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Chapter 22. Measuring a Nation’s Income. Two Methods of Computing An Economy’s Income (Fig. 22-1). Expenditure Approach : Sum the total expenditures by households (from the top portion of the circular flow). Resource Cost or Income Approach :

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Chapter 22

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Chapter 22 l.jpg

Chapter 22

Measuring a Nation’s Income


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Two Methods of Computing An Economy’s Income (Fig. 22-1)

  • Expenditure Approach:

    • Sum the total expenditures by households (from the top portion of the circular flow).

  • Resource Cost or Income Approach:

    • Sum the total wages and profit paid by firms for resources (from the bottom portion of the circular flow).


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The Economy’s Income and Expenditure

  • When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

  • For an economy as a whole, income must equal expenditure.


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Gross Domestic Product

The total market value of all final goods and services produced during a given period of time within a country.


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Important Features of GDP

  • Goods/services are valued at market determined prices.

  • Only new output is counted.

  • GDP records only the output of final goods. We want to “count” production only once.

  • Transfer purchases not included.


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What Is and What Is Not Counted in GDP?

  • GDP includes all items produced in the economy and sold legally in markets.

  • GDP does not include items produced and consumed at home and never enter the marketplace. It does not include items produced and sold illicitly, such as illegal drugs.


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Gross National Product

The total market value of all final goods and services produced during a given period of time by the nation’s residents, regardless of the place produced.


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Three Other Measures of Income

  • Net Domestic Product (NDP):

    • Total income of residents of a nation after subtracting capital consumption allowances (depreciation).

  • Personal Income (PI):

    • The income that households and non-corporate businesses receive.

  • Disposable Income (DI):

    • Personal income less personal taxes.


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The Components of GDP

  • GDP (Y) is the sum of:

    • Consumption (C)

    • Investment (I)

    • Government Purchases (G)

    • Net Exports (NX)

      Y = C + I + G + NX


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Four Components of GDP

  • Consumption (C):

    • Is the spending by households on goods and services

      • e.g. buying clothing, food, movie tickets

  • Investment (I):

    • Is the purchases of capital equipment and structures

      • e.g. factory, houses, etc.


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The Four Components of GDP

  • Government Purchases (G):

    • Includes spending on goods and services by local, state and federal governments (e.g. roads, police, etc.).

    • Does not include transfer payments, because it is not made in exchange for currently produced goods or services.

  • Net Exports (NX):

    • Exports minus imports.


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Table 22-1 GDP (1998)


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GDP Components of Measurement


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GDP Components of Measurement

Consumption

68 %


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GDP Components of Measurement

Investment

16%

Consumption

68 %


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GDP Components of Measurement

Investment

16%

Consumption

68 %

Government

Spending

18%


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GDP Components of Measurement

Government

Spending

18%

Investment

16%

Net Exports

-2 %

Consumption

68 %


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Real versus Nominal GDP

  • GDP is the market value of the economy’s current production, referred to as Nominal GDP.

  • Real GDPmeasures any given year’s total output in “constant” prices.

  • An accurate view of the economy requires adjusting nominal to real GDP, using the GDP Price Deflator.


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GDP Price Deflator

  • The GDP Price Deflatoris a price index that uses a bundle of all final goods and services.

    • It tells us the rise in nominal GDP that is attributable to a rise in prices.

  • Converting Nominal GDP to Real GDP:

    Real GDP19xx =

    (Nominal GDP19xx ) ÷ (GDP deflator19xx)X100


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Table 22-2

  • Calculating Nominal GDP, Real GDP and the GDP Deflator (see p. 501)


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U.S. Real and Nominal GDP ($b)


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Current Trends in GDP

  • Link to Bureau of Economic Analysis website (http://www.bea.doc.gov/briefrm/gdp.htm)

  • Most Recent U.S. GDP (nom) $10,369B or $10.369T (2002Q2)


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GDP and Economic Well-Being

  • GDP Per Persontells us the income and expenditure of the average person in the economy.

    • It is a good measure of the material well-being of the economy as a whole.

    • More Real GDP means we have a higher material standard of living by being able to consume more goods and services.

    • It is NOT intended to be a measure of happiness or quality of life.


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GDP and Economic Well-Being

  • Some factors and issues not in GDP that lead to the “well-being” of the economy:

    • Factors that contribute to a good life such as leisure.

    • Factors that lead to a quality environment.

    • The value of almost all activity that takes place outside of the markets, e.g. volunteer work and child-rearing.


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