1. Chapter 7 Measuring Domestic Output and National Income McGraw-Hill/IrwinCopyright © 2015 by McGraw-Hill Education. All rights reserved.

2. Assessing the Economy’s Performance I. Income: Of a Person versus of a Country 1. A person’s income (annual): - Example 1 – Lawyer = 540,000 baht (in 2015) - Example 2 – Flight attendant = 264,000 baht (in 2015) Source: http://www.adecco.co.th/Uploads/Knowledge-Center-Thought-Leadership/Thailand-Salary-Guide/Adecco-Thailand-Salary-Guide-2015.pdfhttp://www.adecco.co.th/Uploads/Knowledge-Center-Thought-Leadership/Thailand-Salary-Guide/Adecco-Thailand-Salary-Guide-2015.pdf 2. Add up all individual incomes = Thailand’s national income (annual): - Total = 9,471 billion baht (in 2015) - Average (per person) = 139,367 baht (in 2015) Source: http://data.worldbank.org/indicatorhttp://data.worldbank.org/indicator

3. Question 3. Thailand’s per-capita (per person) income (annual): - Per-capita income = 13,777 baht (in 1960) - Per-capita income = 139,367 baht (in 2015) Source: http://data.worldbank.org/indicatorhttp://data.worldbank.org/indicator - Can we conclude that Thais are now much richer than before?

4. Question 4. Cross-country comparison (in 2015): - Per-capita income = 139,367 baht, convert into US$. - US$1 = 35 baht. Source: https://www.google.co.th/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=baht%20to%20usdhttps://www.google.co.th/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=baht%20to%20usd - Thailand’s per-capita income = US$3,982. - US’ per-capita income = US$55,837. Source: http://data.worldbank.org/indicator/NY.GDP.PCAP.CDhttp://data.worldbank.org/indicator/NY.GDP.PCAP.CD - Can we conclude that Americans are approximately 14 times richer than Thais?

5. GDP II. Gross Domestic Product (GDP) 1. GDP is defined as the monetary values of all the final goods and services produced within a given period of time by the inputs located within a country. 2. GDP can be measured as a country’s total product = total income = total expenditure. - Example: The value of total product of Thailand was 9,471 billion baht (in 2015). - Example: The value of total income of Thailand was 9,471 billion baht (in 2015). - Example: The value of total expenditure of Thailand was 9,471 billion baht (in 2015).

6. Approaches to GDP 3. GDP = total product = total income = total expenditure. Why? - One person: - Your lecturer teaches, or produces, a class, worth 1,000 baht = product. - Your lecturer gets paid by 5 p.m. today, gets 1,000 baht = income. - Your lecturer goes shopping, spends 1,000 baht = expenditure. - Therefore, your lecturer’s product = income = expenditure. - Because your lecturer works, earns income, which allows him/her to spend. - Question: What if your lecturer puts 250 baht in her bank account to save?

7. 4. From one person to one country - Add up everyone in the country, then we get one country. - Therefore, Thailand’s GDP = total product = total income = total expenditure. GDP = total product = total income = total expenditure Approaches to GDP

8. AE Approach to GDP III. GDP = Aggregate Expenditure (AE) Approach 1. GDP = AE focuses on the demand or expenditure side. - In other words, why did Thailand produce GDP = 9,471 billion baht in 2015? - Because that was how much Thais purchased or spent. 2. Four types of buyers - AE = Consumption (C) + Investment (I) + Government (G) + Net Exports (NX) (i) Consumption expenditure (C) - What you and I spend on goods and services, such as food, rent, car, etc. - These expenditures are for our enjoyment.

9. AE Approach to GDP (ii) Investment (I), or gross investment expenditure - What firms spend on goods and services, such as ABAC’s buying electricity, 7- 11 buying milk, Thai Airways buying planes, etc. - These expenditures are on inputs, and to produce more. - Specifically, gross I can be measured in two ways: (a) I = fixed capital formation + changes in inventories (b) I = net investment + depreciation

10. AE Approach to GDP (iii) Government expenditure (G) - What the government spends on goods and services, such as building roads and schools, etc. (iv) Net Exports (NX) = Exports – Imports - What Thailand has produced may not be consumed by Thais, but by people around the world (exports). - What Thais have consumed may not have been produced in Thailand, but was produced in other countries (imports). - Why do we add back exports and subtract imports?

11. Income Approach to GDP IV. GDP = Income Approach 1. GDP = income - In other words, who produced Thailand’s GDP = 9,471 billion baht in 2015? - The workers, firms, etc. who worked in Thailand in 2015. 2. Different types of income (i) Wages - Income for workers involved in the production process. - Example: Lecturer, workers at 7-11, etc. (ii) Corporate profits - Profits for business owners. - Example:

12. Income Approach to GDP (iii) Other incomes - Interest income from financial assets and rental income for landlords who own properties. - Example: You have a savings account that pays monthly interest. - Example: You pay monthly rent for your apartment. (iv) Indirect taxes (income for the government) - Any tax other than income tax. Why? - Example: Import taxes, gasoline tax, etc. (v) Depreciation - Income for people to perform maintenance. - Example: You hire someone to fix your delivery truck. GDP = Total Income = Wages + Profits + Other incomes + Indirect Taxes + Depreciation

13. Caution! V. Notes on GDP 1. GDP avoids double-counting. - Example: Final product = book. - Production process: Step 1: Papers are made (500 baht) Step 2: Printing press gets papers, prints words on papers (800 baht) Step 3: Binder gets printed papers, bind to become book (1,000 baht) - What is the contribution to GDP?

14. Caution! 2. GDP excludes second-hand sales. - Example: You sell a used textbook to your friend for 200 baht. - This transaction is NOT counted in GDP – why not? 3. GDP excludes sales of stocks and bonds. - Example: You have 500 shares of IBM and you sell 100 in the stock market. - This transaction is NOT counted in GDP – why not?

15. Nominal versus Real GDP VI. Nominal versus Real GDP 1. How can we make a sensible comparison of the GDP values from 1960 and 2015, given that prices must have gone up by a lot? 2. We need to somehow take into account the price increases across the years. 3. We can calculate nominal GDP and real GDP.

16. Nominal versus Real GDP 4. An example: - Nominal GDP for 1960 versus 2015: - Real GDP for 1960 versus 2015: Choosing a base year, or the year as the basis for comparison. Suppose we choose 1960. Food (lbs)Clothing (meters)Price of foodPrice of clothing 1960105200150 2015122250200

17. Nominal versus Real GDP 5. In our simple example, the nominal GDP in 2015 was ________ than the nominal GDP in 1960. After we have adjusted for price increases (inflation), the real GDP in 2015 was ________ than the real GDP in 1960. 6. To summarize: - Nominal GDP = current goods and services, current year prices. - Real GDP = current goods and services, base year prices.

18. From Nominal and Real GDP to Price Index VII. Price Index 1. GDP includes many, many goods and services produced in a country. It can be a lot of work to calculate all the goods and services using prices from different years. 2. Governments and international institutions such as the World Bank, International Monetary Fund, etc. do keep track of price index. - Price index of 2015 = - In our example, price index of 2015 is = __________________. 3. If we only have information on two of the three unknowns, we can calculate the third… more in Chapter 9.

19. Shortcomings of GDP Concepts VIII. GDP cannot measure… 1. Economic activities not reported to the government. - Examples: 2. Non-market activities. - Examples: 3. Quality of life. - Examples: 4. Effects on the environment. - Examples: