1. Chapter 22 Measuring a Nation’s Income

2. 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

3. 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

4. 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

5. 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)

6. 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)

7. 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

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

9. 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

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

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

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

13. 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

14. 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 Table 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 Gross Domestic Product