-
In this chapter, look for the answers to these questions:What is
Gross Domestic Product (GDP)? How is GDP related to a nations total
income and spending? What are the components of GDP? How is GDP
corrected for inflation?Does GDP measure societys well-being?*
-
MEASURING A NATIONS INCOME*Micro vs. MacroMicroeconomics: The
study of how individual households and firms make decisions,
interact with one another in markets.Macroeconomics: The study of
the economy as a whole.We begin our study of macroeconomics with
the countrys total income and expenditure.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Income and ExpenditureGross Domestic
Product (GDP) measures total income of everyone in the economy. GDP
also measures total expenditure on the economys output of g&s.
For the economy as a whole, income equals expenditure because every
dollar a buyer spends is a dollar of income for the seller.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*The Circular-Flow Diagrama simple
depiction of the macroeconomyillustrates GDP as spending, revenue,
factor payments, and incomePreliminaries:Factors of production are
inputs like labor, land, capital, and natural resources. Factor
payments are payments to the factors of production (e.g., wages,
rent).
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*The Circular-Flow
DiagramHouseholds:own the factors of production, sell/rent them to
firms for incomebuy and consume goods & servicesFirms:buy/hire
factors of production, use them to produce goods and servicessell
goods & services
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*The Circular-Flow Diagram
MEASURING A NATIONS INCOME
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MEASURING A NATIONS INCOME*What This Diagram OmitsThe
governmentcollects taxes, buys g&sThe financial systemmatches
savers supply of funds with borrowers demand for loansThe foreign
sectortrades g&s, financial assets, and currencies with the
countrys residents
MEASURING A NATIONS INCOME
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MEASURING A NATIONS INCOME*the market value of all final goods
& services produced within a country in a given period of
time.Gross Domestic Product (GDP) IsGoods are valued at their
market prices, so:All goods measured in the same units (e.g.,
dollars in the U.S.)Things that dont have a market value are
excluded, e.g., housework you do for yourself.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*the market value of all final goods
& services produced within a country in a given period of
time.Gross Domestic Product (GDP) IsFinal goods: intended for the
end user Intermediate goods: used as components or ingredients in
the production of other goods GDP only includes final goods they
already embody the value of the intermediate goods used in their
production.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*the market value of all final goods
& services produced within a country in a given period of
time.Gross Domestic Product (GDP) IsGDP includes tangible goods
(like DVDs, mountain bikes, beer)and intangible services (dry
cleaning, concerts, cell phone service).
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*the market value of all final goods
& services produced within a country in a given period of
time.Gross Domestic Product (GDP) IsGDP includes currently produced
goods, not goods produced in the past.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*the market value of all final goods
& services produced within a country in a given period of
time.Gross Domestic Product (GDP) IsGDP measures the value of
production that occurs within a countrys borders, whether done by
its own citizens or by foreigners located there.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*the market value of all final goods
& services produced within a country in a given period of
time.Gross Domestic Product (GDP) IsUsually a year or a quarter (3
months)
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*The Components of GDPRecall: GDP is
total spending. Four components:Consumption (C)Investment
(I)Government Purchases (G)Net Exports (NX)These components add up
to GDP (denoted Y):Y = C + I + G + NX
MEASURING A NATIONS INCOME
-
GDPIf, Income = ExpenditureAnd, Income (Y) = ExpenditureGDP base
on expenditure is C + I + G + NXThen Y = C + I + G + NXMEASURING A
NATIONS INCOME*
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Consumption (C)is total spending by
households on g&s. Note on housing costs: For renters,
consumption includes rent payments. For homeowners, consumption
includes the imputed rental value of the house, but not the
purchase price or mortgage payments.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Investment (I)is total spending on
goods that will be used in the future to produce more goods.
