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Measuring a Nation’s Income

Measuring a Nation’s Income. Professor Chris Adam Australian Graduate School of Management University of Sydney and University of New South Wales. INTRODUCTION. Macroeconomics – study of economy as a whole Explain economic changes that affect many households, firms and markets at once

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Measuring a Nation’s Income

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  1. Measuring a Nation’s Income Professor Chris Adam Australian Graduate School of Management University of Sydney and University of New South Wales

  2. INTRODUCTION • Macroeconomics – study of economy as a whole • Explain economic changes that affect many households, firms and markets at once • Consider data that are used to monitor overall economy

  3. GROSS DOMESTIC PRODUCT • GDP • Total income of everyone working in economy • Total expenditure on economy’s output of goods and services • For economy as a whole, income must equal expenditure • Circular flow diagram

  4. GROSS DOMESTIC PRODUCT • GDP is … the market value … use of prices … of all … external sales; imputation … final … vs intermediate … goods and services … tangibles and intangibles … produced … current production … within a country … vs Gross National Product … in a given period of time. quarterly; annually

  5. COMPONENTS OF GROSS DOMESTIC PRODUCT • Algebra! Y = C + I + G + NX Y is GDP C is consumption: household spending I is investment: spending that creates future income G is government: spending by government NX is net exports: exports (foreign-purchased, domestic-produced g&s) minus imports (domestic-purchased, foreign-produced g&s)

  6. MEASURING GDP • Three methods: • GDP expenditure: method described above • GDP income: sum of factor incomes, consumption of fixed capital, net indirect taxes • GDP production: market value of g&s produced minus cost of g&s used (“intermediate production”); also called “value added”

  7. DATA

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  17. REAL vs NOMINAL GDP • Increase of GDP(E) over time • We produced more g&s at the same prices? • We paid more for the same g&s? • Some combination? • Nominal GDP: value of g&s produced now using current prices • Real GDP: value of g&s produced now using previous (unchanging) prices

  18. REAL vs NOMINAL GDP Nominal GDP GDP deflator = x 100 Real GDP • Real GDP has grown over time but not constantly • GDP not measure “beauty of our poetry”, but can tell us if we can afford poetry

  19. WHAT GDP MISSES • Leisure reduction increases GDP but may reduce well-being • Removal of environmental regulation may increase GDP but reduce quality of environment • Use of market prices excludes non-market activities

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