Macroeconomics

Measuring achenxue
Nation’s
Premium
Income Email:chenxue@szu.edu.cnPowerPoint
Slides by
Ron Cronovich
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2012 UPDATE
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Text BOOK

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 Micro-economics
Macro-economics

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 Micro vs. Macro
Microeconomics VS macroeconomics

▪ 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.

▪ We begin our study of macroeconomics with

income and expenditure….
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 N. Gregory Mankiw

Economics
Principles of

Sixth Edition

23
Measuring a Nation’s
Premium
Income PowerPoint
Slides by
Ron Cronovich
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2012 UPDATE
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 In this chapter,
look for the answers to these questions:
• What is Gross Domestic Product (GDP)?
• How is GDP related to a nation’s total income
and spending?
• What are the components of GDP?
• How is GDP corrected for inflation?
• Does GDP measure society’s well-being?

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 The ranking of GDP 1960-2028

一国收入的衡量
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 Income and Expenditure The Economy's total
Income and total
Expenditure;
▪ Gross Domestic Product (GDP) measures
total income of everyone in the economy.
▪ GDP also measures total expenditure on the
economy’s output of g&s.

For the economy as a whole,

income equals expenditure
because every dollar a buyer spends
is a dollar of income for the seller.

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What kind of factors of production do they need？

一国收入的衡量 10
 The Circular-Flow Diagram
▪ a simple depiction of the macro economy
▪ illustrates GDP as spending, revenue,
factor payments, and income
▪ Preliminaries:
▪ Factors of production are inputs like labor,
land, capital, and natural resources.
▪ Factor payments are payments to the factors
of production (e.g., wages, rent).

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 The Circular-Flow Diagram

Households:
▪ own the factors of production,
sell/rent them to firms for income
▪ buy and consume goods & services

Firms Households

Firms:
▪ buy/hire factors of production,
use them to produce goods
and services
▪ sell goods & services
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 The Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income (=GDP)
profit (=GDP)
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 What This Diagram Omits
▪ The government
▪ collects taxes, buys g&s
▪ The financial system
▪ matches savers’ supply of funds with
borrowers’ demand for loans
▪ The foreign sector
▪ trades g&s, financial assets, and currencies
with the country’s residents

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 Gross Domestic Product (GDP) Is…
…the market value of all final goods &
services produced within a country
in a given period of time.

Goods are valued at their market prices, so:

▪ All goods measured in the same units
(e.g., dollars in the U.S.)
▪ Things that don’t have a market value are
excluded, e.g., housework you do for yourself.

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 Gross Domestic Product (GDP) Is…
…the market value of all final goods &
services produced within a country
in a given period of time.

Final goods: intended for the end user

Intermediate goods: used as components
or ingredients in the production of other goods
GDP only includes final goods—they already
embody the value of the intermediate goods
used in their production.
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 Gross Domestic Product (GDP) Is…
…the market value of all final goods &
services produced within a country
in a given period of time.

GDP includes tangible goods

(like cell phones, mountain bikes, beer)
and intangible services
(dry cleaning, concerts, cell phone service).

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 Gross Domestic Product (GDP) Is…
…the market value of all final goods &
services produced within a country
in a given period of time.

GDP includes currently produced goods,

not goods produced in the past.

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 Gross Domestic Product (GDP) Is…
…the market value of all final goods &
services produced within a country
in a given period of time.

GDP measures the value of production that occurs

within a country’s borders, whether done by its own
citizens or by foreigners located there.

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 Gross Domestic Product (GDP) Is…
…the market value of all final goods &
services produced within a country
in a given period of time.

Usually a year or a quarter (3 months)

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 https://www.youtube.com/watch?

The Components of GDP v=oUM8VDQkqpI&t=322s

▪ Recall: GDP is total spending.

▪ Four components: GDP definition; Components
of GDP
▪ Consumption (C) Nominal GDP, real GDP,
GDP deflator.
▪ Investment (I)
▪ Government Purchases (G)
▪ Net Exports (NX)
▪ These components add up to GDP (denoted Y):

Y = C + I + G + NX

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 Consumption (C)
▪ is total spending by households on g&s. goods and services

▪ Note on housing costs:

▪ For renters,
consumption includes rent payments.
▪ For homeowners,
consumption includes the imputed rental value
of the house, but not the purchase price or
mortgage payments.

