1. Introduction to Macroeconomics Chapter 10
Measuring a Nation’s Income
GDP and other measures

2. Measuring a Country’s Income
Gross Domestic Product: (GDP) measure of a country’s income and expenditure
Income is based on the amount of goods and services an economy produces
Expenditure is the amount of money needed to buy all the goods and services an economy produces
In the economy as a whole:
EXPENDITURE = INCOME
Every dollar spent by buyers = Money received by firms

3. Gross Domestic Product
The market value of all final goods and services produced within a country in a given period of time.
GDP measures how well an economy is doing over time
GDP measures how well an economy is doing compared to other economies
GDP measures fluctuations in the economy

4. Breakdown of GDP
Market Value: the amount of money needed to buy all goods and services produced in the economy at market prices
Final goods and services: Products that are for final sale – not intermediate goods used in the production of other goods
In a country: Counts only goods produced within the legal geographical boundaries of a country regardless of who makes them
In a given period: Counts only goods produced within that current year or quarter (not goods produced in the past)

5. Breakdown of GDP
Market Value: the amount of money needed to buy all goods and services produced in the economy at market prices
Final goods and services: Products that are for final sale – not intermediate goods used in the production of other goods
In a country: Counts only goods produced within the legal geographical boundaries of a country regardless of who makes them
In a given period: Counts only goods produced within that current year or quarter (not goods produced in the past)

6. Breakdown of GDP
Market Value: the amount of money needed to buy all goods and services produced in the economy at market prices
Final goods and services: Products that are for final sale – not intermediate goods used in the production of other goods
In a country: Counts only goods produced within the legal geographical boundaries of a country regardless of who makes them
In a given period: Counts only goods produced within that current year or quarter (not goods produced in the past)

7. Breakdown of GDP
Market Value: the amount of money needed to buy all goods and services produced in the economy at market prices
Final goods and services: Products that are for final sale – not intermediate goods used in the production of other goods
In a country: Counts only goods produced within the legal geographical boundaries of a country regardless of who makes them
In a given period: Counts only goods produced within that current year or quarter (not goods produced in the past)

8. Components of GDP Output Equation: Y = C + I + G + NX
Y = Output or GDP
Amount of goods and services produced by an economy
C = Consumption
Spending on goods and services by households
I = Investment
Spending on capital goods by firms
G = Government Spending
Spending on goods and services by the government
NX = Net Exports
Exports - Imports

9. Finding GDP Data Go to www.bea.gov
Click on Gross Domestic Product  Interactive Tables
Begin using table Table Gross Domestic Product (A)
Click on the Chart option
Find each of the components of GDP
“Modify”  Change the years you are looking at
How have each of the components changed?
Can you identify periods of recession?

10. Application 1
Discuss how the following scenarios would impact GDP and which component of GDP is affected:
Panera Bread sees that its market share is growing in the US and decides to open 100 more locations.
Congress cuts the Pentagon’s budget by $20 billion. It can no longer invest in new robotic weapons.
Jane buys a new charger for her laptop that she purchases online. The charger is made in China.
The Smith family hires a nanny to watch their kids. They pay her cash.
The purchase on marijuana in Colorado vs. Nevada
Tom works for an NYC consulting firm that is based in Hong Kong.

11. Nominal GDP vs. Real GDP NGDP = P1*Q1 + P2*Q2 + P3*Q3 +….+ Pn*Qn
Nominal GDP: The value of output at current prices – takes into account price change and quantity change
NGDP = P1*Q1 + P2*Q2 + P3*Q3 +….+ Pn*Qn
Real GDP: The value of output at constant prices – takes into account only quantity change
RGDP = Pb*Q1 + Pb*Q2 + Pb*Q3 +….+ Pb*Qn
Pb = prices at base year

12. Application 2.a
Consider the economy of Fairview, which produces calculators, pens, and paper. Using the following table, determine the nominal GDP each year and real GDP if the base year is What is the percentage change in each type of GDP?
Calculators
Pens
Paper
Price
Quantity
2011
$20
100 $5
300
$10
600
2012
$20.50
105
$5.25
350
$11
640
2013
$21.75
107
$5.80
425
$12
645

13. Application 2.a Nominal GDP = P x Q Calculators Pens Paper GDP P Q PxQ
Calculators
Pens
Paper
GDP P Q
PxQ
2011
$20
100
$2,000 $5
300
$1,500
$10
600
$6,000
$9,500
2012
$20.50
105
$2,153
$5.25
350
$1,838
$11
640
$7,040
$11,031
2013
$21.75
107
$2,327
$5.80
425
$2,465
$12
645
$7,740
$12,532

14. Application 2.a Real GDP = P(2011) x Q Calculators Pens Paper GDP P Q
Calculators
Pens
Paper
GDP P Q
PxQ
2011
$20
100
$2,000 $5
300
$1,500
$10
600
$6,000
$9,500
2012
$20.50
105
$2,100
$5.25
350
$1,750
$11
640
$6,400
$10,250
2013
$21.75
107
$2,140
$5.80
425
$2,125
$12
645
$6,450
$10,715

15. Application Reflection
Why does this matter?
This application shows the difference between real GDP and nominal GDP calculations
Real GDP reflects only the increase in production of goods in the economy, keeping prices (or values) of those good constant
Nominal GDP reflects both increase in price and increase in production of goods in the economy.
Most Important Takeaway
Real and Nominal GDP both give important insights into what is happening in an economy.
They track production changes as well as price changes
Muddiest Point?

