Ma CH 10 Measuring A Nations Income

10
Measuring a Nation’s Income
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Andreea CHIRITESCU
Eastern Illinois University
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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
Economy’s Income & Expenditure
*** Because every transaction has a buyer and a
seller, the total expenditure in the economy must
equal the total income in the economy.
• 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
Figure 1
The Circular-Flow Diagram
Households buy goods

and services from firms,
and firms use their
revenue from sales to
pay wages to workers,
rent to landowners, and
profit to firm owners.
GDP equals the total
amount spent by
households in the market
for goods and services. It
also equals the total
wages, rent, and profit
paid by firms in the
markets for the factors of
production.
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
• “… 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
• “… 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
• “… 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
The Components of GDP
• Y = C + I + G + NX
• There are four components of GDP:
• Y = GDP
• C = consumption
• I = investment
• G = government purchases (local, state,
federal)
• NX = net exports
• Consumption, C
– Spending by households on goods and
services
– Exception: purchases of new housing
• Investment, I
– Spending on capital equipment,
inventories, and structures
– Household purchases of new housing
– Inventory accumulation
• Government purchases, G
– Government consumption expenditure and
gross investment
– Spending on goods and services included
military expenses…
– By local, state, and federal governments
– Does not include transfer payments
• Net exports (NX)
NX = Exports - Imports
– Exports
• Spending on domestically produced goods by
foreigners
– Imports
• Spending on foreign goods by domestic
residents
Quick- check multiple choice
In the economy of Talikastan in 2015,
consumption was $6,000, exports were
$1,000, GDP was $10,000, government
purchases were $1800, and imports were
$1200. What was Talikastan’s investment in
2015?
a. $0
Y = C+ I+ G+NX
b. $1200
10,000= 6,000+I+1,800+(1,000-1,200)
c. $2400
d. $5600
Which of the following is included in the calculation
of GDP?
a. The purchase of tutoring services from a tutor who
holds citizenship outside the country but resides within
the country.
b. The purchase of a new edition of a foreign textbook
that was produced in a different nation.
c. The purchase of ink and paper supplies by a textbook
company for the production of new textbooks.
d. The purchase of a used textbook from a friend who
took the same class last year
Most goods and services produced at home
a. and most goods and services produced illegally are
included in GDP.
b. are included in GDP while most goods and services
produced illegally are excluded from GDP.
c. are excluded from GDP while most goods and
services produced illegally are included in GDP
d. and most goods and services produced illegally are
excluded from GDP.
Net exports equal
a. exports plus imports.
b. exports minus imports.
c.imports minus exports.
d. GDP minus imports.
Real versus Nominal GDP
• If total spending rises from one year to the next at
least one of the two effects must be true:
a. Economy - producing a larger output of goods and
services and/or
b. Goods and services are being sold at higher prices
❖ This leads economists want to separate these 2
effects.
• Nominal GDP
– Production of goods and services
– Valued at current prices
• 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
•
Table 1
Real and Nominal GDP
This table shows how to calculate real GDP, nominal GDP, and the GDP deflator for a
hypothetical economy that produces only hot dogs and hamburgers.
• 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
GDP
• GDP – “the best single 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
Top 3 GDP in the World
1. United state (21.3 trillions)
2. China (15.3 trillions)
3. Japan (4.6 trillions)
*listed by DEBTCLOCK.ORG (2021)
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 GDP reflects the factory’s
production, but not the
income harm it inflicts on the
environment.
Quick Check Multiple Choices
28. If real GDP is 5,100 and nominal GDP is
4,900, then the GDP deflator is
a. 104.1 so prices are higher than in the base year.
b. 104.1 so prices are lower than in the base year.
c. 96.1 so prices are higher than in the base year.
d. 96.1 so prices are lower than in the base year.
GDP Deflator= Nominal GDP/Real GDP * 100

= (4,900/5,100)*100=96.1
29. If in some year real GDP was $5 trillion and the
GDP deflator was 200, what was nominal GDP?
a. $2.5 trillion.
b. $10 trillion.
c. $40 trillion.
d. $100 trillion.
GDP Deflator= (Nominal GDP/ Real GDP)
*100
200= (Nominal GDP/ $5 trillion)*100
= (200 *$5 trillion)/100
= $10 trillion
10. Which of the following statements about
GDP is correct?
a. Nominal GDP values production at current prices, whereas
real GDP values production at constant prices.
b. Nominal GDP values production at constant prices,
whereas real GDP values production at current prices.
c. Nominal GDP values production at market prices, whereas
real GDP values production at the cost of the resources used
in the production process.
d. Nominal GDP values production at the cost of the
resources used in the production process, whereas real GDP
values production at market prices.
31. If in some year nominal GDP was $18 billion
and the GDP deflator was 120, what was real
GDP?
a. $6.7 billion.
b. $15 billion.
c. $21.6 billion.
d. $38 billion.
GDP Deflator= (Nominal GDP/Real GDP) *100
120=($18 billion/Real GDP)*100
=($18 billion/120)*100
=$15 billion

Ma CH 10 Measuring A Nations Income

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Measuring a Nation’s Income

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Households buy goods

*listed by DEBTCLOCK.ORG (2021)

GDP Deflator= Nominal GDP/Real GDP * 100

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