includes spending oncapital equipment (e.g., machines,
tools)structures (factories, office buildings, houses)inventories
(goods produced but not yet sold)Note: Investment does not mean the
purchase of financial assets like stocks and bonds.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Government Purchases (G)is all
spending on the g&s purchased by govt at the federal, state,
and local levels.G excludes transfer payments, such as Social
Security or unemployment insurance benefits. They are not purchases
of g&s.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Net Exports (NX)NX = exports(X)
imports (M)Exports represent foreign spending on the economys
g&s. Imports are the portions of C, I, and G that are spent on
g&s produced abroad. Adding up all the components of GDP
gives:Y = C + I + G + NX
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*U.S. GDP and Its Components, 2007
MEASURING A NATIONS INCOME
-
In each of the following cases, determine how much GDP and each
of its components is affected (if at all).A.Debbie spends $200 to
buy her husband dinner at the finest restaurant in Boston.B.Sarah
spends $1800 on a new laptop to use in her publishing business. The
laptop was built in China. C.Jane spends $1200 on a computer to use
in her editing business. She got last years model on sale for a
great price from a local manufacturer. D.General Motors builds $500
million worth of cars, but consumers only buy $470 million worth of
them.A C T I V E L E A R N I N G 1 GDP and its components
-
A.Debbie spends $200 to buy her husband dinner at the finest
restaurant in Boston.Consumption and GDP rise by $200. B.Sarah
spends $1800 on a new laptop to use in her publishing business. The
laptop was built in China. Investment rises by $1800, net exports
fall by $1800, GDP is unchanged.A C T I V E L E A R N I N G 1
Answers*
-
C.Jane spends $1200 on a computer to use in her editing
business. She got last years model on sale for a great price from a
local manufacturer. Current GDP and investment do not change,
because the computer was built last year.D.General Motors builds
$500 million worth of cars, but consumers only buy $470 million of
them.Consumption rises by $470 million, inventory investment rises
by $30 million, and GDP rises by $500 million.A C T I V E L E A R N
I N G 1 Answers*
-
Measuring GDPMEASURING A NATIONS INCOME*
MEASURING A NATIONS INCOME
-
* of 35Calculating GDPexpenditure approach A method of computing
GDP that measures the total amount spent on all final goods and
services during a given period.income approach A method of
computing GDP that measures the incomewages, rents, interest, and
profitsreceived by all factors of production in producing final
goods and services. Output approach A method of computing GDP from
the output of each firm or supplier according to the
sectors/industry. Example agriculture, manufacturing, services
MEASURING A NATIONS INCOME
-
* of 35Calculating GDPThe Expenditure ApproachThere are four
main categories of expenditure: Personal consumption expenditures
(C): household spending on consumer goods
Gross private domestic investment (I): spending by firms and
households on new capital, that is, plant, equipment, inventory,
and new residential structures
Government consumption and gross investment (G)
Net exports (EX - IM): net spending by the rest of the world, or
exports (EX) minus imports (IM)GDP = C + I + G + (EX - IM)
MEASURING A NATIONS INCOME
-
* of 35Calculating GDPThe Expenditure Approach
TABLE 21.2 Components of U.S. GDP, 2007: The Expenditure
ApproachBillions Of DollarsPercentage of GDPPersonal consumption
expenditures (C)9,734.270.3Durable goods1,078.27.8Nondurable
goods2,833.220.5Services5,822.842.1Gross private domestic
investment
(l)2,125.415.4Nonresidential1,481.810.7Residential640.74.6Change in
business inventories2.90.0Government consumption and gross
investment (G)2,689.819.4Federal976.07.1State and
local1,713.812.4Net exports (EX IM)-708.0- 5.1Exports
(EX)1,643.011.9Imports (IM)2,351.017.0Gross domestic
product13,841.3100.0Note: Numbers may not add exactly because of
rounding. Source: U.S. Department of Commerce, Bureau of Economic
Analysis.
MEASURING A NATIONS INCOME
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* of 35Calculating GDPThe Income Approachnational income The
total income earned by the factors of production owned by a
countrys citizens.
TABLE 21.3 National Income, 2007Billions of DollarsPercentage of
National IncomeNational Income12,221.1100.0Compensation of
employees7,874.264.4Proprietors income1,042.68.5Rental
income65.40.5Corporate profits1,598.213.1Net interest602.64.9
Indirect taxes minus subsidies961.47.9Net business transfer
payments94.20.8Surplus of government enterprises-14.5-0.1Source:
See Table 6.2.
MEASURING A NATIONS INCOME
-
* of 35Calculating GDPThe Income Approachcompensation of
employees Includes wages, salaries, and various supplementsemployer
contributions to social insurance and pension funds, for
examplepaid to households by firms and by the government.
proprietors income The income of unincorporated businesses. rental
income The income received by property owners in the form of
rent.corporate profits The income of corporations.net interest The
interest paid by business.
MEASURING A NATIONS INCOME
-
* of 35Calculating GDPThe Income Approachindirect taxes minus
subsidies Taxes such assales taxes, customs duties, and license
fees less subsidies that the government pays for which it receives
no goods or services in return.net business transfer payments Net
transferpayments by businesses to others.surplus of government
enterprises Income ofgovernment enterprises.
MEASURING A NATIONS INCOME
-
* of 35Calculating GDPThe Income Approach
TABLE 21.4 GDP, GNP, NNP and National Income, 2007Dollars
(Billions)GDP13,841.3Plus: Receipts of factor income from the rest
of the world+ 817.5Less: Payments of factor income to the rest of
the world - 721.8Equals: GNP13,937.1Less: Depreciation-
1,686.6Equals: Net national product (NNP)12,250.5Less: Statistical
discrepancy - 29.4Equals: National income12,221.1Source: See Table
6.2.
MEASURING A NATIONS INCOME
-
Output Methods* of 35
-
* of 35Gross National ProductExclusion of Output Produced Abroad
by Domestically Owned Factors of Production GDP is the value of
output produced by factors of production located within a
country.gross national product (GNP) The total market value of all
final goods and services produced within a given period by factors
of production owned by a countrys citizens, regardless of where the
output is produced.
GNP = GDP + foreign capital inflow foreign capital outflow
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Real versus Nominal GDPInflation can
distort economic variables like GDP, so we have two versions of
GDP: One is corrected for inflation, the other is not. Nominal GDP
values output using current prices. It is not corrected for
inflation. Real GDP values output using the prices of a base year.
Real GDP is corrected for inflation.
