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

Firms Households

Market for Factors

of Production

Market for Goods

and Services

SpendingRevenue

Wages, rent, and

profit

Income

Goods & Services

sold

Goods & Services bought

Labor, land, and capital

Inputs for 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

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 GDP and Its Components (1998)(1998)

Total (Billions of Dollars)

Per Person (In Dollars)

% of Total

GDP (Y) $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

Net Exports NX -151 -559 -2

Net Exports -2 %

GDP and Its Components (1998)

Consumption 68 %

Investment16%

Government Purchases

18%

Measuring Economic GrowthMeasuring 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 GrowthMeasuring Economic Growth

Business Cycle ForecastsReal 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 LevelReal GDP and the Price LevelDeflating the GDP BalloonNominal GDP increases because production—real GDP– increases.

Real GDP and the Price LevelReal GDP and the Price Level

Deflating the GDP Balloon

Nominal GDP also increases because prices rise.

Real GDP and the Price LevelReal 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

1970 1975 1980 1985 1990 19953,000

4,000

5,000

6,000

7,000

Billions of 1992 Dollars

2000

8,000

Hawaii GSP (1997)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)

Consumption46%

Investment6%

Government22%

Visitor21%

Other Exp5%

Consumption

Investment

Government

Visitor

Other Exp

GDP, Life Expectancy, and GDP, Life Expectancy, and LiteracyLiteracy

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