Chapter 2 Measuring A Nation's Income PDF

Chapter 2 Measuring a Nation’s Income N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 1 posted to a publicly accessible website, in whole or in part. ...

Chapter 2 Measuring a Nation’s Income N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 1 posted to a publicly accessible website, in whole or in part.  Economics Microeconomics – Study of how households and firms Make decisions Interact in markets Macroeconomics – Study of economy-wide phenomena Including inflation, unemployment, and economic growth N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 2 posted to a publicly accessible website, in whole or in part.  Economy’s Income & Expenditure Gross Domestic Product (GDP) – Measures the total income of everyone in the economy – Measures the total expenditure on the economy’s output of goods and services For an economy as a whole – Income must equal expenditure N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 3 posted to a publicly accessible website, in whole or in part.  Economy’s Income & Expenditure, Part 2 Circular-flow diagram – assumptions: – Markets Goods and services Factors of production – Households Spend all of their income Buy all goods and services – Firms Pay wages, rent, profit to resource owners N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 4 posted to a publicly accessible website, in whole or in part. Figure 1 The Circular-Flow Diagram N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  The Measurement of GDP Gross domestic product (GDP) – Market value of all final goods and services – Produced within a country – In a given period of time “GDP is the market value…” – Market prices – reflect the value of the goods N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 6 posted to a publicly accessible website, in whole or in part.  The Measurement of GDP “… of all…” – All items produced in the economy And sold legally in markets – Excludes most items Produced and sold illicitly Produced and consumed at home N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 7 posted to a publicly accessible website, in whole or in part.  The Measurement of GDP “… final…” – Value of intermediate goods is already included in the prices of the final goods “… goods and services…” – Tangible goods & intangible services “… produced…” – Goods and services currently produced N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 8 posted to a publicly accessible website, in whole or in part.  The Measurement of GDP “… within a country…” – Goods and services produced domestically Regardless of the nationality of the producer “… in a given period of time” – A year or a quarter N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 9 posted to a publicly accessible website, in whole or in part.  The Components of GDP Identity: Y = C + I + G + NX Y = GDP C = consumption I = investment G = government purchases NX = net exports N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 10 posted to a publicly accessible website, in whole or in part.  The Components of GDP Consumption, C – Spending by households on goods and services Goods: durable goods, nondurable goods Services: intangibles, spending on education – Exception: purchases of new housing N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 11 posted to a publicly accessible website, in whole or in part.  The Components of GDP Investment, I – Purchase of (capital) goods that will be used to produce other goods and services in the future Business capital: business structures, equipment, and intellectual property products Residential capital: landlord’s apartment building; a homeowner’s personal residence Inventory accumulation N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 12 posted to a publicly accessible website, in whole or in part.  The Components of GDP Government purchases, G – Government consumption expenditure and gross investment – Spending on goods and services – By local, state, and federal governments – Does not include transfer payments N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 13 posted to a publicly accessible website, in whole or in part.  The Components of GDP Net exports, NX = Exports - Imports – Exports Spending on domestically produced goods by foreigners – Imports Spending on foreign goods by domestic residents N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 14 posted to a publicly accessible website, in whole or in part.  The Components of U.S. GDP 2015, GDP of the U.S.: almost $18 trillion GDP per person = $55,822 – Consumption = $38,218 per person 68% of GDP – Investment = $9,402 per person – Government purchases = $9,919 per person – Net exports = - $1,657 per person Americans spent more on foreign goods than foreigners spent on American goods N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Table 1 GDP and Its Components N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  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 N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 17 posted to a publicly accessible website, in whole or in part.  Real Versus Nominal GDP Real GDP – Production of goods and services – Valued at constant prices – Designate one year as base year – Not affected by changes in prices For the base year – Nominal GDP = Real GDP N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 18 posted to a publicly accessible website, in whole or in part. Table 2 Real and Nominal GDP N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Real Versus Nominal GDP The GDP deflator – Ratio of nominal GDP to real GDP times 100 – Is 100 for the base year – Measures the current level of prices relative to the level of prices in the base year – Can be used to take inflation out of nominal GDP (“deflate” nominal GDP) N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 20 posted to a publicly accessible website, in whole or in part.  Real Versus Nominal GDP Inflation – Economy’s overall price level is rising Inflation rate – Percentage change in some measure of the price level from one period to the next N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 21 posted to a publicly accessible website, in whole or in part.  A Half Century of Real GDP The GDP data – Real GDP grows over time The real GDP of the U.S. economy in 2015 was more than four times its 1965 level Growth – average 3% per year since 1965 – Growth is not steady GDP growth interrupted by recessions N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  A Half Century of Real GDP Recession – Two consecutive quarters of falling GDP – Real GDP declines – Lower income – Rising unemployment – Falling profits – Increased bankruptcies N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Figure 2 Real GDP in the United States N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  GDP GDP – “the single best measure of the economic well-being of a society” – Economy’s total income – Economy’s total expenditure – Larger GDP Good life, better healthcare Better educational systems – Measure our ability to obtain many of the inputs into a worthwhile life N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 25 posted to a publicly accessible website, in whole or in part.  GDP GDP – not a perfect measure of well- being – Doesn’t include Leisure Value of almost all activity that takes place outside markets Quality of the environment – Nothing about distribution of income N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 26 posted to a publicly accessible website, in whole or in part.  International Differences: GDP & Quality of Life Rich countries — higher GDP per person – Better Life expectancy Literacy Internet usage Poor countries — lower GDP per person – Worse Life expectancy Literacy Internet usage N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  International Differences: GDP & Quality of Life Low GDP per person – More infants with low birth weight – Higher rates of infant mortality – Higher rates of maternal mortality – Higher rates of child malnutrition – Less common access to safe drinking water – Fewer school-age children are actually in school N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  International Differences: GDP & Quality of Life Low GDP per person – Fewer teachers per student – Fewer televisions – Fewer telephones – Fewer paved roads – Fewer households with electricity N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Table 3 GDP and the Quality of Life N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30