MEASURING A NATIONS INCOME
-
Real and Nominal GDPYear 1 = 500units x $1 = $500 Year 2 = 600
units x $2 = $1200Nominal GDP Y2Year 2 = 600 units x $1 = $600 Real
GDP Y2
Year 1 = 500units x $1 = $500Year 2 = 500 units x $2 =
$1000(Inflation)
MEASURING A NATIONS INCOME*
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*EXAMPLE:Compute nominal GDP in each
year:2005:$10 x 400 + $2 x 1000 = $6,0002006:$11 x 500 + $2.50 x
1100 = $8,2502007:$12 x 600 + $3 x 1200 = $10,800Increase:
PizzaLatteyearPQPQ2005$10400$2.0010002006$11500$2.5011002007$12600$3.001200
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*EXAMPLE:Compute real GDP in each
year, using 2005 as the base year:Increase:2005:$10 x 400 + $2 x
1000 = $6,0002006:$10 x 500 + $2 x 1100 = $7,2002007:$10 x 600 + $2
x 1200 = $8,400
PizzaLatteyearPQPQ2005$10400$2.0010002006$11500$2.5011002007$12600$3.001200
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*EXAMPLE:In each year,nominal GDP is
measured using the (then) current prices. real GDP is measured
using constant prices from the base year (2005 in this
example).
yearNominal GDPReal
GDP2005$6000$60002006$8250$72002007$10,800$8400
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*EXAMPLE:The change in nominal GDP
reflects both prices and quantities. The change in real GDP is the
amount that GDP would change if prices were constant (i.e., if zero
inflation). Hence, real GDP is corrected for inflation.
yearNominal GDPReal
GDP2005$6000$60002006$8250$72002007$10,800$8400
MEASURING A NATIONS INCOME
-
Nominal and Real GDP in the U.S., 1965-2007Real GDP (base year
2000)Nominal GDP*
graph--nom & real GDP
237.21570.5
240.51568.7
244.61568
254.41590.9
260.41616.1
267.31644.6
273.91654.1
275.21658
2701633.2
266.21628.4
267.71646.7
265.21629.9
275.21696.8
284.61747.3
3021815.8
313.41848.9
3291871.3
336.71903.1
343.61941.1
3481944.4
351.31964.7
352.21966
358.51978.8
371.42043.8
378.42082.3
3822098.1
381.12085.4
375.92052.5
375.32042.4
3762044.3
380.82066.9
389.52107.8
402.62168.5
410.92204
419.52233.4
4262245.3
428.32234.8
434.22252.5
439.32249.8
448.12286.5
457.22300.3
459.22294.6
466.42317
461.52292.5
4542230.2
458.12243.4
471.72295.2
4852348
495.42392.9
508.42455.8
509.32453.9
513.22462.6
526.92517.4
526.12504.8
528.92508.7
523.62476.2
527.92491.2
5392538
549.42579.1
562.52631.8
5762679.1
583.22708.4
5902733.3
593.32740
602.42775.9
611.22810.6
623.92863.5
633.52885.8
649.62950.5
658.82984.8
670.53025.5
675.63033.6
695.73108.2
708.13150.2
725.23214.1
747.53291.8
770.83372.3
779.93384
793.43406.3
807.13433.7
817.93464.1
822.53464.3
837.13491.8
852.83518.2
879.93590.7
904.23651.6
919.43676.5
936.33692
9613750.2
976.33760.9
996.53784.2
1004.63766.3
1017.33760
1033.23767.1
1050.73800.5
1052.93759.8
1098.33864.1
1119.13885.9
1139.33916.7
1151.73927.9
1190.63997.7
1225.94092.1
1249.74131.1
12874198.7
1335.54305.3
1371.94355.1
1391.24331.9
1432.34373.3
14474335.4
1485.34347.9
1514.24305.8
1553.44288.9
15704237.6
1605.64268.6
1663.14340.9
1714.64397.8
1772.64496.8
1804.94530.3
1838.34552
1885.34584.6
1939.34640
20064731.1
2066.84815.8
2111.64815.3
21504830.8
2275.65021.2
2336.25070.7
24175137.4
2464.45147.4
2527.65152.3
2600.75189.4
2660.55204.7
2725.35221.3
2729.35115.9
2786.65107.4
2916.95202.1
3052.75307.5
3085.95266.1
3178.75329.8
3196.45263.4
3186.85177.1
3242.75204.9
3276.25185.2
3314.45189.8
3382.95253.8
3484.15372.3
3589.35478.4
3690.45590.5
3809.65699.8
3908.65797.9
3978.25854.3
4036.35902.4
4119.55956.9
4178.46007.8
4261.36101.7
4321.86148.6
4385.66207.4
4425.76232
4493.96291.7
4546.16323.4
4613.86365
46906435
4767.86493.4
4886.36606.8
4951.96639.1
5062.86723.5
5146.66759.4
5253.76848.6
5367.16918.1
5454.16963.5
5531.97013.1
5584.37030.9
5716.47112.1
5797.77130.3
5849.47130.8
5848.87076.9
58887040.8
5964.37086.5
6035.67120.7
6095.87154.1
6196.17228.2
6290.17297.9
6380.57369.5
6484.37450.7
6542.77459.7
6612.17497.5
6674.67536
6800.27637.4
69117715.1
7030.67815.7
7115.17859.5
7232.27951.6
7298.37973.7
7337.77988
7432.18053.1
7522.58112
7624.18169.2
7776.68303.1
7866.28372.7
8000.48470.6
8113.88536.1
8250.48665.8
8381.98773.7
8471.28838.4
8586.78936.2
8657.98995.3
8789.59098.9
8953.89237.1
9066.69315.5
9174.19392.6
9313.59502.2
9519.59671.1
9629.49695.6
9822.89847.9
9862.19836.6
9953.69887.7
10021.59875.6
10128.99905.9
10135.19871.1
10226.39910
10333.39977.3
10426.610031.6
10527.410090.7
10591.110095.8
10705.610126
10831.810212.7
11086.110398.7
11219.510467
11430.910566.3
11649.310671.5
11799.410753.3
11970.310822.9
12173.210913.8
12346.111001.8
12573.511115.1
12730.511163.8
13008.411316.4
13197.311388.1
13322.611443.5
13458.211513
Nominal GDP
Real GDP (base year = 2000)
Billions
GDP data
GDP = nominal GDP, billions of current dollars, seasonally
adjusted annual rate.