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 Note: “Investment”
does not mean the
Investment (I) purchase of financial
assets like stocks and
▪ is total spending on goods bonds.
that will be used in the
future to produce more
goods.
▪ includes spending on
▪ capital equipment (e.g.,
machines, tools)
▪ structures (factories, office
buildings, houses)
▪ inventories (goods
produced but not yet sold)

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 Government Purchases (G)
▪ is all spending on the g&s purchased by govt
at the federal, state, and local levels.
▪ G excludes transfer payments, such as
Social Security or unemployment insurance
benefits.
They are not purchases of g&s.

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 Net Exports (NX)
▪ NX = exports – imports
▪ Exports represent foreign spending on the
economy’s g&s.
▪ Imports are the portions of C, I, and G
that are spent on g&s produced abroad.
▪ Adding up all the components of GDP gives:

Y = C + I + G + NX

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 ACTIVE LEARNING 1
GDP and its components
In each of the following cases, determine how much
GDP and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
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.
D. Tesla builds $500 million worth of cars,
but consumers only buy $470 million worth of them.
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 ACTIVE LEARNING 1
Answers
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.

B. Sarah spends $1800 on a new laptop to use in

her publishing business. The laptop was built in
China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.

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 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.

D. Tesla builds $500 million worth of cars, but

consumers only buy $470 million of them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
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except
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 ▪U.S. GDP and Its Components,2023
（billions; %）

total percentage
Y 27,957.0 100.00
C 18,914.5 67.66
I 4,954.4 17.72
G 4,871.8 17.43
NX -783.7 -2.80

一国收入的衡量
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 ▪China GDP and Its Components
（0.1billions RMB）

2023 2022 2021

Y 1258647. 1205017 1140340.1
3
C 493247.2 450468.1 438015.2
I 530439.7 523890.4 489897.2

G 208113.4 193722.8 182071.6

NX 26847 39493.7 29521.9

一国收入的衡量
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 China GDP and Its Components （%）

2023 2022 2021

C 39.19% 37.17% 38.48%
I 42.14% 43.48% 42.96%
G 16.53% 16.08% 15.97%
NX 2.13% 3.28% 2.59%

一国收入的衡量
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 Real versus Nominal GDP
▪ Inflation can distort economic variables like GDP,
so we have two versions of GDP:
▪ Nominal GDP we have to multiply goods and services that we produced by currnent prices
▪ values output using current prices P*Q WHERE P IS current year
prices
▪ not corrected for inflation Q is GDP of current year

▪ Real GDP
▪ values output using the prices of a base year
▪ is corrected for inflation

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 EXAMPLE:
Pizza Latte
year P price Q quantity P Q
2022 $10 400 $2.00 1000
2023 $11 500 $2.50 1100
2024 $12 600 $3.00 1200

Compute nominal GDP in each year:

p P *Q
Increase:
Q
2022: $10 x 400 + $2 x 1000 = $6,000
37.5%
2023: $11 x 500 + $2.50 x 1100 = $8,250
30.9%
2024: $12 x 600 + $3 x 1200 = $10,800
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 EXAMPLE:
JO BASE YEAR LY GY PRICE USKI AY GI SRF BAKI QUANTITY CHANGE HOTI RHY GI

Pizza Latte
year P Q P Q
2022 $10 400 $2.00 1000
2023 $11 500 $2.50 1100
2024 $12 600 $3.00 1200

Compute real GDP in each year,

using 2022 as the base year: Increase:
2022: $10 x 400 + $2 x 1000 = $6,000
20.0%
2023: $10 x 500 + $2 x 1100 = $7,200
16.7%
2024: $10 x 600 + $2 x 1200 = $8,400
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 EXAMPLE:
Nominal Real
year GDP GDP
2022 $6000 $6000
2023 $8250 $7200
2024 $10,800 $8400

In each year,
▪ nominal GDP is measured using the (then)
current prices.
▪ real GDP is measured using constant prices from
the base year (2020 in this example).

