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Reading materials

UNIT 2: N. Gregory Mankiw (2021), Principles of Economics 9th edition,

Cengage Learning, ISBN 978-0-357-03831-4
Measuring a Nation’s Income
CHAPTER 23: Measuring a Nation’s Income (P473)

LECTURER: Assoc.Prof. HA QUYNH HOA, PhD

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The Circular-Flow Diagram

Look for the answers to these questions:
Revenue (=GDP) expenditure (=GDP)
Markets for Goods
& Services
G&S G&S
u What is Gross Domestic Product (GDP)? sold bought
u How is GDP related to a nation’s total income and spending?
u What are the components of GDP?
u How is GDP corrected for inflation? Firms Households

u Does GDP measure society’s well-being?

Factors of Labor, land,
production capital
Markets for Factors
of Production
Wages, rent, profit Income (=GDP)
3 (=GDP)
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What This Diagram Omits Income and Expenditure

u The government u Income equals expenditure

Collects taxes, buys goods and services o For the economy as a whole
u The financial system o Because every dollar a buyer spends is a dollar of income for the seller.
Matches savers’ supply of funds with borrowers’ demand for loans u Gross Domestic Product (GDP)
u The foreign sector o Measures total income of everyone in the economy.

Trades goods and services, financial assets, and currencies with the o Also measures total expenditure on the economy’s output of goods and
country’s residents services.

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Gross Domestic Product (GDP) Is…

“Gross Domestic Product (GDP) is the market value
of all final goods and services produced within a
country in a given period of time”
…the market value of all final goods & services produced within a country
in a given period of time.
u Goods are valued at their market prices, so:
o All goods measured in the same units (e.g., dollars in the U.S; VND in VN)
o Things that don’t have a market value are excluded, e.g., housework you do
for yourself.

Chỉ tính gdp với những cái ……..

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Gross Domestic Product (GDP) Is… Gross Domestic Product (GDP) Is…

…the market value of all final goods & services produced within a country
…the market value of all final goods & services produced within a country in a given period of time.
in a given period of time.
u Final goods: intended for the end user chỉ tính final goods vào gdp

u Intermediate goods: used as components or ingredients in the production of u GDP measures the value of production that occurs within a country’s
other goods borders, whether done by its own citizens or by foreigners located there.
u GDP only includes final goods—they already embody the value of the
intermediate goods used in their production.
u GDP includes all items produced and sold legally in markets
u GDP excludes most items produced and sold illicitly/illegally. It also
excludes most items that are produced and consumed at home.
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Gross Domestic Product (GDP) Is…

The Components of GDP
…the market value of all final goods & services produced within a country
in a given period of time. u Recall: GDP is total spending.
u Four components:
o Consumption (C)
u GDP includes currently produced goods, not goods produced in the past
o Investment (I)
u Usually a year or a quarter (3 months)
currently produced : spham sản xuất quý 1 năm 2022 mới đc tính vào gdp 2022 o Government Purchases (G)
tính theo thời gian sản xuất
hàng hoá cũ, dùng rồi mua bán lại không tính vào gdp năm đó o Net Exports (NX)
u These components add up to GDP (denoted Y):
Y = C + I + G + NX

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Consumption (C) Investment (I)

u Consumption (C): Total spending by households on goods and services with
the exception of purchases of new housing
u Note on housing costs:
o For renters, C includes rent payments.
o For homeowners, C includes the imputed rental value of the house, but
not the purchase price or mortgage payments
o Not included in C: purchases of new housing
the imputed rental value :giá trị thuê nhà ước tính
u Investment (I): Total spending on goods that will be used to produce more goods
in the future.
o Business capital: business structures (factory, office building…),
equipment (machine, computer…), and intellectual property products
(software…)
o Residential capital: landlord’s apartment building; a homeowner’s
personal residence
o Inventory accumulations: goods produced but not yet sold

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Government Purchases (G) Net Exports (NX)

u Government purchases (G) u Net exports, NX = exports – imports
o All spending on the goods and services purchased by the government o Exports: foreign spending on the economy’s goods and services
At the federal, state, and local levels. o Imports: are the portions of C, I, and G
o Includes: salaries of government workers, building highways, national that are spent on goods and services produced abroad
IMPORT
hospital, healthcare system, education spending… DOMESTIC

o Excludes transfer payments u Adding up all the components of GDP gives:

