1. Lecture 2

2. Gross National Product The market value of the goods and services produced within a given period by nationals (residents of a nation). It includes the income earned by nationals abroad. It does not include income earned within the country by foreigners Income earned by Poles working in London a part of Polish GNP, profit earned by a Japanese owner of Toyota in Wałbrzych part of Japanese GNP How to avoid double counting (cars + tiers = other parts, materials?) Counting of value added of each firm only Value added = firm’s sale minus the value of materials it buys to use in producing its products Final goods and services = those purchased by their final users GNP = value of final goods and services Value of output not sold through market should be estimated (value of services homeowners receive from living in their houses) But volunteer services, value of housework and do-it-yourself not included Illegal activities excluded as well (grey or underground economy) How big it is? Could be 25%?

3. Gross Domestic Product The total income earned domestically. It includes income earned domestically by foreigners. It does not include income earned by domestic residents abroad. Some examples: a Ukrainian worker income earned in Poland part of Poland GDP (earned domestically) but not the part of Polish GNP (worker not a Polish national). The difference between GNP and GDP in most cases rather small. GDP more frequently used as a measure How to estimate the value of services produced by government not sold through market (defense, police, public education)? Usually value of public goods = wages paid to public employees

4. Other measures of income 1) Net National Product (NNP) = GNP – depreciation Depreciation of capital=the amount of stock of plants, equipment and residential structures that wears out during a year, equals about 10% of GNP 2) National Income (NI) = NNP – indirect taxes (such as sales tax) NI a measure of how much everyone has earned 5 categories of National Income: compensation of employees (wages+ benefits) proprietors’ income (income of noncorporate businesses such as small farms, mom-and-pop stores, law partnerships) rental income ( income of landlords ) corporate profits (the income of corporations after payments to their workers and creditors) net interest (interest paid by domestic businesses minus the interest they receive, plus interest earned from foreigners)

5. Personal Income An income that households and noncorporate businesses receive Personal Income=National Income - corporate profits (retaining earnings + dividends + taxes) + transfers (such as social security and welfare benefits) + social insurance contributions + dividends + personal interest income (the interest that households earn) Disposable Personal Income = Personal Income – Personal Tax and nontax payments

6. Nominal and Real GNP output Price $/unit Value of output, current $ Value of output current $ Value of output, 1982 ( $) Value of output 1982 ($) 19821989198219891982198919821989 Cars10015024200600200300 meat10014046400840400560 6001440600860 Nominal GNP Real GNP

7. The GNP deflator Distinction between real and nominal GNP = one of most widely used measure of inflation GNP deflator = the ratio of nominal GNP to real GNP expressed as an index GNP deflator for 1989 = (1440/860) x 100 = 167,4 Prices increased 67.4% between 1982-89 Nominal GDP=real GDP x GDP deflator Nominal GDP measures the dollar value of the output Real GDP measures the amount of output, the output valued at constant (base year) prices The GDP deflator measures the price of the typical unit of output relative to its price in the base year

8. The consumer price index The most popular measure of the level of prices CPI turns the prices of many goods and services into a single index measuring the overall level of prices C PI the price of a basket of goods and services relative to the price of this basket in a base year CPI tells us how much it costs now to buy the basket relative to how much it cost to buy the same basket in a base year The producer price index measures the price of typical basket of goods bought by firms

9. C PI and GDP deflator GDP deflator measures the prices of all goods and services produced, CPI prices of goods bought by consumers GDP deflator includes goods produced domestically, prices of imported goods do not show up C PI assigns fixed weights to the prices of different goods, GDP deflator assigns changing weights (allows the basket of goods to change over time)