RGDP = real GDP, billions of chained 2000 dollars, seasonally
adjusted annual rate.
notes:A Guide to the National Income and Product Accounts of the
United
States (NIPA) - (http://www.bea.doc.gov/bea/an/nipaguid.pdf)
the source I used:http://research.stlouisfed.org/fred2/
original source:U.S. Department of Commerce: Bureau of Economic
Analysis
datex-axisNominal GDPReal GDP (base year = 2000)
1947-01-011947237.21570.5
1947-04-011947.25240.51568.7
1947-07-011947.5244.61568.0
1947-10-011947.75254.41590.9
1948-01-011948260.41616.1
1948-04-011948.25267.31644.6
1948-07-011948.5273.91654.1
1948-10-011948.75275.21658.0
1949-01-011949270.01633.2
1949-04-011949.25266.21628.4
1949-07-011949.5267.71646.7
1949-10-011949.75265.21629.9
1950-01-011950275.21696.8
1950-04-011950.25284.61747.3
1950-07-011950.5302.01815.8
1950-10-011950.75313.41848.9
1951-01-011951329.01871.3
1951-04-011951.25336.71903.1
1951-07-011951.5343.61941.1
1951-10-011951.75348.01944.4
1952-01-011952351.31964.7
1952-04-011952.25352.21966.0
1952-07-011952.5358.51978.8
1952-10-011952.75371.42043.8
1953-01-011953378.42082.3
1953-04-011953.25382.02098.1
1953-07-011953.5381.12085.4
1953-10-011953.75375.92052.5
1954-01-011954375.32042.4
1954-04-011954.25376.02044.3
1954-07-011954.5380.82066.9
1954-10-011954.75389.52107.8
1955-01-011955402.62168.5
1955-04-011955.25410.92204.0
1955-07-011955.5419.52233.4
1955-10-011955.75426.02245.3
1956-01-011956428.32234.8
1956-04-011956.25434.22252.5
1956-07-011956.5439.32249.8
1956-10-011956.75448.12286.5
1957-01-011957457.22300.3
1957-04-011957.25459.22294.6
1957-07-011957.5466.42317.0
1957-10-011957.75461.52292.5
1958-01-011958454.02230.2
1958-04-011958.25458.12243.4
1958-07-011958.5471.72295.2
1958-10-011958.75485.02348.0
1959-01-011959495.42392.9
1959-04-011959.25508.42455.8
1959-07-011959.5509.32453.9
1959-10-011959.75513.22462.6
1960-01-011960526.92517.4
1960-04-011960.25526.12504.8
1960-07-011960.5528.92508.7
1960-10-011960.75523.62476.2
1961-01-011961527.92491.2
1961-04-011961.25539.02538.0
1961-07-011961.5549.42579.1
1961-10-011961.75562.52631.8
1962-01-011962576.02679.1
1962-04-011962.25583.22708.4
1962-07-011962.5590.02733.3
1962-10-011962.75593.32740.0
1963-01-011963602.42775.9
1963-04-011963.25611.22810.6
1963-07-011963.5623.92863.5
1963-10-011963.75633.52885.8
1964-01-011964649.62950.5
1964-04-011964.25658.82984.8
1964-07-011964.5670.53025.5
1964-10-011964.75675.63033.6
1965-01-011965695.73108.2
1965-04-011965.25708.13150.2
1965-07-011965.5725.23214.1
1965-10-011965.75747.53291.8
1966-01-011966770.83372.3
1966-04-011966.25779.93384.0
1966-07-011966.5793.43406.3
1966-10-011966.75807.13433.7
1967-01-011967817.93464.1
1967-04-011967.25822.53464.3
1967-07-011967.5837.13491.8
1967-10-011967.75852.83518.2
1968-01-011968879.93590.7
1968-04-011968.25904.23651.6
1968-07-011968.5919.43676.5
1968-10-011968.75936.33692.0
1969-01-011969961.03750.2
1969-04-011969.25976.33760.9
1969-07-011969.5996.53784.2
1969-10-011969.751004.63766.3
1970-01-0119701017.33760.0
1970-04-011970.251033.23767.1
1970-07-011970.51050.73800.5
1970-10-011970.751052.93759.8
1971-01-0119711098.33864.1
1971-04-011971.251119.13885.9
1971-07-011971.51139.33916.7
1971-10-011971.751151.73927.9
1972-01-0119721190.63997.7
1972-04-011972.251225.94092.1
1972-07-011972.51249.74131.1
1972-10-011972.751287.04198.7
1973-01-0119731335.54305.3
1973-04-011973.251371.94355.1
1973-07-011973.51391.24331.9
1973-10-011973.751432.34373.3
1974-01-0119741447.04335.4
1974-04-011974.251485.34347.9
1974-07-011974.51514.24305.8
1974-10-011974.751553.44288.9
1975-01-0119751570.04237.6
1975-04-011975.251605.64268.6
1975-07-011975.51663.14340.9
1975-10-011975.751714.64397.8
1976-01-0119761772.64496.8
1976-04-011976.251804.94530.3
1976-07-011976.51838.34552.0
