Measuring a Nation’s Income GDP

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
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?
◆


The Circular-Flow Diagram
Revenue
Goods &
Services sold

Market for
Goods
and Services

Firms

Inputs for
production
Wages, rent,

and profit

Spending
Goods &
Services
bought

Households

Market for
Factors
of Production

Labor, land,
and capital
Income


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
(1998)
Total (Billions
of Dollars)

Per Person (In
Dollars)

% of Total

$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

-559

-2

GDP (Y)

Net Exports NX -151


GDP and Its Components (1998)
Investment
16%

Consumption

68 %

Government
Purchases
18%

Net Exports
-2 %


Measuring 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 Growth
◆

Business Cycle Forecasts
➤Real 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 Level
◆Deflating

the GDP Balloon

➤Nominal GDP increases because production—real GDP–
increases.


Real GDP and the Price Level
➤Nominal GDP also increases because prices
rise.
◆

Deflating the GDP Balloon


Real GDP and the Price Level

◆

We use the GDP Deflator to take the air out of
Nominal GDP.


Real GDP in the United States
Billions of
1992 Dollars

8,000

(Periods of falling real GDP)

7,000
6,000
5,000
4,000
3,000
1970

1975

1980

1985

1990

1995

2000


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)

Other Exp
5%
Visitor

21%

Consumption
Consumption
46%

Investment
Government
Visitor
Other Exp

Government
22%

Investment
6%


GDP, Life Expectancy, and
Literacy
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


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