CHAPTER 23: MEASURING A NATIONS INCOME

Macroeconomics- the study of the performance of the economy as a whole including inflation,
unemployment and economic growth.
Gross Domestic Product (GDP) - is a common measure/yardstick for an economy's performance.

THE CIRCULAR FLOW DIAGRAM

Market for ssumphio ns services

are
goods and Servíce
) Al godk and
and thot HH
bought by HH
îmcome.

Households spends dh tneir

Fims

Wages,
Rentand 1Ond, lahor
profit Market for
ond capital
&
fachrs of produchon

NOTE: GDP measures 2 things at once: Total Income and Total Expenditure

(An economy's income = expenditure since every transaction has two parties: a buyer and a seller)

The actual economy is, of course, more complicated.

HH pays taxes
HH buyimported goods
Some goods are bought by suits
Some goods are boughtbyfirms

Outflows
Savings
Taxes

Import Spending
Inflows/Injections
Investment
Government Expenditures/Subsidies/TP
Export Earning

What this program Omits:

1. Government-collect taxes and buy goods

2. Financial Sector
3. Foreign Sector

THE MEASUREMENT OF GROSS DOMESTIC PRODUCT (GDP)

price x quantity produced
GDP-is the total monetary or market value of all the finished goods and services produced within a
country's borders in a specific time period.

(1) GDP is the market value - GDP adds together many different kind of products into a single

measure of the value of economic activity.

(2) Of All-6DP is a comprehensive measure of economic activity.
Excluding: Home production, legal Activities, and Goods that do not enter the marketplace
 (3) Final-GDP includes all final goods produced.
Intermediate Goods are items that we use to create another product. In other words, they are
in GDP
inputs in other products or the ingredients of finished products and they are excluded
because this will result in double counting because their value is already reflected in the value of

the final good.

Examples:
Milk-is considered intermediategoods because a restaurant purchased them to make

out of a something.
Salt-can also be considered as intermediate because a baker used it for making bread
but it can also considered as consumer goods because consumers directly utilize them.

(4) Goods and Services- it includes both tangible and intangible commodities.
(5) Produced-these are currently produced goods or services and DOES NOT include produced
items in the past.
and are
Example: Used Car; not included in GDP because they were produced in a previous year
part of that year's GDP.
(6) W/in a Country-domestically produced goods, regardless of nationality.
Note: OFW incomes are also not included in GDP.
(7) In a given period of time- quarterly, yearly.

THE COMPONENTS OF GDP

1. Consumption or Personal Consumption Expenditures-spending by HH on goods and services

with the exception of purchases of now housing.

2. Investment- the purchase of goods that will be used in the future to produce more goods and

services.
COMPONENTS OF INVESTMENT:

Business Fixed Investment

Residential
Inventory
3. Government Purchases-spending by the government on goods and services.
Expenditure: Transfer Payments, Social Security Payments and Disability Payments
4. Net Export-(Formula: Value of Exports-Value of Imports)

Calculating GDP

Year Price of Rice (per kilo) Quantity Price of Fish (per kilo) Quantity

2010 30 100 50 100

2011 35 200 60 200

2012 40 300 70 300

CALCULATING NOMINAL GDP

Nominal GDP-the production of goods and services valued at current prices.

Year price x quantity

2010 (30x 100) + (50x 100) = 8,000

2011 (35 x 200) + (60 X 200) = 19,000

2012 (40 X 300) + (70 X 300) = 33,000

CALCULATING REAL GDP

Real GDP- the production of goods and services valued at constant prices.

Year Base Year 2010

2010 (30 X 100) + (50 X 100) 8,000

=

2011 (30X 200) + (50 X 200) 16,000

=

2012 (30 X 300)+ (50 X 200) = 18,000

NOTE: Real GDP is a better measure than Nominal GDP

The GDP Deflator- a measure of the price level calculated as the ratio of Nominal GDP to Real GDP
times 100. A measure of the level of prices of all new, domestically produced, final goods and service in

an economy in a year.

Formula:

GDP Deflator: Nominal GDP DD

X
Real GDP

Inflation Rate =
GDP DeAatur, 6DP DefiotorE
X 100
GDP Defltor 4-1

Is GDP a good measure of Economic Well-being?

National Income Accounts - is a statistical framework of the economy's production, expenditures and
income, and records the annual flow of goods and services in the economy during a given period of

time.

Gross National Product (GNP)-is the total market value offinal goods and service produced by the
nation's economy or by the nation's economic resources in any given period of time, including earning
from abroad.

Net Factor Income from Abroad- the difference between the receipts of the country for its resources
used in the production of goods and services abroad, and the payments the country use to make for the
use of foreign resources for domestic production, during a given period of time. In simple words, the
difference between the income earned by a country from abroad and the income paid by a country
abroad/rest of the world.

GDP GNP- Net Factorincome from abroad

GNP GDP + Net Factor income from abroad

GDP per Capita Formula: GDP/Population (A country's gross domestic product divided by its
population)
Approaches in Computing GNP/GDP

1. Expenditure Approach (GDP = C (Consumption)+ I(nvestment)+ G(Government) + NX (Net

Exports)
2. Income Approach (=Total National Income +Sales Taxes + Depreciation + Net Foreign Factor

Income)
3. Value Added by Industry Origin (= Gross Value of Output -Value of Intermediate Consumption)
or (=Selling Price-Purchase Cost)

Example: Value Added

100 pesos 100

Agriculture- Sugarcane
Industry-Sugar 150 pesos 50
Services-Trader 200 pesos 50
200

GDP& ECONOMICWELL-BEING

REAL GDP per Capita/z is the main indicator of the average person's standard of
living.
But GDP is not a perfect measure of well-being.

not allow for the health of our children, the

According to Senator Robert Kennedy in 1968, "GDP does
quality for their education, and the joy of their play.

GDP does not Value

1. The quality of the environment

2. Leisure time
3. Non
4. An equitable distribution of income

Then why do we care about GDP?

to afford schools, a clean environment, heathcare, etc.

Having a large GDP enables a country
life are positively related with GDP
Many indicators of quality of