1976-10-011976.751885.34584.6
1977-01-0119771939.34640.0
1977-04-011977.252006.04731.1
1977-07-011977.52066.84815.8
1977-10-011977.752111.64815.3
1978-01-0119782150.04830.8
1978-04-011978.252275.65021.2
1978-07-011978.52336.25070.7
1978-10-011978.752417.05137.4
1979-01-0119792464.45147.4
1979-04-011979.252527.65152.3
1979-07-011979.52600.75189.4
1979-10-011979.752660.55204.7
1980-01-0119802725.35221.3
1980-04-011980.252729.35115.9
1980-07-011980.52786.65107.4
1980-10-011980.752916.95202.1
1981-01-0119813052.75307.5
1981-04-011981.253085.95266.1
1981-07-011981.53178.75329.8
1981-10-011981.753196.45263.4
1982-01-0119823186.85177.1
1982-04-011982.253242.75204.9
1982-07-011982.53276.25185.2
1982-10-011982.753314.45189.8
1983-01-0119833382.95253.8
1983-04-011983.253484.15372.3
1983-07-011983.53589.35478.4
1983-10-011983.753690.45590.5
1984-01-0119843809.65699.8
1984-04-011984.253908.65797.9
1984-07-011984.53978.25854.3
1984-10-011984.754036.35902.4
1985-01-0119854119.55956.9
1985-04-011985.254178.46007.8
1985-07-011985.54261.36101.7
1985-10-011985.754321.86148.6
1986-01-0119864385.66207.4
1986-04-011986.254425.76232.0
1986-07-011986.54493.96291.7
1986-10-011986.754546.16323.4
1987-01-0119874613.86365.0
1987-04-011987.254690.06435.0
1987-07-011987.54767.86493.4
1987-10-011987.754886.36606.8
1988-01-0119884951.96639.1
1988-04-011988.255062.86723.5
1988-07-011988.55146.66759.4
1988-10-011988.755253.76848.6
1989-01-0119895367.16918.1
1989-04-011989.255454.16963.5
1989-07-011989.55531.97013.1
1989-10-011989.755584.37030.9
1990-01-0119905716.47112.1
1990-04-011990.255797.77130.3
1990-07-011990.55849.47130.8
1990-10-011990.755848.87076.9
1991-01-0119915888.07040.8
1991-04-011991.255964.37086.5
1991-07-011991.56035.67120.7
1991-10-011991.756095.87154.1
1992-01-0119926196.17228.2
1992-04-011992.256290.17297.9
1992-07-011992.56380.57369.5
1992-10-011992.756484.37450.7
1993-01-0119936542.77459.7
1993-04-011993.256612.17497.5
1993-07-011993.56674.67536.0
1993-10-011993.756800.27637.4
1994-01-0119946911.07715.1
1994-04-011994.257030.67815.7
1994-07-011994.57115.17859.5
1994-10-011994.757232.27951.6
1995-01-0119957298.37973.7
1995-04-011995.257337.77988.0
1995-07-011995.57432.18053.1
1995-10-011995.757522.58112.0
1996-01-0119967624.18169.2
1996-04-011996.257776.68303.1
1996-07-011996.57866.28372.7
1996-10-011996.758000.48470.6
1997-01-0119978113.88536.1
1997-04-011997.258250.48665.8
1997-07-011997.58381.98773.7
1997-10-011997.758471.28838.4
1998-01-0119988586.78936.2
1998-04-011998.258657.98995.3
1998-07-011998.58789.59098.9
1998-10-011998.758953.89237.1
1999-01-0119999066.69315.5
1999-04-011999.259174.19392.6
1999-07-011999.59313.59502.2
1999-10-011999.759519.59671.1
2000-01-0120009629.49695.6
2000-04-012000.259822.89847.9
2000-07-012000.59862.19836.6
2000-10-012000.759953.69887.7
2001-01-01200110021.59875.6
2001-04-012001.2510128.99905.9
2001-07-012001.510135.19871.1
2001-10-012001.7510226.39910.0
2002-01-01200210333.39977.3
2002-04-012002.2510426.610031.6
2002-07-012002.510527.410090.7
2002-10-012002.7510591.110095.8
2003-01-01200310705.610126.0
2003-04-012003.2510831.810212.7
2003-07-012003.511086.110398.7
2003-10-012003.7511219.510467.0
2004-01-01200411430.910566.3
2004-04-012004.2511649.310671.5
2004-07-012004.511799.410753.3
2004-10-012004.7511970.310822.9
2005-01-01200512173.210913.8
2005.2512346.111001.8
2005.512573.511115.1
2005.7512730.511163.8
200613008.411316.4
2006.2513197.311388.1
2006.513322.611443.5
2006.7513458.211513.0
2007
-
MEASURING A NATIONS INCOME*The GDP DeflatorThe GDP deflator is a
measure of the overall level of prices. Definition:One way to
measure the economys inflation rate is to compute the percentage
increase in the GDP deflator from one year to the next.