Such as Social Security benefits to an elderly or unemployment insurance
benefits to recently laid off workers. Y = C + I + G + NX
Y = C + I + G + EX - IM
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Real GDP vs. Nominal GDP Economic growth

u Nominal GDP is the production of goods and services valued at current prices
u Economic growth rate is the percentage change in real GDP from the
o Values output using current prices preceding period.
o Not corrected for inflation
𝐺𝐷𝑃!" = ∑!#$% 𝑞#" . 𝑝#" 𝐺𝐷𝑃!&'&& = ∑!#$% 𝑞#&'&& . 𝑝#&'&& 𝑮𝑫𝑷𝒕𝒓 %𝑮𝑫𝑷𝒕#𝟏
𝒈𝒕 = 𝒓
. 𝟏𝟎𝟎%
u Real GDP is the production of goods and services valued at constant prices 𝑮𝑫𝑷𝒕#𝟏𝒓

o Values output using the prices of a base year

o Is corrected for inflation ()*%&'&& %()*%&'&(
𝑔&'&& = . 100% = 8.02%
𝐺𝐷𝑃(" = ∑!#$% 𝑞#" . 𝑝#' 𝐺𝐷𝑃(&'&& = ∑!#$% 𝑞#&'&& . 𝑝#&'%' ()*%&'&(

u For the base year

Nominal GDP = Real GDP
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GDP Deflator GDP Deflator and Inflation rate

để tính sự khác biệt giữa GDP Delator giữa 2 năm =>> inflation rate ( tỉ lệ lạm phát )
u Economy’s inflation rate
u GDP deflator cho biết current level of price
The percentage increase in the GDP deflator from one year to the next
o A measure of the overall level of prices.
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷𝒕
𝑮𝑫𝑷 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟𝒕 = 𝑹𝒆𝒂𝒍 𝑮𝑫𝑷𝒕
𝒙𝟏𝟎𝟎 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟" − 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟"6%
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 " = . 100%
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟"6%
o Measures the current level of prices relative to the level of prices in the base year
o For the base year, the GDP deflator is 100.

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GDP and Economic Well-Being Why do we care about GDP?

u Having a large GDP enables a country to afford

u Real GDP per capita
Better schools, a cleaner environment, health care, etc.
Main indicator of the average person’s standard of living
phúc lợi ng nông dân đc hưởng: u Many indicators of the quality of life are positively correlated with GDP.
u But GDP is not a perfect measure of well-being. GDP does not value: For example…
• The quality of the environment - Life Expectancy
• Leisure time
- Average Schooling
• Non-market activity, such as the child care a parent provides at home
- Overall Life Satisfaction
• An equitable distribution of income
- …

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OTHER APPROACHES TO MEASURE GDP OTHER MEASURES OF INCOME

1. INCOME APPROACH Gross national product (GNP) is the total income earned by a
GDP = W + R + i + Pr + Dep + Te nation’s permanent residents (called nationals).
GDP = Wages + Rent income+ Interest income+ Profit+ Depreciation+ It differs from GDP in that it includes income that our citizens earn abroad
+ Sale taxes (taxes on expenditures) and excludes income that foreigners earn here.

2. PRODUCTION APPROACH For example, when a Canadian citizen works temporarily in the United
𝒏 States, her production is part of U.S. GDP, but it is not part of U.S. GNP. (It
𝐆𝐃𝐏 = A 𝑽𝑨𝒊 is part of Canada’s GNP).
𝐢$𝟏 For most countries, including the United States, domestic residents are
Where: responsible for most domestic production, so GDP and GNP are quite close.
𝑽𝑨𝒊 =Revenue of firm (i)- Total Intermediate costs of firm (i)
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OTHER MEASURES OF INCOME OTHER MEASURES OF INCOME

NFA NFA Dep Net national product (NNP) is the total income of a nation’s
residents (GNP) minus losses from depreciation.
NX Depreciation is the wear and tear on the economy’s stock of equipment and
GNP Sta_Dis
G structures, such as trucks rusting and old computer models becoming
GDP NNP obsolete.
I NI In the national income accounts prepared by the Department of Commerce,
depreciation is called the “consumption of fixed capital”.
C

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OTHER MEASURES OF INCOME OTHER MEASURES OF INCOME

Personal income is the income that households and noncorporate businesses
receive.
National income is the total income earned by a nation’s residents in the
production of goods and services. Unlike national income:
• NI differ from NNP because of the statistical discrepancy that arises • It excludes indirect business taxes (such as sales taxes) and including
from problems in data collection. business subsidies.
• It excludes retained earnings, which is income that corporations have earned
but have not paid out to their owners.
• It subtracts corporate income taxes, and contributions for social insurance
(mostly Social Security taxes).
• It includes the interest income that households receive from their holdings
of government debt and the income that households receive from
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OTHER MEASURES OF INCOME Summary

• Gross Domestic Product (GDP) measures a country’s total income and

Disposable personal income is the income that households and
noncorporate businesses have left after satisfying all their obligations to
the government.
It equals personal income minus personal taxes and certain nontax
payments (such as traffic tickets).
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expenditure.
• The 4 spending components of GDP include: Consumption, Investment,
Government Purchases, and Net Exports.
• Nominal GDP is measured using current prices. Real GDP is measured
using the prices of a constant base year and is corrected for inflation.
• GDP is the main indicator of a country’s economic well-being, even though
it is not perfect.
• Other measures of income: GNP, NNP, NI, PI, Disposable personal income
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