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

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

3. 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

4. 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

5. 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

6. 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

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

8. Figure Real GDP in the United States 2 8 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.

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11. Jun 30, 20144.06% Dec 31, 20134.57% Dec 31, 20123.47% Dec 31, 20113.64% Dec 31, 20104.56% Dec 31, 20090.11% Dec 31, 2008-0.92% Dec 31, 20074.40% Dec 31, 20065.12% Dec 31, 20056.52% Dec 31, 20046.31% Dec 31, 20036.42% GNP Growth Rate and the current “Great Recession” 11

12. Dec 31, 194576.35% Dec 31, 1944118.27% Dec 31, 1943117.22% Dec 31, 194289.93% Dec 31, 194139.14% Dec 31, 194021.20% Dec 31, 193925.84% Dec 31, 193830.84% Dec 31, 193762.59% Dec 31, 193642.69% Dec 31, 1935-4.01% Dec 31, 1934-27.55% Dec 31, 1933-45.32% The Great Depression and the War Years (WW II) 12

13. GNP Growth is Not Steady 13

14. The Business Cycle – Another Look 14

15. Business Cycle - Phases 15

16. 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

17. 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

18. 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

19. 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 0.415 http://www.theatlantic.com/international/archive/2011/09/map-us-ranks-near-bottom-on-income-inequality/245315/ 19

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23. Equality of Distribution of Income 23

24. 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

25. 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 1,128 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.