1. Measuring a Nation’s Income
Professor Chris Adam
Australian Graduate School of Management
University of Sydney and University of New South Wales

2. INTRODUCTION Macroeconomics – study of economy as a whole
Explain economic changes that affect many households, firms and markets at once
Consider data that are used to monitor overall economy

3. GROSS DOMESTIC PRODUCT
GDP
Total income of everyone working in economy
Total expenditure on economy’s output of goods and services
For economy as a whole, income must equal expenditure
Circular flow diagram

4. GROSS DOMESTIC PRODUCT
GDP is
… the market value … use of prices
… of all … external sales; imputation
… final … vs intermediate
… goods and services … tangibles and intangibles
… produced … current production
… within a country … vs Gross National Product
… in a given period of time. quarterly; annually

5. COMPONENTS OF GROSS DOMESTIC PRODUCT
Algebra!
Y = C + I + G + NX
Y is GDP
C is consumption: household spending
I is investment: spending that creates future income
G is government: spending by government
NX is net exports: exports (foreign-purchased, domestic-produced g&s) minus imports (domestic-purchased, foreign-produced g&s)

6. MEASURING GDP Three methods: GDP expenditure: method described above
GDP income: sum of factor incomes, consumption of fixed capital, net indirect taxes
GDP production: market value of g&s produced minus cost of g&s used (“intermediate production”); also called “value added”

7. DATA

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17. REAL vs NOMINAL GDP Increase of GDP(E) over time
We produced more g&s at the same prices?
We paid more for the same g&s?
Some combination?
Nominal GDP: value of g&s produced now using current prices
Real GDP: value of g&s produced now using previous (unchanging) prices

18. REAL vs NOMINAL GDP Nominal GDP GDP deflator = x 100 Real GDP
Real GDP has grown over time but not constantly
GDP not measure “beauty of our poetry”, but can tell us if we can afford poetry

19. WHAT GDP MISSES
Leisure reduction increases GDP but may reduce well-being
Removal of environmental regulation may increase GDP but reduce quality of environment
Use of market prices excludes non-market activities