Chapter Measuring a Nation’s Income GNP, Business Cycles 10

The Components of GDP Y = C + I + G + NX – Identity – Y = GDP – C = consumption – I = investment – G = government purchases – NX = net exports 2

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 3

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 4

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 5

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 6

List of countries by GDP (nominal, Atlas method) (10^6 current US$)(Top 10)US$ 7

Figure Real GDP in the United States 2 8 This figure shows quarterly data on real GDP for the U.S. economy since Recessions—periods of falling real GDP—are marked with the shaded vertical bars.

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Jun 30, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % GNP Growth Rate and the current “Great Recession” 11

Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % Dec 31, % The Great Depression and the War Years (WW II) 12

GNP Growth is Not Steady 13

The Business Cycle – Another Look 14

Business Cycle - Phases 15

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 16

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 17

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). 18

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

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Equality of Distribution of Income 23

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!) 24

Table GDP and the quality of life 3 25 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, years % % The table shows GDP per person and three other measures of the quality of life for twelve major countries.