Chapter 22 Measuring a Nation’s Income

The Economy’s Income & Expenditure GDP measures both total income of everyone in an economy or total expenditures on economy’s goods & services Either way you look at it, same result Simplified in circular flow model

Measurement of Gross Domestic Product GDP: Market value of all final goods and services produced within a country in a given period of time - Use market prices (including housing) - excludes illegal activities & home consumption - Only final products, not intermediate goods - Inventory investment does count

Measurement of GDP - Doesn’t count used items being resold - Must be produced within country’s borders - Usually measured yearly; if measured quarterly it is seasonally adjusted

The Components of GDP Y = C + I + G + NX Consumption = spending by households on goods & services (except new housing) Investment = Purchase of goods that will be used in the future to produce more goods/services (includes new housing)

Components of GDP Government Purchases = spending on goods/services by local, state & federal gov’t Be careful with transfer payments like Soc. Sec. * Net Exports = Foreign purchases of domestically produced goods (exports) minus domestic purchases of foreign goods (imports)

Real vs. Nominal GDP If GDP rises: 1. economy may be producing larger output of goods/services or 2. goods/services are being sold at higher prices To figure out, which is really happening, we must use Real GDP to take out the effects of inflation

Alternative Approach Can also use income to measure GDP Equation is: Wages + Rent + Interest + Profits = GDP

Real vs. Nominal GDP Nominal GDP = production of goods & services valued at current prices Real GDP = production of goods & services valued at constant prices (base year is a pre-determined year in past) - Real GDP reflects only changes in the amounts being produced, not the change in prices

GDP Deflator Reflects only the prices of goods & services Nominal GDP ---------------- x 100 Real GDP

Inflation Economy’s overall price level is rising GDP deflator (yr 2) – GDP deflator (yr 1) ________________________________ x 100 GDP deflator (yr 1)

Recessions In general, real GDP grows over time, but GDP declines are called recessions - Usually marked by 2 consecutive quarters of falling real GDP

Other Measures of Income GNP = Gross National Product, total income earned by a nation’s residents NNP = Net National Product, GNP minus depreciation National Income = similar to NNP with exceptions of business taxes & subsidies Personal income = income that households and noncorporate businesses receive Disposable Personal Income = income left after taxes

BEA.gov National – Gross Domestic Product Gross Domestic Product - Interactive Tables: GDP and the National Income and Product Account (NIPA) Historical Tables Begin Using the Data Section 1- Domestic Product and Income Use table 1.1.1 Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product (A) (Q) ( click on OPTIONS icon to set years and set for “Quarterly” or “Annual”) (use PRINT icon)   Also use Table 1.1.5 Gross Domestic Product