16. Change in GDP
Change in nominal GDP – reflects changes in both prices and quantities produced
Change in real GDP – reflects only changes in quantities produced
Real GDP is “corrected” for inflation
Growth in production – growth in real GDP!
Income and economic well being is rising!

17. Growth in GDP Nominal GDP Percent Change Real 2011 $9,500 2012 $11,030
Nominal
GDP
Percent
Change
Real
2011
$9,500
2012
$11,030
16.1%
$10,250
7.9 %
2013
$12,532
13.6%
$10,715
4.5%

18. Using GDP to understand prices
Price level in an economy – a statement of what is happening with prices overall in an economy.
GDP Deflator – index of prices based on nominal and real GDP
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟= 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑥 100

19. Application 2.b
Based on your earlier calculations – what is the GDP deflator each year? Can you calculate inflation based on this measure?

20. Application 2.b
NOMINAL GDP
REAL GDP
GDP Deflator
Inflation
2011
$9,500
100 -
2012
$11,030
$10,250
107
7.6%
2013
$12,532
$10,715
117
8.2%
Inflation: Percentage change in price levels from last year to this year.

21. Application Reflection
Why does this matter?
Because we have two measures of GDP – one with constant prices, one with current prices – the ratio between them gives us an idea about what is happening with prices over time
GDP deflator measure the changes in prices overall in the economy based on changes in the value of goods produced
Another measure of prices overall in the economy is the Consumer Price Index, which reflects prices changes based on the value of goods consumed in the economy
Most Important Takeaway
Changes in the GDP deflator give an indication of changes in prices in the economy – therefore we can calculate inflation
Muddiest Point?

22. GDP and Economic Well-being
GDP per capita – measure of a nation’s wealth distributed evenly across its population
Indicates the average standard of living that is possible in a country
Higher GDP per capita -- people are better able to satisfy their needs and wants

23. Finding GDP Data Go to http://databank.worldbank.org/data/home.aspx
Click on “World Development Indicators”
Choose 4 -5 countries from the list
In series – Choose GDP per capita (Constant 2010 US$)
In Time – Choose 2000 – 2015 (or recent 15 years)
Download the data
Download option  Excel
Open Excel File
Copy data  paste in new sheet (Transpose)
Add Year column in Column A
Create a line graph

24. Economic Well-being across the World

25. Writing to Learn Exercise
Consider all the components that make up GDP and how it defines “well-being” of the people in a country.
What is missing from this definition of well-being?
Is it all encompassing?
Can people in the US be better off that people in Germany just based on GDP per capita? Why or why not?

26. Despite the shortcomings…
Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc.
Many indicators of the quality of life are positively correlated with GDP. For example…
Then why do we care about GDP?
Because a large GDP does in fact help us to lead a good life. GDP does not measure the health of our children, but nations with larger GDP can afford better health care for their children. GDP does not measure the beauty of our poetry, but nations with larger GDP can afford to teach more of their citizens to read and enjoy poetry. GDP does not take account of our intelligence, integrity, courage, wisdom, or devotion to country, but all of these laudable attributes are easier to foster when people are less concerned about being able to afford the material necessities of life.
In short, GDP does not directly measure those things that make life worthwhile, but it does measure our ability to obtain the inputs into a worthwhile life. 26

27. GDP and Life Expectancy in 12 countries
Japan
Bangladesh
China
Mexico
U.S.
Brazil
Germany
Russia
Life expectancy (years)
Indonesia
India
Pakistan
This figure and the two that follow are from the data in Table 3 of the textbook.
Real GDP per capita figures are expressed in U.S. dollars.
Source: Human Development Report 2011, United Nations. Real GDP is for 2011, expressed in 2005 dollars.
Nigeria
Real GDP per person 27

28. GDP and Average Schooling in 12 countries
Germany
Japan
U.S.
Russia
China
Mexico
Average years of school
Brazil
Indonesia
Source: Human Development Report 2011, United Nations.
Average years of schooling is among adults 25 and older.
The three unlabeled countries with 5 years of schooling are, from left to right: Bangladesh ($1529), Nigeria ($2069), and Pakistan ($2550).
India
Real GDP per person 28

29. GDP and Water Quality in 12 countries
Germany
Indonesia
Bangladesh
U.S.
Japan
Brazil
China
Satisfaction with water quality (% of population)
Mexico
India
Source: Human Development Report 2011, United Nations.
Pakistan
Russia
Nigeria
Real GDP per person 29