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*EXAMPLE:Compute the GDP deflator in
each year:
yearNominal GDPReal GDPGDP
Deflator2005$6000$60002006$8250$72002007$10,800$8400
MEASURING A NATIONS INCOME
-
A C T I V E L E A R N I N G 2 Computing GDP*Use the above data
to solve these problems:A. Compute nominal GDP in 2007.B. Compute
real GDP in 2008. C. Compute the GDP deflator in 2009.
2007 (base yr)20082009PQPQPQGood A$30900$311,000$361050Good
B$100192$102200$100205
-
A C T I V E L E A R N I N G 2 Answers*A.Compute nominal GDP in
2007.$30 x 900 + $100 x 192 = $46,200B.Compute real GDP in 2008.
$30 x 1000 + $100 x 200 = $50,000
2007 (base yr)20082009PQPQPQGood A$30900$311,000$361050Good
B$100192$102200$100205
-
A C T I V E L E A R N I N G 2 Answers*C.Compute the GDP deflator
in 2009. Nom GDP = $36 x 1050 + $100 x 205 = $58,300 Real GDP = $30
x 1050 + $100 x 205 = $52,000 GDP deflator = 100 x (Nom GDP)/(Real
GDP) = 100 x ($58,300)/($52,000) = 112.1
2007 (base yr)20082009PQPQPQGood A$30900$311,000$361050Good
B$100192$102200$100205
-
MEASURING A NATIONS INCOME*GDP and Economic Well-BeingReal GDP
per capita is the main indicator of the average persons standard of
living.GDP measures the income and expenditure in the country GDP
per capita meaures the average income and expenditure of a person
living in the country.But GDP is not a perfect measure of social
well-being. Robert Kennedy issued a very eloquent yet harsh
criticism of GDP:
MEASURING A NATIONS INCOME
-
Gross Domestic Product does not allow for the health of our
children, the quality of their education, or the joy of their play.
It does not include the beauty of our poetry or the strength of our
marriages, the intelligence of our public debate or the integrity
of our public officials. It measures neither our courage, nor our
wisdom, nor our devotion to our country. It measures everything, in
short, except that which makes life worthwhile, and it can tell us
everything about America except why we are proud that we are
Americans.- Senator Robert Kennedy, 1968*
-
MEASURING A NATIONS INCOME*GDP Does Not Value:the quality of the
environmentleisure timenon-market activity, such as the child care
a parent provides his or her child at homean equitable distribution
of income
MEASURING A NATIONS INCOME
-
MEASURING A NATIONS INCOME*Then Why Do We Care About GDP?Having
a large GDP enables a country to afford better schools, a cleaner
environment, health care, etc. Many indicators of the quality of
life are positively correlated with GDP. For example
MEASURING A NATIONS INCOME
-
GDP and Life Expectancy in 12 countries*Life expectancy
(years)Real GDP per
capitaU.S.GermanyJapanMexicoRussiaBrazilChinaIndiaIndonesiaPakistanBangladeshNigeria
-
GDP and Literacy in 12 countries*Adult Literacy (% of
population)Real GDP per
capitaU.S.GermanyJapanMexicoRussiaBrazilChinaIndiaIndonesiaNigeriaPakistanBangladesh
-
GDP and Internet Usage in 12 countries*Internet Usage (% of
population)Real GDP per
capitaU.S.GermanyJapanMexicoRussiaBrazilChinaIndiaIndonesiaNigeriaBangladeshPakistan
-
CHAPTER SUMMARYGross Domestic Product (GDP) measures a countrys
total income and expenditure.The four spending components of GDP
include: Consumption, Investment, Government Purchases, and Net
Exports.Nominal GDP is measured using current prices. Real GDP is
measured using the prices of a constant base year and is corrected
for inflation. GDP is the main indicator of a countrys economic
well-being, even though it is not perfect.*
*It would be helpful to have your students bring their
calculators to class for this chapter so they can practice
calculating real and nominal GDP and so forth.
