8
THE DATA OF MACROECONOMICS
Measuring a Nation’s
Income
23
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Measuring a Nation’s Income
• Macroeconomics answers questions like the
following:
• Why is average income high in some countries and
low in others?
• Why do prices rise rapidly in some time periods
while they are more stable in others?
• Why do production and employment expand in
some years and contract in others?
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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.
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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.
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• 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.
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “GDP is the Market Value . . .”
• Output is valued at market prices.
• “. . . Of All Final . . .”
• It records only the value of final goods, not
intermediate goods (the value is counted only once).
• “. . . Goods and Services . . . “
• It includes both tangible goods (food, clothing,
cars) and intangible services (haircuts,
housecleaning, doctor visits).
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “. . . Produced . . .”
• It includes goods and services currently produced,
not transactions involving goods produced in the
past.
• “ . . . Within a Country . . .”
• It measures the value of production within the
geographic confines of a country.
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “. . . In a Given Period of Time.”
• It measures the value of production that takes place
within a specific interval of time, usually a year or a
quarter (three months).
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THE COMPONENTS OF GDP
• GDP includes all items produced in the
economy and sold legally in markets.
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THE COMPONENTS OF GDP
• What Is Not Counted in GDP?
• GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
• It excludes items produced and sold illicitly, such as
illegal drugs.
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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
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THE COMPONENTS OF GDP
• Consumption (C):
• The spending by households on goods and services,
with the exception of purchases of new housing.
• Investment (I):
• The spending on capital equipment, inventories, and
structures, including new housing.
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THE COMPONENTS OF GDP
• Government Purchases (G):
• The spending on goods and services by local, state,
and federal governments.
• Does not include transfer payments because they
are not made in exchange for currently produced
goods or services.
• Net Exports (NX):
• Exports minus imports.
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Table 1 GDP and Its Components
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GDP and Its Components (2001)
Government Purchases
18%
Investment Net Exports
16% -3 %
Consumption
69%
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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.
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REAL VERSUS NOMINAL GDP
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.
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Table 2 Real and Nominal GDP
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Table 2 Real and Nominal GDP
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Table 2 Real and Nominal GDP
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The GDP Deflator
• The GDP deflator is a measure of the price
level calculated as the ratio of nominal GDP to
real GDP times 100.
• It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a rise
in the quantities produced.
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The GDP Deflator
• The GDP deflator is calculated as follows:
N o m in al G D P
G D P d eflato r = 1 0 0
R eal G D P
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The GDP Deflator
• Converting Nominal GDP to Real GDP
• Nominal GDP is converted to real GDP as follows:
N o m in al G D P2 0 X X
R eal G D P 2 0 X X 1 0 0
G D P d eflato r2 0 X X
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Table 2 Real and Nominal GDP
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GDP AND ECONOMIC WELL-
BEING
• GDP is the best single measure of the economic
well-being of a society.
• GDP per person tells us the income and
expenditure of the average person in the
economy.
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GDP AND ECONOMIC WELL-
BEING
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the happiness
or quality of life, however.
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GDP AND ECONOMIC
WELL-BEING
• Some things that contribute to well-being are
not included in GDP.
• The value of leisure.
• The value of a clean environment.
• The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.
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GNP
• Gross National Product includes the income of
the resident nationals which they received
abroad and excludes the incomes generated
locally but accruing to the non-nationals.
• GNP= Market value of goods and services
produced by the residents in the country -
incomes earned in the country by foreigners +
incomes received by residents of a country
from abroad.
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NNP
• Net National Product is obtained by subtracting
depreciation from GNP.
• NNP = GNP - Depreciation
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PI
• Personal Income can be defined as the sum of
all kinds of incomes received by the individuals
from all sources of incomes.
• Personal income includes wages and salaries,
fees and commission, bonus, fringe benefits,
dividends, interest earnings and earnings from
self-employment.
• It also includes transfer incomes like pensions,
family allowances, unemployment allowances,
sickness allowances, social security benefits.
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PI
• Personal Income = All source of income –
retained earnings.
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Disposable Income
• Disposable income includes personal income
and excludes all personal taxes.
• Disposable income = Personal Income –
Personal taxes
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