Measuring a Nation

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Measuring a Nations Income

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The Economys Income and Expenditure

• Gross Domestic Product (GDP)
• Measures the total income of everyone in the
  economy
• Measures the total expenditure on the economys
  output of goods and services
• For an economy as a whole
• Income must equal expenditure
• Circular-flow diagram assumptions
• All goods and services bought by households
• Households - -spend all of their income

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The circular-flow diagram

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Households buy goods and services from firms, and
firms use their revenue from sales to pay wages
to workers, rent to landowners, and profit to
firm owners. GDP equals the total amount spent by
households in the market for goods and services.
It also equals the total wages, rent, and profit
paid by firms in the markets for the factors of
production.
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Measurement of Gross Domestic Product

• Gross domestic product (GDP)
• Market value of all final goods and services
• Produced within a country
• In a given period of time
• GDP is the market value
• Market prices - reflect the value of the goods

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Measurement of Gross Domestic Product

• of all
• All items produced in the economy
• And sold legally in markets
• Excludes items that are
• Produced and sold illicitly, or
• Produced and consumed at home
• final
• Value of intermediate goods is already included
  in the prices of the final goods

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Measurement of Gross Domestic Product

• within a country
• Goods and services produced domestically,
  regardless of the nationality of the producer
• in a given period of time
• A year or a quarter

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The Components of GDP

• Y C I G NX
• Identity
• Y GDP
• C consumption
• I investment
• G government purchases
• NX net exports

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The Components of GDP

• Consumption
• Spending by households
• On goods and services
• Exception purchases of new housing
• Investment
• Spending on capital equipment, inventories, and
  structures
• Including household purchases of new housing
• Inventory accumulation

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The Components of GDP

• Government purchases
• Government consumption expenditure and gross
  investment
• Spending on goods and services
• By local, state, and federal governments
• Does not include transfer payments

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The Components of GDP

• Net exports Exports - Imports
• Exports
• Spending on domestically produced goods by
  foreigners
• Imports
• Spending on foreign goods by domestic residents

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The components of U.S. GDP

• 2007, GDP of the United States 14 trillion
• GDP per person 45,838
• Consumption 32,225 per person
• Investment 7,061 per person
• Government purchases 8,912 per person
• Net exports 2,360 per person

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Real Versus Nominal GDP

• Total spending rises from one year to the next
• Economy - producing a larger output of goods and
  services
• And/or goods and services are being sold at
  higher prices
• Nominal GDP
• Production of goods and services
• Valued at current prices

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Real Versus Nominal GDP

• Real GDP
• Production of goods and services
• Valued at constant (or base year) prices
• Designate one year as base year
• Not affected by changes in prices
• For the base year
• Nominal GDP Real GDP

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Real and Nominal GDP

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Prices and Quantities Prices and Quantities Prices and Quantities Prices and Quantities Prices and Quantities Prices and Quantities
Year Price of hot dogs Quantity of hot dogs Price of hamburgers Price of hamburgers Quantity of hamburgers
2008 2009 2010 1 2 3 100 150 200 2 3 4 2 3 4 50 100 150
Calculating Nominal GDP Calculating Nominal GDP Calculating Nominal GDP Calculating Nominal GDP Calculating Nominal GDP Calculating Nominal GDP
2008 2009 2010 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (2 per hot dog 150 hot dogs) (3 per hamburger 100 hamburgers) 600 (3 per hot dog 200 hot dogs) (4 per hamburger 150 hamburgers) 1,200 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (2 per hot dog 150 hot dogs) (3 per hamburger 100 hamburgers) 600 (3 per hot dog 200 hot dogs) (4 per hamburger 150 hamburgers) 1,200 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (2 per hot dog 150 hot dogs) (3 per hamburger 100 hamburgers) 600 (3 per hot dog 200 hot dogs) (4 per hamburger 150 hamburgers) 1,200 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (2 per hot dog 150 hot dogs) (3 per hamburger 100 hamburgers) 600 (3 per hot dog 200 hot dogs) (4 per hamburger 150 hamburgers) 1,200 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (2 per hot dog 150 hot dogs) (3 per hamburger 100 hamburgers) 600 (3 per hot dog 200 hot dogs) (4 per hamburger 150 hamburgers) 1,200
Calculating Real GDP (base year 2008) Calculating Real GDP (base year 2008) Calculating Real GDP (base year 2008) Calculating Real GDP (base year 2008) Calculating Real GDP (base year 2008) Calculating Real GDP (base year 2008)
2008 2009 2010 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (1 per hot dog 150 hot dogs) (2 per hamburger 100 hamburgers) 350 (1 per hot dog 200 hot dogs) (2 per hamburger 150 hamburgers) 500 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (1 per hot dog 150 hot dogs) (2 per hamburger 100 hamburgers) 350 (1 per hot dog 200 hot dogs) (2 per hamburger 150 hamburgers) 500 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (1 per hot dog 150 hot dogs) (2 per hamburger 100 hamburgers) 350 (1 per hot dog 200 hot dogs) (2 per hamburger 150 hamburgers) 500 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (1 per hot dog 150 hot dogs) (2 per hamburger 100 hamburgers) 350 (1 per hot dog 200 hot dogs) (2 per hamburger 150 hamburgers) 500 (1 per hot dog 100 hot dogs) (2 per hamburger 50 hamburgers) 200 (1 per hot dog 150 hot dogs) (2 per hamburger 100 hamburgers) 350 (1 per hot dog 200 hot dogs) (2 per hamburger 150 hamburgers) 500
Calculating the GDP Deflator Calculating the GDP Deflator Calculating the GDP Deflator Calculating the GDP Deflator Calculating the GDP Deflator Calculating the GDP Deflator
2008 2009 2010 (200 / 200) 100 100 (600 / 350) 100 171 (1,200 / 500) 100 240 (200 / 200) 100 100 (600 / 350) 100 171 (1,200 / 500) 100 240 (200 / 200) 100 100 (600 / 350) 100 171 (1,200 / 500) 100 240 This table shows how to calculate real GDP, nominal GDP, and the GDP deflator for a hypothetical economy that produces only hot dogs and hamburgers. This table shows how to calculate real GDP, nominal GDP, and the GDP deflator for a hypothetical economy that produces only hot dogs and hamburgers.
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Real Versus Nominal GDP

