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Princ ch23 Presentation
Princ ch23 Presentation
23
Measuring a Nation’s Income
Economics
PRINCIPLES OF
N. Gregory Mankiw
2
Micro vs. Macro
Microeconomics:
The study of how individual households and
firms make decisions, interact with one another
in markets.
Macroeconomics:
The study of the economy as a whole.
For
For the
the economy
economy as as aa whole,
whole,
income
income equals
equals expenditure
expenditure
because
because everyevery dollar
dollar aa buyer
buyer spends
spends
is
is aa dollar
dollar of
of income
income forfor the
the seller.
seller.
Households:
Households:
own
own the
the factors
factors of
of production,
production,
sell/rent
sell/rent them
them to
to firms
firms for
for income
income
buy
buy and
and consume
consume goodsgoods & & services
services
Firms Households
Firms:
Firms:
buy/hire
buy/hire factors
factors of
of production,
production,
use
use them
them toto produce
produce goods
goods
and
and services
services
MEASURING
sell
sell goods
goods &
& services
services
A NATION’S INCOME 6
The Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Y
Y =
= C
C +
+ II +
+ G
G +
+ NX
NX
includes spending on
capital equipment (e.g., machines, tools)
structures (factories, office buildings, houses)
inventories (goods produced but not yet sold)
Note:
Note: “Investment”
“Investment” does
does not
not
mean
mean the
the purchase
purchase of
of financial
financial
assets
assets like
like stocks
stocks and
and bonds.
bonds.
MEASURING A NATION’S INCOME 17
Government Purchases (G)
is all spending on the g&s purchased by govt
at the federal, state, and local levels.
G excludes transfer payments: chi trả , such
as
Social Security or unemployment insurance
benefits.
They are not purchases of g&s.
Y
Y =
= C
C +
+ II +
+ G
G +
+ NX
NX
22
ACTIVE LEARNING 1
Answers
C. Jane spends $1200 on a computer to use in her
editing business. She got last year’s model on
sale for a great price from a local manufacturer.
Current GDP and investment do not change,
because the computer was built last year.
In each year,
nominal GDP is measured using the (then)
current prices.
real GDP is measured using constant prices from
the base year (2005 in this example).
MEASURING A NATION’S INCOME 27
EXAMPLE:
Nominal Real
year GDP GDP
2005 $6000 $6000
37.5% 20.0%
2006 $8250 $7200
30.9% 16.7
2007 $10,800 $8400
%
The change in nominal GDP reflects both prices
and quantities.
The change in real GDP is the amount that
GDP would change if prices were constant
(i.e., if zero inflation).
Hence, real GDP is corrected for inflation.
MEASURING A NATION’S INCOME 28
Nominal and Real GDP in the U.S.,
1965-2007
Billions
$12,000
$10,000
Real GDP
$8,000 (base year
$6,000
2000)
$4,000
Nominal
$2,000 GDP
$0
1965 1970 1975 1980 1985 1990 1995 2000 2005
29
The GDP Deflator
The GDP deflator is a measure of the overall
level of prices.
Definition:
nominal GDP
GDP
GDP deflator 100 xx
deflator == 100
real GDP
Indonesia
Japan
China
Life expectancy (years)
U.S.
Mexico Germany
Brazil
Pakistan
Russia
India
Bangladesh
Nigeria
Brazil
Adult Literacy
Indonesia
Nigeria
India
Pakistan
Bangladesh
Japan
U.S.
(% of population)
Internet Usage
Germany
Brazil
Indonesia
Mexico
Pakista
Russia
n
China
Nigeria India