the data of macroeconomics 10 -...

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Copyright © 2004 South-Western

1010Measuring a Nation’s

Income


The Data of Macroeconomics

• The rest of the quarter: Macroeconomics.Looking at GDP, inflation, unemployment…

• Chapter 10: Measuring a Nation’s Income• Principle 8: A Country’s Standard of Living

Depends on Its Ability to Produce Goods andServices.


Measuring a Nation’s Income

• Two branches of Economics:• Microeconomics

• Microeconomics is the study of how individual householdsand firms make decisions and how they interact with oneanother in markets.

• 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.• Much of the economy revolves around certain

macroeconomic terms, such as GDP and unemployment.These are the kinds of variables that influence the USeconomy.


Measuring a Nation’s Income

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

others?• Why do prices rise rapidly in some time periods while they

are more stable in others?• Why do production and employment expand in some years

and contract in others?• In this chapter and the next, we’ll be attempting to answer

the following question. How do we monitor theperformance of the overall economy? In this chapterlooking at GDP deflator and next chapter we’ll be looking atCPI.

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THE MEASUREMENT OF GROSSDOMESTIC PRODUCT

• What is GDP?• Gross domestic product (GDP) is a measure of

the income and expenditures of an economy.• More intuitively: It is the total market value of

all final goods and services produced within acountry in a given period of time.


THE ECONOMY’S INCOME ANDEXPENDITURE

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

of income for some seller.• A good explanation is the circular-flow

diagram, but I wouldn’t focus to much on thediagram.


THE COMPONENTS OF GDP

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

consumed at home and that never enter themarketplace.

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



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

Y = C + I + G + NX• GDP includes all of these various forms of

spending on domestically produced goods andservices. Y could be interpreted as income andthe RHS could be interpreted as expenditures.

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• 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, andstructures, 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 producedgoods or services (A more advancedmacroeconomic class deals with this issue oftransfer payments).

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


REAL VERSUS NOMINAL GDP

• If GDP rises from one year to the next, twothings must be true: (1) the economy isproducing a larger output of goods and services,or (2) goods and services are being sold athigher prices.

• Nominal GDP values the production of goodsand services at current prices.

• Real GDP values the production of goods andservices at constant prices.

• As an economist, we want to separate the two.


REAL VERSUS NOMINAL GDP

• Putting together the nominal GDP and realGDP gives us more or less an indication of theeconomy.

• An accurate view of the economy requiresadjusting nominal to real GDP by using theGDP deflator.

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Table 2 Real and Nominal GDP

Copyright©2004 South-Western

Calculate nominal GDP, real GDP, calculate GDP deflator… Justsuppose economy has only two goods: hot dogs and hamburgers.LA: See notes, write out table…



Lets calculate Nominal GDP.Once again, what’s Nominal GDP?Nominal GDP values the production of goods and services atcurrent prices.



Next, let’s calculate real GDP, which is the production of goods andservices valued at constant prices. What is the meaning of constantprice? You must pick a base year. In this case, 2001 is the baseyear?


The GDP Deflator

• The GDP deflator is a measure of the pricelevel calculated as the ratio of nominal GDP toreal GDP times 100.

• Intuitively: It tells us the rise in prices ratherthan a rise in the quantities produced. This isour goal from the beginning, separate the outputand prices.

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The GDP Deflator

• The GDP deflator is calculated as follows:

GDP deflator =Nominal GDP

Real GDP!100



This is just one measurement to measure the prices in theeconomy. In the next chapter, we’ll look at another one - theconsumer price index (CPI).

GDP deflator =Nominal GDP

Real GDP!100

Remember, it tells us the rise in nominal GDP that is attributableto a rise in prices rather than a rise in the quantities produced.

Figure 2 Real GDP in the United States over the last 30years

Billions of1996 Dollars

$10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,0001970 1975 1980 1985 1990 20001995


Most obvious feature is that real GDP grows over time.

2nd feature: Real GDP not steady. When real GDP declines, it’s a recessionand these are identified by the shaded areas.


GDP AND ECONOMIC WELL-BEING

• GDP is the best single measure of the economicwell-being of a society.

• GDP per person tells us the income andexpenditure of the average person in theeconomy.

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GDP AND ECONOMIC WELL-BEING

• GDP is not a perfect measure of the happinessor quality of life, however.

• Great quote on p. 216 discussing how GDPdoesn’t measure certain items. He’s correct andincorrect at the same time. In this book, itstates, “GDP does not directly measure certainquality of life that makes life worthwhile, but itdoes measure our ability to obtain the inputsinto a worthwhile life.’


GDP AND ECONOMICWELL-BEING

• Some things that contribute to well-being arenot 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 timeparents spend with their children and the value ofvolunteer work.


Summary

• Because every transaction has a buyer and aseller, the total expenditure in the economymust equal the total income in the economy.

• Gross Domestic Product (GDP) measures aneconomy’s total expenditure on newly producedgoods and services and the total income earnedfrom the production of these goods andservices.


Summary

• GDP is the market value of all final goods andservices produced within a country in a givenperiod of time.

• GDP is divided among four components ofexpenditure: consumption, investment,government purchases, and net exports.

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Summary

• Nominal GDP uses current prices to value theeconomy’s production. Real GDP uses constantbase-year prices to value the economy’sproduction of goods and services.

• The GDP deflator—calculated from the ratio ofnominal to real GDP—measures the level ofprices in the economy!!! Must know how tocalculate GDP deflator.


Summary

• GDP is a good measure of economic well-beingbecause people prefer higher to lower incomes.

• It is not a perfect measure of well-beingbecause some things, such as leisure time and aclean environment, aren’t measured by GDP.

the data of macroeconomics 10 -...

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