Measuring a Nation's Income - Economics Lecture PDF

Lecture 1 - Measuring a Nation’s Income Econ 222 Macroeconomics Spring 2025 Prof. Liao Income and Expenditure Gross Domestic Product (GDP) ○ Measures total income of everyone in the economy. ○ Also measures total expenditure on the economy’s output of goods an...

Lecture 1 - Measuring a Nation’s Income Econ 222 Macroeconomics Spring 2025 Prof. Liao Income and Expenditure Gross Domestic Product (GDP) ○ Measures total income of everyone in the economy. ○ Also measures total expenditure on the economy’s output of goods and services. Income equals expenditure ○ For the economy as a whole ○ every dollar a buyer spends is a dollar of income for the seller. The Circular-Flow The Circular-Flow Diagram ○ Simple depiction of the macroeconomy. ○ Illustrates GDP as spending, revenue, factor payments, and income Preliminaries: ○ Factors of production: labor, land, capital, and natural resources. ○ Factor payments: payments to the factors of production (e.g., wages, rent). What is left out of the Circular Flow The government ○ Collects taxes, buys goods and services The financial system ○ Matches savers’ supply of funds with borrowers’ demand for loans The foreign sector ○ Trades goods and services, financial assets, and currencies with the country’s residents I. Formal Definition of GDP - GDP is the market value of all final goods & services produced within a country in a given period. iClicker Question Is this final good? The purchase of a new machine tool by the Toyota Company. A. Yes it is. B. No it is not. iClicker Question Which of the following is NOT considered a part of GDP? A. The $10 your neighbor pays you to mow their lawn B. Your cousin went an a trip to Maine and bought you a mug for $10 C. Aluminum used to produce a new machine D. The car your grandpa bought at the Jeep dealer in SLO February of this year. II. The Components of GDP These components add up to GDP (denoted Y) Y = C + I + G + NX Four components: ○ Consumption (C) : Spending by households on goods and services ○ Investment (I): Spending on goods that will be used in the future to produce more goods ○ Government Purchases (G):Spending on the goods and services purchased by the government ○ Net Exports (NX) = Export - Imports: Exports: foreign spending on the economy’s goods and services iClicker Question What are the components of the GDP? A. Consumption + Government Borrowing + Investment + Exports B. Consumption + Government Borrowing + Financial Investment + Net Export C. Consumption + Government Purchase + Investment + Net Exports D. Consumption + Government Purchase + Financial Investment + Imports U.S. GDP and its Components, 2021 Exercise ! What is the effect on GDP and its components? A. Jade spends $300 to buy her husband dinner at the finest restaurant in Boston B. Nylah spends $1200 on a new smartphone to use in her publishing business. The smartphone was built in China C. Joseph spends $800 on a tablet to use in his editing business. He got last year’s model on sale for a great price from a local manufacturer D. GM builds $500 million worth of cars, but consumers only buy $470 million worth of them III. Real versus Nominal GDP Nominal GDP ○ The production of goods and services valued at current prices ○ Not adjusted for inflation Real GDP ○ The production of goods and services valued at constant prices (base year) ○ Adjusted for inflation For the base year Nominal GDP = Real GDP Nominal and Real GDP in the U.S., 1965–2022 Exercise ! Compute total spending (nominal GDP) in each year Pizza Chocolate Year P Q P Q 2021 $15 300 $2.5 1000 2022 $16 400 $3 1200 2023 $17 500 $3.5 1300  IV. The GDP Deflator GDP deflator =100×(Nominal GDP)/(Real GDP) ○ Measures the current level of prices relative to the level of prices in the base year Inflation rate ○ % increase in the GDP deflator from one year to the next Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise! a. Compute nominal GDP in 2021 b. Compute real GDP in 2022 c. Compute the GDP deflator in 2023 2021(P) 2021(Q) 2022(P) 2022(Q) 2023(P) 2023(Q) Cookies $1 900 $2 1000 $3 1250 Smartpho $900 185 $1000 200 $1200 210 nes V. GDP and Economic Well-Being Real GDP per capita ○ Main indicator of the average person’s standard of living GDP is not a perfect measure of well-being. Discuss! What does GDP Not Measure? GDP Does Not Measure: The quality of the environment Leisure time An equitable distribution of income Non-market activity GDP is a good measure of economic well-being for most—but not all—purposes. Then Why Do We Care About GDP? 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… GDP and Life Expectancy in 12 Countries GDP versus HDI https://ourworldindata.org/grapher/human-development-index-vs-gdp-per-capita#:~:text=The%20Human%20Development%20Index%20(HDI,cost% 20of%20living%20betweencountries. Discuss! What should go into measurement of economic health? https://www.stlouisfed.org/open-vault/2023/apr/three-other-ways-to-measure-economic-health-beyond-gdp