Measuring a Nation’s Income

1. 10 Measuring a Nation’s Income

2. 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

3. 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

4. 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

5. 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

6. The Components of GDP • Y = C + I + G + NX • Identity • Y = GDP • C = consumption • I = investment • G = government purchases • NX = net exports

7. 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

8. 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

9. The Components of GDP • Net exports = Exports - Imports • Exports • Spending on domestically produced goods by foreigners • Imports • Spending on foreign goods by domestic residents

10. 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

11. 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

12. 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

13. 2 Real and Nominal GDP

14. 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 • Economy’s overall price level is rising

15. 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)

16. 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

17. GNP Growth is Not Steady

18. 2 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.

19. The Business Cycle – Another Look

20. Business Cycle - Phases

21. GDP - Good Measure of Economic Well-being? • GDP – “single measure of the economic well-being of a society”? • Measures both economy’s total income and total expenditure • Larger GDP correlated with • Good life • Better healthcare • Better educational systems

22. 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

23. 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 => 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).

24. 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/2011/09/map-us-ranks-near-bottom-on-income-inequality/245315/

28. Equality of Distribution of Income

29. GDP - Good Measure of Economic Well-being? • GDP – not a perfect measure of well-being • Besides equality/inequality of distribution of income • Also doesn’t include value of • Leisure • Quality of the environment • Almost all activity that takes place outside markets (some legal, some not!)

30. 3 GDP and the quality of life