Lecture 2 measuring a nation s income

LECTURE Measuring a Nation’s Income Some etiquette rules in the class • Attendance check is compulsory and constitutes 10% to the final grade • Please have your smartphones on silent mode • Students must homework before the tutorial class If you forget to them or don’t have them printed out, please leave the class • Food and drinks: refreshments are allowed in class • Writing emails: – Subject is a must – Be concise and polite, i.e RE: problem set or RE: midterm test – Use proper words, no abbreviation, no wink, no smiley, no !!!!!!!!!!!!!!!!!!!!! Or ????????????? Or WRITING THE WHOLE SENTENCE IN BLOCK LETTERS IS EXCRUTIATINGLY IMPOLITE – If you miss your deadlines, you might be considered to have makeup midterm or small test but only with a proper paper from a hospital – No emails about your grades regarding the FINAL EXAM It is handled by the faculty staff, not me Assessment for the subject will be on the basis of: • Class Participation Required 10% • Group assignment(s) Required 10% • Midterm: 20%, small test: 10% • To pass this subject students must achieve: • 50% or more in the final examination, AND an overall mark of 50% or more (For students entering Cohort 2016-2020 or earlier) • An overall mark of 50% or more (For students entering Cohort 2017-2021 or after) Lecture Objectives • Consider why an economy’s total income equals its total expenditure • Learn how gross domestic (GDP) is defined and calculated and its four components • Distinguish between real GDP and nominal GDP • Consider whether GDP is a good measure of economic well-being The Economy’s Income and Expenditure • Gross Domestic Product (GDP) - Measures the total income of everyone in the economy - Measures the total expenditure on the economy’s 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 Figure The circular-flow diagram 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 Measurement of Gross Domestic Product • Gross domestic product (GDP) - Market value of all final goods and service - Produced within a country - In a given period of time • “GDP is the market value…” Market prices - reflect the value of the goods Table GDP and its components Gross domestic product, Y Consumption, C Investment, I Government purchases, G Net exports, NX Total (in billions of dollars) Per person (in dollars) Percent of total $13,843 9,732 2,132 2,691 -712 $45,838 32,225 7,061 8,912 -2,360 100% 70 15 19 -5 This table shows total GDP for the U.S economy in 2010 and the breakdown of GDP among its four components When reading this table, recall the identity Y = C + I + G + NX 14 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 15 Real Versus Nominal GDP • Real GDP - Production of goods and services - Valued at constant prices - Designate one year as base year - Not affected by changes in prices • For the base year - Nominal GDP = Real GDP 16 Table Real and Nominal GDP Prices and Quantities Year Price of hot dogs Quantity of hot dogs Price of hamburgers Quantity of hamburgers 2008 2009 2010 $1 $2 $3 100 150 200 $2 $3 $4 50 100 150 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 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 Calculating the GDP Deflator 2008 2009 2010 ($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 17 Real Versus Nominal GDP • The GDP deflator - Measure of the price 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 - Economy’s overall price level is rising 18 Real Versus Nominal GDP • Inflation rate - Percentage change in some measure of the price level from one period to the next Inflationin year  GDP deflator in year - GDP deflator in year GDP deflator in year 100 • The GDP deflator - Can be used to take inflation out of nominal GDP (“deflate” nominal GDP) 19 Real GDP over recent history • The GDP data - Real GDP grows over time - Growth is not steady - https://www.youtube.com/watch?v=wykaDgXoajc • Recession - Real GDP declines - Lower income - Rising unemployment - Falling profits - Increased bankruptcies 20 Figure Real GDP in the United States This figure shows quarterly data on real GDP for the U.S economy since 1965 Recessions—periods of falling real GDP—are marked with the shaded vertical bars 21 22 GDP - Good Measure of Economic Well-being? • GDP - “single measure of the economic wellbeing of a society” - Economy’s total income - Economy’s total expenditure - Larger GDP • Good life • Better healthcare • Better educational systems - Measure - ability to obtain many of the inputs into a worthwhile life 23 GDP - Good Measure of Economic Well-being? • GDP - not a perfect measure of well-being - Doesn’t include • Leisure • Value of almost all activity that takes place outside markets • Quality of the environment - No distribution of income - https://www.telegraph.co.uk/travel/news /vienna-mercer-quality-of-living-2018/ 24 International differences in GDP and 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 25 International differences in GDP and the quality of life • Low GDP per person - More infants with low birth weight - Higher rates of infant mortality - Higher rates of maternal mortality - Higher rates of child malnutrition - Less common access to safe drinking water - Fewer school-age children are actually in school - Fewer teachers per student - Fewer televisions; Fewer telephones - Fewer paved roads - Fewer households with electricity 26 Table GDP and the quality of life Country United States Japan Germany Russia Mexico Brazil China Indonesia India Pakistan Bangladesh Nigeria Real GDP per person (2005) $41,890 31,267 29,461 10,845 10,751 8,402 6,757 3,843 3,452 2,370 2,053 1,128 Life expectancy 78 years 82 79 65 76 72 72 70 64 65 63 47 Adult literacy (% of population) Internet usage (% of population) 99% 99 99 99 92 89 91 90 61 50 47 69 63 % 67 45 15 18 19 7 0.3 The table shows GDP per person and three other measures of the quality of life for twelve major countries 27 ... faculty staff, not me Assessment for the subject will be on the basis of: • Class Participation Required 10% • Group assignment (s) Required 10% • Midterm: 20 %, small test: 10% • To pass this subject... goods and services - Valued at current prices 15 Real Versus Nominal GDP • Real GDP - Production of goods and services - Valued at constant prices - Designate one year as base year - Not affected... United States This figure shows quarterly data on real GDP for the U .S economy since 1965 Recessions—periods of falling real GDP—are marked with the shaded vertical bars 21 22 GDP - Good Measure