Pertemuan 1

1. Measuring a Nation's Income

Microeconomics vs. Macroeconomics

• Microeconomics: This is about small parts of the economy. It looks at individual households and firms. Think of it as studying how families and businesses make decision and interact in markets.

• Macroeconomics: This is the big picture! It analyzes the whole economy, trying to explain changes that affect many households and firms together.

Key Questions Addressed by Macroeconomics

1. Income Disparities: Why do some countries have high average incomes while others are low?

2. Price Changes: Why do prices go up quickly sometimes but stay the same at other times?

3. Production & Employment Fluctuations: Why does production and jobs increase in some years, but decrease in others?

Economy's Income and Expenditure

• To see how well the economy is doing, we look at the total income every household earns.

• Income and Expenditure Equality: Every time someone buys something, there’s a seller. For every dollar someone spends, there’s another person earning that dollar!

Circular-Flow Diagram

• This diagram helps us visualize the economy:

  • Firms: These are businesses that make and sell goods/services. They also hire people (factors of production) and buy inputs (like raw materials).

  • Households: Families that buy goods and services and sell factors of production, like labor.

Gross Domestic Product (GDP)

• Definition: GDP is the total value of all final goods and services made in a country over a set time.

• Importance: It measures both the income and what is spent in the economy.

Features of GDP (Measurement):

1. Market Value: Values items at current market prices.

2. All Items: include all items produced and legally sold.

3. Final Goods & Services: Counts only the final products to avoid double counting, tangible and intangible.

4. Produced: Only includes things made recently, not resales.

5. Within a Country: Counts only what’s produced inside the country's borders.

6. Given Period: Looks at production over a specific time, like a year.

Exclusions from GDP

• Non-Market Transactions: Things made but not sold (like family cleaning) are not counted.

• Illicit Goods: Illegal sales (like drug trade) don’t count in GDP.

Components of GDP

The formula for GDP is: GDP (Y) = C + I + G + NX

• C (Consumption): Money spent by households on goods/services (not new houses).

• I (Investment): Spending on things like capital goods, inventory, and new housing.

• G (Government Purchases): Money spent by the government on goods/services.

• NX (Net Exports): Exports (goods sold abroad) minus imports (goods bought from abroad).

Example of GDP and it Components

Real vs. Nominal GDP

• Nominal GDP: This shows the dollar value of goods/services at current prices.

• Real GDP: This adjusts to take into account inflation, showing the value at constant prices.

• Adjusting is crucial for accurately reflecting the economy.

Example of Real and Nominal GDP

How To Calculate Nominal and Real GDP

GDP Deflator

• Definition: This is a price level measure that compares nominal GDP to real GDP, times 100.

• It shows how much of GDP growth is due to price increases instead of actual output growth.

Formula of GDP Deflator

GDP Deflator = (Nominal GDP/Real GDP) x 100

Formula of Nominal GDP to Real GDP

Real GDP = (Nominal GDP/GDP Deflator) x 100

Assessing Economic Well-Being with GDP

• GDP as an Indicator: It provides a rough estimate of a nation's economic performance and living standards. More GDP usually means better living conditions, but it isn’t everything!

• GDP doesn’t include:

  • Value of leisure time

  • Quality of the environment

  • Non-market activities like family care or volunteering

Global Context

• Different GDP levels among countries show the differences in economic prosperity. Real GDP per person gives a clearer comparison for living standards across countries.

Conclusion on Income Measurement

• Key Points:

  • Every economic transaction involves both income and expenses, and GDP reflects this.

  • While GDP is helpful, it has limits and should be looked at with other quality of life measures.