Econ - Ch 10. Measuring a Nation's Income

What is Economics about?

Scarcity: The limited nature of society’s resources.

What is Macroeconomics?

Study the behavior and performance of an economy as a whole

Goals of Macroeconomics

Define and identify significant economic concepts

Identify the equilibrium within the supply and demand model

Explain the concepts of the business cycle

Analyze the impacts of fiscal and monetary policy on the economic fluctuations

What are the four macro markets

resource market

loanable funds market

foreign exchange market

aggregate goods and services market.

When price (P) changes

Quantity (Q) changes

What is GDP (Y) ?

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

• Total income of everyone in the economy.

• Total expenditure on the economy’s output of goods and services.

  • “income” equals expenditure because every dollar a buyer spends is a dollar of income for the seller

Circular Flow Diagram

“The market value”

Actual market for the goods and services.

“all final goods and services”

Final goods: Goods whose sale is intended to be for their final purpose.

Intermediate goods: Goods that are bought to be used in the production of another good

• NOT a part of GDP

“Produced”

Only goods and services produced by the economy are counted. It does not matter whether the goods are bought, sold, consumed, traded, etc.

• NOT items produced in the past

  • ex) A used 1997 car being transacted in 2025 only counts for the 1997 GDP not 2025 one

“Within a country”

Only measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there

“In a given period of time”

Typically a year or quarter. Goods and services that counted toward GDP in a previous calculation do not affect the current calculation.

Components of GDP

C, I, G, NX

(G) Government Expenditures

Government Expenditures - All spending on the goods and services purchased by government at the federal, state, and local levels

Examples of Government Expenditures

• Salaries of government employees

• Contracts to build new roads and bridges

• Military spending

Examples of NOT Government Expenditures

Transfer Payments: Made by the government to households and firms that are not in exchange for goods or services

• Unemployment insurance

• medicare

• social security

• ie transaction from the government to the individual (nothing new produced)

(C) Consumption

Total spending by households on goods and services

Notes on Households: (buying house services)

• for renters. consumption includes rent

• for homeowners, consumption includes the imputed rental value of the house, but not the purchase of new housing or mortgage

(I) Investment/Business spending

Total spending on goods that will be used in the future to produce more goods

• Business spending, residential investment, changes in inventory

• Investment includes

  • capital equipment (tools)

  • structures (purchasing a new house, etc)

  • inventories (goods produced but not sold)

(NX) Net Exports

Value of exports after taking out the value of imports

NX =

Exports - Imports

What are Exports

Goods and services produced in the US but bought and consumed internationally.

Import

Goods and services produced internationally but bought and consumed in the US.

What is Gross National Product (GNP) ?

The total income earned by a nation’s permanent residents (called nationals).

It differs from GDP. It includes income that our citizens earn abroad and excludes income that foreigners earn here.

GNP =

GDP + any income earned by residents from overseas - income earned by foreigners within the country

What is Economic Growth?

measured as the percentage change in GDP from one year to the next

What is the Percentage Change formula

(This year - Last year) / Last year * 100

What is Nominal GDP?

Measures everything in terms of today

• Can change due to a change in prices or quantities .

Nominal GDP =

Current Prices * Current Quantities

What is Real GDP?

Measures the market value of production using a base year’s prices

• Changes only come from changes in production.

• Standard metric for gauging economic growth.

• Base year can be any year.

Real GDP =

Base Year * Current Quantities

What is GDP Deflator?

Measure of the overall price level in an economy

GDP Deflator =

Nom. GDP / R. GDP * 100

What is Inflation?

The percentage increase in the price level from one year to the next

Inflation Rate =

(GDP Deflator Today - GDP Deflator Last Year) / (GDP Deflator Last Year) * 100

Real GDP per capita is the main indicator for a person’s standard of living but

its not a perfect measure of wellbeing