1. Chapter Measuring a Nation’s Income 15

2. Microeconomics vs. Macroeconomics Microeconomics – Study of how households and firms Make decisions Interact in markets Macroeconomics – Study of economy-wide phenomena Including inflation, unemployment, and economic growth 2

3. 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

4. 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

5. Measurement of Gross Domestic Product “… of all…” – All items produced in the economy And sold legally in markets – Excludes most items Produced and sold illicitly Produced and consumed at home “… final…” – Value of intermediate goods is already included in the prices of the final goods 5

6. Measurement of Gross Domestic Product “… goods and services…” – Tangible goods & intangible services “… produced…” – Goods and services currently produced “… 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

7. The Components of GDP Y = C + I + G + NX – Identity – Y = GDP – C = consumption – I = investment – G = government purchases – NX = net exports 7

8. 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

9. 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

10. 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

11. 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 The components of U.S. GDP 11

12. Table GDP and its components 1 12 Total (in billions of dollars) Per person (in dollars) Percent of total Gross domestic product, Y Consumption, C Investment, I Government purchases, G Net exports, NX $13,843 9,732 2,132 2,691 –712 $45,838 32,225 7,061 8,912 –2,360 100% 70 15 19 -5 This table shows total GDP for the U.S. economy in 2007 and the breakdown of GDP among its four components. When reading this table, recall the identity Y = C + I + G + NX.

13. 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 13

14. Real Versus Nominal GDP Real GDP – Production of goods and services – Valued at constant prices – Designate one year as base year – Not affected by changes in prices For the base year – Nominal GDP = Real GDP 14

15. The GDP data – Real GDP grows over time – Growth is not steady Recession – Real GDP declines – Lower income – Rising unemployment – Falling profits – Increased bankruptcies Real GDP over recent history 15

16. Figure Real GDP in the United States 2 16 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.

17. GDP - Good Measure of Economic Well-being? GDP – “single measure of the economic well- being of a society” – Economy’s total income – Economy’s total expenditure – Larger GDP Good life Better healthcare Better educational systems – Measure - ability to obtain many of the inputs into a worthwhile life 17

18. GDP - Good Measure of Economic Well-being? GDP – not a perfect measure of well-being – Doesn’t include Leisure Value of almost all activity that takes place outside markets Quality of the environment – No distribution of income 18

19. Rich countries - Higher GDP per person – Better Life expectancy Literacy Internet usage Poor countries - Lower GDP per person – Worse Life expectancy Literacy Internet usage International differences in GDP and the quality of life 19

20. Low GDP per person – More infants with low birth weight – Higher rates of infant mortality – Higher rates of maternal mortality – Higher rates of child malnutrition – Less common access to safe drinking water – Fewer school-age children are actually in school – Fewer teachers per student – Fewer televisions; Fewer telephones – Fewer paved roads – Fewer households with electricity International differences in GDP and the quality of life 20

21. Table GDP and the quality of life 3 21 Country Real GDP per person (2005) Life expectancy Adult literacy (% of population) Internet usage (% of population) United States Japan Germany Russia Mexico Brazil China Indonesia India Pakistan Bangladesh Nigeria $41,890 31,267 29,461 10,845 10,751 8,402 6,757 3,843 3,452 2,370 2,053 1,128 78 years 82 79 65 76 72 70 64 65 63 47 99% 99 92 89 91 90 61 50 47 69 63 % 67 45 15 18 19 9 7 3 7 0.3 4 The table shows GDP per person and three other measures of the quality of life for twelve major countries.