This is the first purely macro chapter in the textbook. It
covers the definition of GDP, the spending components of GDP, real
vs. nominal GDP, the GDP deflator, and why GDP is a useful but not
perfect measure of a nations well-being.***This is the first
strictly macro chapter of the textbook, so its worth spending a
moment emphasizing the difference between microeconomics and
macroeconomics.
Examples of questions that microeconomics seeks to answer:How do
consumers decide how much of each good to buy?How do firms decide
how much output to produce and what price to charge? What
determines the price and quantity of individual goods and services?
How do taxes on specific goods and services affect the allocation
of resources?
Examples of questions that macroeconomics seeks to answer:How do
consumers decide how to divide their income between spending and
saving? What determines the total amount of employment and
unemployment? What determines the overall level of prices and the
rate of inflation? Why does the economy go through cycles, where
things are great for a few years (like the late 90s) and then lousy
for a year or two (like 2001-2002)?When unemployment is high, what
can the government do to help?
**Notes:
1. The text in the first bullet point is NOT the formal textbook
definition of GDP. The formal definition is given and discussed in
detail immediately after the Circular-Flow Diagram.
2. g&s = goods and services
A good way to judge how well someone is doing economically is to
look at his or her income. We can judge how well a country is doing
economically by looking at the total income that everyone in the
economy is earning. GDP is our measure of the economys total
income, often called national income.
GDP also measures total expenditure on the goods and services
produced in the economy, and the value of the economys output
(production) of goods and services. Thus, GDP is also referred to
as output.
The equality of income and expenditure is an accounting identity
(not, for example, an equilibrium condition): it must be true that
income equals expenditure. **If your students already know the
terms factors of production and factor payments, you may wish to
delete the preliminaries from this slide. **This and the following
slide build the Circular-Flow Diagram piece by piece.
**In this diagram, the green arrows represent flows of
income/payments. The red arrows represent flows of goods &
services (including services of the factors of production in the
lower half of the diagram).
To keep the graph simple, we have omitted the government,
financial system, and foreign sector, as discussed on the next
slide.
Changing the animation on this slide:If you wish, you can easily
change the order in which the markets and arrows appear. From the
Slide Show drop-down menu, choose Custom Animation Then, a box will
appear (maybe along the right-hand-side of your PowerPoint window)
that allows you to modify the order in which things appear (as well
as other aspects of the animation). For further information, open
PowerPoint help and search on change the sequence of animations.
**In future chapters, we will study the role of each of these in
greater detail.
We could draw a more complicated circular flow diagram that
includes the government, financial system, and foreign sector.
Including them, however, would not change the basic conclusion that
GDP simultaneously measures the countrys total income, expenditure,
revenue, and factor payments.
**This slide and the five that follow focus on the meaning of
each part of this critically important definition.
Note that transactions occurring in the so-called underground
economy are also omitted from the official measure of GDP. In the
textbook, near the end of this chapter, an In the News box contains
an excellent article on the underground economy. ************Each
of the four components is defined and discussed in detail on the
following slides.
**Mostly, the term consumption refers to what students probably
already think of as total consumer spending. The note about the
treatment of owner-occupied housing is an exception, and some of
the test bank questions are designed to see if students remember
this exception.
(For more on this issue, see the notes accompanying the
following slide.) **More on the treatment of owner-occupied
housing:
In the national income and product accounts, a house is
considered a piece of capital that is used to produce a flow of
services housing services.
When a consumer (as a tenant) rents a house or apartment, the
consumer is buying housing services. These services are considered
consumption, so the price paid for these services rent is counted
in the consumption component of GDP .
When someone buys a new house to live in, she is both a producer
and a consumer. As a producer, she has made an investment (the
purchase of the house) that will produce a service. She is also the
consumer of this service, which is valued at the market rental rate
for that type of house. So, the accounting conventions treat this
situation as if the person is her own landlord and rents the house
to/from herself.
When students begin to understand this, they may wonder why
certain other goods (like cars) that produce a flow of consumer
services are not also treated this way. There really is no good
answer. Its just a convention of the national income and product
accounts.
**You might tell your students that transfer payments, like
Social Security checks, are excluded from G to avoid
double-counting: retired persons spend part or all of their Social
Security benefits on food, rent, prescriptions, and so forth, all
of which count in consumption. If we also counted the Social
Security check as part of G, then the same money would be counted
twice, which would make GDP look bigger than it really is.
**The net in net exports refers to the fact that we are
subtracting imports from exports. This subtraction is important,
because imports are also counted in the other components of GDP;
failing to subtract them would cause GDP to measure not just the
value of goods produced domestically, but also goods produced
abroad and imported.
For example, if a consumer spends $100 on a DVD player imported
from Japan, that $100 counts in consumption, even though the player
was not produced domestically. We subtract off that $100 import so
that GDP ends up including the value of only domestically-produced
goods and services.
**This data is slightly different than that shown in Table 1 in
this chapter of the textbook. The data on this slide was obtained
after the BEA had slightly revised its initial GDP figures.
