Measuring a Nation’s Income GDP

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.. The

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 (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?

Gross Domestic Product

The Circular-Flow Diagram

Market for Factors

of Production

Market for Goods and Services

Spending Revenue

production

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

GDP and Its Components

18%

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

◆ Deflating the GDP Balloon

➤ Nominal GDP also increases because prices rise.

Real GDP and the Price Level

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

(Periods of falling real GDP)

Real GDP in the United States

Hawaii GSP (1997)

◆ This pie chart shows how

Hawaii’s Gross State

Product is broken down.

◆ Notice how the visitor

industry is relatively high

Investment 6%

Government 22%

Visitor 21%

Other Exp 5%

Consumption Investment Government Visitor Other Exp

GDP, Life Expectancy, and

Literacy

Country Real GDP Per

Person (1997) Life Expectancy Adult Literacy USA $29,010 77 years 99%

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