NationalIncome.ppt

Chapter 22Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Measuring a Nation’s Income
Chapter 22
Copyright © 2001 by Harcourt, Inc.
All rights reserved. Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department, Harcourt College Publishers,
6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
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Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Microeconomics
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Macroeconomics
Macroeconomics is the study of the economy as a whole.
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Macroeconomics
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?
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The Economy’s
Income and Expenditure
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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.
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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.
Gross Domestic Product
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The Circular-Flow Diagram
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7
The Measurement of GDP
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Output is valued at market prices.
It records only the value of final goods, not intermediate goods (the value is counted only once).
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It includes goods and services currently produced, not transactions involving goods produced in the past.
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It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).
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What Is Counted in GDP?
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What Is Not Counted in GDP?
GDP excludes most items that are produced and consumed at home and that never enter the marketplace.
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Other Measures of Income
Gross National Product (GNP)
Net National Product (NNP)
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Gross National Product
Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals).
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Net National Product (NNP)
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National Income
National Income is the total income earned by a nation’s residents in the production of goods and services.
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Personal Income
Personal income is the income that households and noncorporate businesses receive.
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Disposable Personal Income
Disposable personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government.
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The Components of GDP
Consumption (C)
Investment (I)
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Consumption (C):
The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I):
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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.
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GDP and Its Components (1998)
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2.unknown
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Consumption
68 %
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Investment
16%
Consumption
68 %
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Consumption
68 %
Government
Purchases
18%
Investment
16%
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Net Exports
Consumption
68 %
Investment
16%
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Two Measures of National Product:
Flow of Product Approach
Flow of Product Approach:
Each year, the public consumes a wide variety of goods and services such as apples, computer software, blue jeans; services such as health care and haircuts.
By adding together all the consumption dollars spend on these ‘final goods,’ one can arrive at this simplified economy’s GDP.
GDP = (price of blue jeans x number of blue jeans) + (price of apples x number of apples) +……………
National accountants use market prices as weights in valuing different commodities because market values reflect the relative economic value of diverse goods and services. The relative prices of different goods reflect how much consumers value their last (or marginal) units of consumption of these goods.
Earnings or Cost Approach (Contd.)
The second and equivalent way to calculate GDP is the ‘earnings or cost approach.’
The flow of all the costs of doing business include the wages paid to labour, the rents paid to land, the profits paid to capital, and so forth.
The costs are also the earnings that households receive from the firms.
By measuring the annual flow of these costs or earnings, statisticians will again arrive at the GDP.
Hence, a second way to calculate GDP is as the total of factor earnings (wages, rents, profits, and interest) that are the costs of producing society’s final products.
The two approaches are identical because profits included in the lower loop along with other incomes.
Overview of the National
Income and Product Accounts
U.S. GDP (1999)
Real versus Nominal GDP
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Real versus Nominal GDP
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GDP Deflator
The GDP deflator measures the current level of prices relative to the level of prices in the base year.
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GDP Deflator
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Converting Nominal GDP to Real GDP
Nominal GDP is converted to real GDP as follows:
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Real and Nominal GDP
5.unknown
6.unknown
7.unknown
8.unknown
Real GDP in the United States
1970
1975
1980
1985
1990
1995
3,000
4,000
5,000
6,000
7,000
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GDP and Economic
Well-Being
GDP is the best single measure of the economic well-being of a society.
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GDP and Economic
Higher GDP per person indicates a higher standard of living.
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GDP and Economic
Well-Being
Some things that contribute to well-being are not included in GDP.
The value of leisure.
The value of a clean environment.
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GDP, Life Expectancy, and Literacy
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9.unknown
Summary
Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy.
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Summary
GDP is the market value of all final goods and services produced within a country in a given period of time.
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Summary
Nominal GDP uses current prices to value the economy’s production. Real GDP uses constant base-year prices to value the economy’s production of goods and services.
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Summary
GDP is a good measure of economic well-being because people prefer higher to lower incomes.
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Graphical Review
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7
Net Exports
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Real GDP in the United States
(Periods of falling real GDP)
1970
1975
1980
1985
1990
1995
3,000
4,000
5,000
6,000
7,000
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) =
$200
2002
$600
2003
$1200
2001
$200
2002
$350
2003
$500

NationalIncome.ppt

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