• The GDP deflator (all goods and services)
• Measure of the price level for all goods and
  services inflation at the national level
• Ratio of nominal GDP to real GDP times 100
• 100 for the base year
• Measures the current level of prices relative to
  the level of prices in the base year
• Inflation
• Economys overall price level is rising

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Real Versus Nominal GDP

• Inflation rate
• Percentage change in some measure of the price
  level from one period to the next
• The GDP deflator
• Can be used to take inflation out of nominal GDP
  (deflate nominal GDP)

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Real GDP over recent history

• The GDP data
• Real GDP grows over time
• Growth is not steady
• Recession
• Real GDP declines
• Lower income
• Rising unemployment
• Falling profits
• Increased bankruptcies

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GNP Growth is Not Steady
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Real GDP in the United States

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This figure shows quarterly data on real GDP for
the U.S. economy since 1965. Recessionsperiods
of falling real GDPare marked with the shaded
vertical bars.
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The Business Cycle Another Look
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Business Cycle - Phases
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GDP - Good Measure of Economic Well-being?

• GDP single measure of the economic well-being
  of a society?
• Measures both economys total income and total
  expenditure
• Larger GDP correlated with
• Good life
• Better healthcare
• Better educational systems

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International differences in GDPand the quality
of life

• Rich countries - Higher GDP per person
• Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries - Lower GDP per person
• Worse
• Life expectancy
• Literacy
• Internet usage

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GDP - Good Measure of Economic Well-being?

• Does not consider how income is distributed
  (GINI coefficient)
• A low Gini coefficient indicates a more equal
  distribution,
• 0 corresponding to complete equality,
• higher Gini coefficients gt more unequal
• 1 corresponding to complete inequality. When used
  as a measure of income inequality,
• most unequal society will be one in which a
  single person receives 100 of the total income
  and the remaining people receive none (G
  1-1/N)
• and the most equal society will be one in which
  every person receives the same income (G 0).

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Relative Income Distribution Rankings

• U.S., Gini coefficient of 0.450, ranks near the
  extreme end of the inequality scale
• comparable income inequality Cameroon,
  Madagascar, Rwanda, Uganda, Ecuador.
• China, significantly more equal than the U.S.
  with a Gini coefficient of 0.415
• http//www.theatlantic.com/international/archive/2
  011/09/map-us-ranks-near-bottom-on-income-inequali
  ty/245315/

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Equality of Distribution of Income
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GDP - Good Measure of Economic Well-being?

• GDP not a perfect measure of well-being
• Besides equality/inequality of distribution of
  income
• Also doesnt include value of
• Leisure
• Quality of the environment
• Almost all activity that takes place outside
  markets (some legal, some not!)

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GDP and the quality of life

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Country Real GDP per person (2005) Life expectancy Adult literacy ( of population) Internet usage ( of population)
United States Japan Germany Russia Mexico Brazil China Indonesia India Pakistan Bangladesh Nigeria 41,890 31,267 29,461 10,845 10,751 8,402 6,757 3,843 3,452 2,370 2,053 1,128 78 years 82 79 65 76 72 72 70 64 65 63 47 99 99 99 99 92 89 91 90 61 50 47 69 63 67 45 15 18 19 9 7 3 7 0.3 4
The table shows GDP per person and three other measures of the quality of life for twelve major countries. The table shows GDP per person and three other measures of the quality of life for twelve major countries. The table shows GDP per person and three other measures of the quality of life for twelve major countries. The table shows GDP per person and three other measures of the quality of life for twelve major countries. The table shows GDP per person and three other measures of the quality of life for twelve major countries.