measuring a nation’s income
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Measuring a Nation’s Income. Chapter 10 or 23. The Economy’s Income and Expenditure. When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. - PowerPoint PPT PresentationTRANSCRIPT
Measuring a Nation’s Income
Chapter 10 or 23
The Economy’s Income and Expenditure
When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.To have this number make sense, it is also best to look at income per person.
The Economy’s Income and Expenditure
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. Say’s Law-Supply creates it’s own demand This process can be seen using a Circular Flow Diagram.
Gross domestic product (GDP) is a measure of the income and expenditures of an economy.
It is the total market value of all final goods and services produced within a country in a given period of time.
How much is the current GDP?
Gross Domestic Product
The Circular-Flow Diagram
Firms Households
Market for Factors
of Production
Market for Goods
and Services
SpendingRevenue
Wages, rent, and
profit
Income
Goods & Services
sold
Goods & Services bought
Labor, land, and capital
Inputs for production
The Measurement of GDP
GDP is: the market value
of all final goods and services produced within a country in a given period of time.
What Is Counted and Not Counted in GDP?
GDP includes all items produced in the economy and sold legally in markets.GDP excludes services that are produced and consumed at home and that never enter the marketplace.
Caring labor, the work that is normally produced by women.Because GDP does not count it, it diminishes its importance.
GDP also excludes black market items, such as illegal drugs.
Other Measures of Income
Gross National Product (GNP) Net National Product (NNP) National Income Personal Income Disposable Personal Income
The Components of GDP
GDP (Y ) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)
Y = C + I + G + NX
GDP and Its Components GDP and Its Components (1998)(1998)
Total (Billions of Dollars)
Per Person (In Dollars)
% of Total
GDP (Y) $8,511 $31,522 100%
Consumption C 5,808 21,511 68%
Investment I 1,367 5,507 16
Government G 1,487 5,507 18
Net Exports NX -151 -559 -2
Net Exports -2 %
GDP and Its Components (1998)
Consumption 68 %
Investment16%
Government Purchases
18%
Measuring Economic GrowthMeasuring Economic Growth
We use real GDP to calculate the economic growth rate.
The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next.
We measure economic growth so we can make: Economic welfare comparisons International welfare comparisons Business cycle forecasts
Measuring Economic GrowthMeasuring Economic Growth
Business Cycle ForecastsReal GDP is used to measure business cycle
fluctuations. These fluctuations are probably accurately
timed but the changes in real GDP probably overstate the changes in total production and people’s welfare caused by business cycles.
Real versus Nominal GDP
Nominal GDP values the production of goods and services at current prices.
Real GDP values the production of goods and services at constant prices.
Real GDP and the Price LevelReal GDP and the Price LevelDeflating the GDP BalloonNominal GDP increases because production—real GDP– increases.
Real GDP and the Price LevelReal GDP and the Price Level
Deflating the GDP Balloon
Nominal GDP also increases because prices rise.
Real GDP and the Price LevelReal GDP and the Price Level
We use the GDP Deflator to take the air out of Nominal GDP.
(Periods of falling real GDP)
Real GDP in the United States
1970 1975 1980 1985 1990 19953,000
4,000
5,000
6,000
7,000
Billions of 1992 Dollars
2000
8,000
Hawaii GSP (1997)Hawaii GSP (1997)
This pie chart shows how Hawaii’s Gross State Product is broken down.
Notice how the visitor industry is relatively high (21%).
Refer to Time Series of Hawaii GSP.
Refer to comparison of USA and Hawaii GDP and GSP.
Hawaii GSP (1997)
Consumption46%
Investment6%
Government22%
Visitor21%
Other Exp5%
Consumption
Investment
Government
Visitor
Other Exp
GDP, Life Expectancy, and GDP, Life Expectancy, and LiteracyLiteracy
Country Real GDP Per Person (1997)
Life Expectancy Adult Literacy
USA $29,010 77 years 99%
Japan 24,070 80 99
Germany 21,260 77 99
Mexico 8,370 72 90
Brazil 6,480 67 84
Russia 4,370 67 99
Indonesia 3,490 65 85
China 3,130 70 83
India 1,670 63 53
Pakistan 1,560 64 41
Bangladesh 1,050 58 39
Nigeria 920 50 59