Source for data on GDP & components:
http://www.bea.govhttp://www.bea.gov/national/index.htm
Source for population data (used to calculate the per capita
figures): http://research.stlouisfed.org/fred2/categories/104,
series POP, value for July 1, 2007, Source: U.S. Department of
Commerce: Census Bureau, www.census.gov
*Suggestion: Show these questions, and give your students 1-3
minutes to formulate their answers. When you are ready to discuss
the answers, go to the next slide.*Suggestion (continued from
previous slide): Show part A (but not the answer) and ask for
someone to volunteer his or her response. Then show the answer to
part A. Repeat for parts B, C, and D. (The answers to parts C and D
appear on the following slide.)
After showing the answer to part A, ask your students whether
the answer would be different if Debbie were a government employee.
The correct answer is NO. Government employees engage in
consumption, just like everyone else. *Regarding part C: Janes
purchase causes investment (for her own business) to increase by
$1200. However, the computer is sold out of inventory, so inventory
investment falls by $1200. The two transactions cancel each other,
leaving aggregate investment and GDP unchanged.
Regarding part D:This problem illustrates why expenditure always
equals output, even when firms dont sell everything they produce
due to lackluster demand. The point here is that unsold output is
counted in inventory investment, even when that investment was
unintentional.****This example is similar to that in the text, but
using different goods and different numerical values.
Suggestion: Ask your students to compute nominal GDP in each
year before revealing the answers. Ask them to compute the rate of
increase before revealing the answers.
In this example, nominal GDP grows for two reasons: prices are
rising, and the economy is producing a larger quantity of
goods.
Thinking of nominal GDP as total income, the increases in income
will overstate the increases in societys well-being because part of
these increases are due to inflation.
We need a way to take out the effects of inflation, to see how
much peoples incomes are growing in purchasing power terms. That is
the job of real GDP. **This example shows that real GDP in every
year is constructed using the prices of the base year and that the
base year doesnt change.
The growth rate of real GDP from one year to the next is the
answer to this question:
How much would GDP (and hence everyones income) have grown if
there had been zero inflation?
Thus, real GDP is corrected for inflation. **The table in the
top half of this slide merely summarizes the answers from the
previous two slides. This table will be used shortly to compute the
growth rates in nominal and real GDP and to compute the GDP
deflator and inflation rates. **Again, the growth rate of real GDP
from one year to the next is the answer to this question:
How much would GDP (and hence everyones income) have grown if
there had been zero inflation?
This is why real GDP is corrected for inflation.**The source I
used: http://research.stlouisfed.org/fred2/The original source:
U.S. Department of Commerce: Bureau of Economic Analysis
Note: This graph is different than the one in this chapter of
the textbook. The one in the textbook excludes nominal GDP, but
includes shaded vertical bars over the dates of each recession.
Since you have just finished covering real vs. nominal GDP, it
might be worthwhile pointing out the following to your
students:
The graph shows that nominal GDP rises faster than real GDP.
This should make sense, because growth in nominal GDP is driven by
growth in output AND by inflation. Growth in real GDP is driven
only by growth in output.
The two lines cross in the year 2000 (the base year for the real
GDP data in this graph). This should make sense because real GDP
equals nominal GDP in the base year. (Better yet, ask your students
whether theres anything significant about the point where the two
lines cross.)
Before the base year, real GDP > nominal GDP. For example, in
1970, nominal GDP is about $1 trillion, while real GDP is about
$3.8 trillion (in 2000 dollars). This should make sense because
prices were so much higher in 2000 than in 1970, so using those
high 2000 prices to value 1970 output would lead to a bigger result
than valuing 1970 output using 1970 prices.
Similarly, after 2000, nominal GDP is higher than real GDP
because prices are higher in later years than they were in 2000.
**The GDP Deflator gets its name because it is used to deflate
(i.e., take the inflation out of) nominal GDP to get real GDP.
***The data in the table are for a hypothetical economy that
produces two final goods, A and B. For all parts of this problem,
use 2007 as the base year.
If youre running short on time, you can skip part A its the
least challenging. If you only have time for one of the three, you
might skip A and B, as C by itself covers all of the material: it
requires students to compute nominal and real GDP before they can
compute the GDP deflator.****Most economists, policymakers, social
scientists, and businesspersons use a countrys real GDP per capita
as the main indicator of the average persons standard of living in
that country.
**Very scathing words, indeed!
**Much of what Robert Kennedy said about GDP is correct. **Then
why do we care about GDP?
Because a large GDP does in fact help us to lead a good life.
GDP does not measure the health of our children, but nations with
larger GDP can afford better health care for their children. GDP
does not measure the beauty of our poetry, but nations with larger
GDP can afford to teach more of their citizens to read and enjoy
poetry. GDP does not take account of our intelligence, integrity,
courage, wisdom, or devotion to country, but all of these laudable
attributes are easier to foster when people are less concerned
about being able to afford the material necessities of life.
In short, GDP does not directly measure those things that make
life worthwhile, but it does measure our ability to obtain the
inputs into a worthwhile life. *This figure and the two that follow
are from the data in Table 3 of the textbook.
Real GDP per capita figures are expressed in U.S. dollars.
Source: Human Development Report 2007/2008, United
Nations.*Source: Human Development Report 2007/2008, United
Nations.*Source: Human Development Report 2007/2008, United
Nations.*