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Income
Chapter 22
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Microeconomics
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Macroeconomics
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Macroeconomics
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The Economy’s
Income and Expenditure
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The Economy’s
Income and Expenditure
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Gross Domestic Product
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The Circular-Flow Diagram
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The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought
Firms
Households
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The Measurement of GDP
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The Measurement of GDP
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The Measurement of GDP
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What Is Counted in GDP?
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What Is Not Counted in GDP?
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Other Measures of Income
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Gross National Product
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Net National Product (NNP)
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National Income
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Personal Income
Personal income is the income that
households and noncorporate businesses
receive.
Unlike national income, it excludes retained
earnings, which is income that corporations
have earned but have not paid out to their
owners.
In addition, it includes household’s interest
income and government transfers.
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Disposable Personal Income
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The Components of GDP
Y = C + I + G + NX
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The Components of GDP
Consumption (C):
The spending by households on goods and
services, with the exception of purchases of
new housing.
Investment (I):
The spending on capital equipment,
inventories, and structures, including
new housing.
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The Components of GDP
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GDP and Its Components (1998)
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GDP and Its Components (1998)
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GDP and Its Components (1998)
Consumption
68 %
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GDP and Its Components (1998)
Investment
16%
Consumption
68 %
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GDP and Its Components (1998)
Government
Investment Purchases
16% 18%
Consumption
68 %
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GDP and Its Components (1998)
Government Purchases
Investment 18% Net Exports
16% -2 %
Consumption
68 %
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Real versus Nominal GDP
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Real versus Nominal GDP
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GDP Deflator
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GDP Deflator
Nominal GDP
GDP deflator = 100
Real GDP
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Converting Nominal GDP to Real
GDP
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Real and Nominal GDP
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Real and Nominal GDP
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Real and Nominal GDP
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Real and Nominal GDP
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Real GDP in the United States
Billions of
1992 Dollars
8,000
(Periods of falling real GDP)
7,000
6,000
5,000
4,000
3,000
1970 1975 1980 1985 1990 1995 2000
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GDP and Economic
Well-Being
GDP is the best single measure of the
economic well-being of a society.
GDP per person tells us the income
and expenditure of the average person
in the economy.
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GDP and Economic
Well-Being
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GDP and Economic
Well-Being
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GDP, Life Expectancy, and Literacy
Country Real GDP per Life Adult
Person (1997) Expectancy Literacy
United States $29,010 77 years 99%
Japan 24,070 80 99
Germany 21,260 77 99
Mexico 8,370 72 90
Brazil 6,480 67 84
Russia 4,370 67 99
Indonesia 3,490 65 85
China 3,130 70 83
India 1,670 63 53
Pakistan 1,560 64 41
Bangladesh 1,050 58 39
Nigeria 920 50 59
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Summary
Because every transaction has a buyer and
a seller, the total expenditure in the
economy must equal the total income in
the economy.
Gross Domestic Product (GDP) measures
an economy’s total expenditure on newly
produced goods and services and the total
income earned from the production of
these goods and services.
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Summary
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Summary
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Summary
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Graphical
Review
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The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought
Firms
Households
Government Purchases
Investment 18% Net Exports
16% -2 %
Consumption
68 %
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Real GDP in the United States
Billions of
1992 Dollars
8,000
(Periods of falling real GDP)
7,000
6,000
5,000
4,000
3,000
1970 1975 1980 1985 1990 1995 2000
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