXPENDITURES

• For an economy as a whole, income must equal expenditure because:• Every transaction has a buyer and a seller.• Every dollar of spending by some buyer is a dollar

of income for some seller.

Remember Circular Flow!!


GROSS DOMESTIC PRODUCT

• Gross domestic product (GDP) is a measure of the income and expenditures of an economy.

• It can be measured in 3 ways:1. Measure the value of final products2. Measure the spending on these products

and services3. Measure the income of factor markets in the

economy


THE MEASUREMENT OF GROSS DOMESTIC PRODUCT

1.Measuring the value of final products—this is the Output approach

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



2.Measuring the spending on all final products—this is the Expenditure approach

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

Y = C + I + G + NX



3.Measuring the income of factor markets—this is the Income approach

NI (National Income) = W+R+I+P

• Wages• Rents• Interest• Profits


Comparing the Three Approaches

INCOME Approach

EXPENDITUREApproach

OUPUT Approach



• All three approaches = each other!!

Remember Circular Flow!!


THE EXPENDITURE APPROACH TO GDP

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

Y = C + I + G + NX


THE COMPONENTS OF GDP

• Consumption (C):• The spending by households on goods and services, with the

exception of purchases of new housing.

• Investment (I):• The spending on capital equipment, inventories, and

structures, including new housing.

• Government Purchases (G):• The spending on goods and services by local, state, and

federal governments.• Does not include transfer payments because they are not

made in exchange for currently produced goods or services.

• Net Exports (NX):• Exports minus imports.


GDP and Its Components (2010)

Consumption 71%

Government Purchases

19% Net Exports -3 %

Investment13%



Remember:

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

YOU ARE MEASURING PRODUCTION!!!


The Finer points of the Components of GDP

• GDP includes all items produced in the economy and sold legally in markets.

• What Is Not Counted in GDP?• GDP excludes most items that are produced and

consumed at home and that never enter the marketplace.

• It excludes items produced and sold illicitly, such as illegal drugs.

• It excludes used items


Resources for GDP figures


GDP Counting Game

• Find a partner

• Get envelope and wkshts

• Get busy!!

• Check with me when done—Get Key!!

• Then do Second GDP worksheet


REAL VERSUS NOMINAL GDP

Learn these two words—we will be using them often, about a number of concepts:

NOMINAL—literally means “in name only”—in Economics, it refers to the idea that you are looking at some measure or value at “face value” or in “current terms”—meaning it has not been adjusted for any outside effects

REAL—in Economics, using the “real” value means you have adjusted the concept for the effects of outside influences



• Nominal GDP values the production of goods and services at current prices—at the “face value” of current prices.

• Real GDP values the production of goods and services at constant prices. In other words, you have adjusted the value to get rid of an outside influence. In this case, you will refigure GDP in dollars that get rid of the influence of rising prices, by choosing a base year in dollars to compare prices against.



• An accurate view of the true growth rate of production in an economy requires adjusting nominal to real GDP


Real and Nominal GDP

Copyright©2004 South-Western


GDP and Economic Well-Being

• We use per capita GDP as the best single measure of the economic well-being of a society.

• GDP per capita tells us the income and expenditure of the average person in the economy AND it takes out the effect of changes in population

• Per capita GDP = Real GDP ÷ population


2013 World “Top Ten”Per Capita GDP (IMF stats)

Luxembourg 1 $112,473

Norway 2 $100,579

Qatar 3 $98,986

Switzerland 4 $81,276

Australia 5 $64, 578

Denmark 6 $59,129

Sweden 7 $58,014

Singapore 8 $55,182

USA 9 $53,001

Canada 10 $52,037


Alternate Statistics

• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita


GDP per capita for U.S.


US States and Country Total GDP: An interesting comparison


GDP and Economic Well-being

• Higher per capita GDP indicates a higher standard of living

HOWEVER…

• GDP is not a perfect measure of happiness or the quality of life

• Robert F. Kennedy said: “Measures of income tell us everything, in short, except that which makes life worthwhile.”


GDP AND WELL-BEING

• Some things that contribute to well-being are not included in GDP.• The value of leisure.• The value of a clean environment.• The value of almost all activity that takes place

outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

• So…here are some other measures of well-being and quality of life


Happy Planet Index

• Uses 3 measures:• Experienced well-being

• The Cantril Self-Anchoring Scale, developed by pioneering social researcher Dr. Hadley Cantril, consists of the following:

• Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.

• The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.

• On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)

• On which step do you think you will stand about five years from now? (ladder-future)

• Life expectancy• Ecological footprint


Happy Planet Index


Economist Mag’s Quality of Life Index:http://www.economist.com/news/21566430-

where-be-born-2013-lottery-life

• Uses 9-11 measures• GDP• Life expectancy• Political stability and security• Family life (Divorce rate)• Community life (church attendance, etc)• Climate/geography• Job security• Political freedom• Gender Equality


Economist Mag’s Quality of Life Index


Distorted Maps


World Alcohol Consumption


HIV Prevalence


House Prices


Military Spending


War and Death


Toy Exports


Toy Imports


Clothing Exports


Clothing Imports


The Wealth of Nations—Year 1500

copyright © 2004 south-western mods 2, 10-11, 37-40 intro to macro, measuring a nation’s income

Documents

goods services

southwestern slide

services copyright

revenue goods

nations income slide

southwestern intro

factors of production

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