Measuring a Nation’s

Income

Chapter 10 or 23
 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.
To have this number make sense, it is

also best to look at income per person.

 The Economy’s
Income and Expenditure

 For an economy as a whole, income must equal

expenditure because:
 Every transaction has a buyer and a seller.
 Every dollar of spending by some buyer is a dollar of
income for some seller.
 Say’s Law-Supply creates it’s own demand
 This process can be seen using a Circular Flow Diagram.
 Gross Domestic Product

 Gross domestic product (GDP) is a

measure of the income and expenditures
of an economy.
 It is the total market value of all final
goods and services produced within a
country in a given period of time.
 How much is the current GDP?
 The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought

Firms
Households

Inputs for Labor, land,

production Market for and capital
Factors
Wages, rent, of Production Income
and profit
The Measurement of GDP

GDP is:
the market value

of all final goods and services

produced within a country

in a given period of time.

What Is Counted and Not Counted
in GDP?
GDP includes all items produced in the economy and sold
legally in markets.
GDP excludes services that are produced and consumed

at home and that never enter the marketplace.

Caring labor, the work that is normally produced by

women.
Because GDP does not count it, it diminishes its

importance.
GDP also excludes black market items, such as illegal

drugs.
 Other Measures of Income

 Gross National Product (GNP)

 Net National Product (NNP)
 National Income
 Personal Income
 Disposable Personal Income
 The Components of GDP

GDP (Y ) is the sum of the following:

 Consumption (C)
  Investment (I)
  Government Purchases (G)
  Net Exports (NX)

Y = C + I + G + NX
 GDP and Its Components
(1998)
Total (Billions Per Person (In % of Total
of Dollars) Dollars)
GDP (Y) $8,511 $31,522 100%

Consumption C 5,808 21,511 68%

Investment I 1,367 5,507 16

Government G 1,487 5,507 18

Net Exports NX -151 -559 -2

 GDP and Its Components (1998)

Government Purchases
Investment 18% Net Exports
16% -2 %

Consumption
68 %
Measuring Economic Growth

 We use real GDP to calculate the economic growth

rate.
 The economic growth rate is the percentage change in
the quantity of goods and services produced from
one year to the next.
 We measure economic growth so we can make:
 Economic welfare comparisons
 International welfare comparisons
 Business cycle forecasts
Measuring Economic Growth

 Business Cycle Forecasts

 Real GDP is used to measure business cycle
fluctuations.
 These fluctuations are probably accurately
timed but the changes in real GDP probably
overstate the changes in total production and
people’s welfare caused by business cycles.
 Real versus Nominal GDP

 Nominal GDP values the production of

goods and services at current prices.
 Real GDP values the production of
goods and services at constant prices.
Real GDP and the Price Level
Deflating the GDP Balloon
Nominal GDP increases because production—real GDP–
increases.
Real GDP and the Price Level
 Nominal GDP also increases because prices rise.

 Deflating the GDP Balloon

Real GDP and the Price Level

 We use the GDP Deflator to take the air out of

Nominal GDP.
 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
 Hawaii GSP (1997)

 This pie chart shows how

Hawaii’s Gross State
Hawaii GSP (1997)
Product is broken down.
 Notice how the visitor Other Exp
industry is relatively high 5%

(21%). Visitor
21% Consumption
Consumption Investment
 Refer to Time Series of 46% Government
Visitor
Hawaii GSP. Other Exp

 Refer to comparison of Government

22%
Investment
USA and Hawaii GDP 6%

and GSP.
 GDP, Life Expectancy, and
Literacy
Country Real GDP Per Life Expectancy Adult Literacy
Person (1997)
USA $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