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 EXAMPLE:
Nominal Real
year GDP GDP
2022 $6000 $6000
37.5% 20.0%
2023 $8250 $7200
2024 $10,800 30.9% $8400 16.7%

▪ 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.
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 Nominal and Real GDP in the U.S.,
2005–2023

Nominal
GDP
billions

Real GDP
(base year
2017)
 The GDP Deflator
▪ The GDP deflator is a measure of the overall
level of prices.
▪ Definition:

nominal GDP
GDP deflator = 100 x
real GDP

▪ One way to measure the economy’s inflation

rate is to compute the percentage increase in
the GDP deflator from one year to the next.

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 EXAMPLE:
Nominal Real GDP
year GDP GDP Deflator
2022 $6000 $6000 100.0
14.6%
2023 $8250 $7200 114.6
2024 $10,800 $8400 128.6
12.2%

Compute the GDP deflator in each year:

FORMULA

2022: 100 x (6000/6000) = 100.0

2023: 100 x (8250/7200) = 114.6

2023: 100 x (10,800/8400) = 128.6

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 ACTIVE LEARNING 2
Computing GDP
2022 (base yr) 2022 2023
P Q P Q P Q
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205

Use the above data to solve these problems:

A. Compute nominal GDP in 2022.
B. Compute real GDP in 2023.
C. Compute the GDP deflator in 2024.
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 ACTIVE LEARNING 2
Answers BASE YEAR MY PRICE FIX RHY GI

2022 (base yr) 2023 2024

P Q P Q P Q
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205

A. Compute nominal GDP in 2022.

$30 x 900 + $100 x 192 = $46,200

B. Compute real GDP in 2023.

$30 x 1000 + $100 x 200 = $50,000
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 ACTIVE LEARNING 2
Answers
2021 (base yr) 2022 2024
P Q P Q P Q
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205

C. Compute the GDP deflator in 2024.

Nom GDP = $36 x 1050 + $100 x 205 = $58,300
Real GDP = $30 x 1050 + $100 x 205 = $52,000
GDP deflator = 100 x (Nom GDP)/(Real GDP)
= 100 x ($58,300)/($52,000) = 112.1
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 GDP and Economic Well-Being
▪ Real GDP per capita is the main indicator of
the average person’s standard of living.
▪ But GDP is not a perfect measure of
well-being.
▪ Robert Kennedy issued a very eloquent
yet harsh criticism of GDP:

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Gross Domestic Product…
“… does not allow for the health of our
children, the quality of their education,
or the joy of their play. It does not
include the beauty of our poetry or
the strength of our marriages, the
intelligence of our public debate or
the integrity of our public officials.
It measures neither our courage, nor our wisdom,
nor our devotion to our country. It measures everything,
in short, except that which makes life worthwhile, and it
can tell us everything about America except why we are
proud that we are Americans.”
- Senator Robert Kennedy, 1968
 GDP, Part 1
• GDP – “the single best measure of the
economic well-being of a society”
– Economy’s total income
– Economy’s total expenditure
– Larger GDP
• Good life, better healthcare
• Better educational systems
– Measure our ability to obtain many of the
inputs into a worthwhile life
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 GDP, Part 2
• GDP – not a perfect measure of well-
being
– Doesn’t include
• Leisure
• Value of almost all activity that takes place
outside markets
• Quality of the environment
– Nothing about distribution of income

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 International differences: GDP & quality of life, Part 1

• Rich countries — higher GDP per person

– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries — lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
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 International differences: GDP & quality of life, Part 2

• Low GDP per person

– More infants with low birth weight
– Higher rates of infant mortality
– Higher rates of maternal mortality
– Higher rates of child malnutrition
– Less common access to safe drinking
water
– Fewer school-age children are actually in
school
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 International differences: GDP & quality of life, Part 3

• Low GDP per person

– Fewer teachers per student
– Fewer televisions
– Fewer telephones
– Fewer paved roads
– Fewer households with electricity

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 Table 3 GDP and the Quality of Life
Country Real GDP per Life Average Overall Life
Person Expectancy Years of Satisfaction (0
Schooling to 10 scale)
United States $52,947 79 years 13 years 7.2
Germany 43,919 81 13 7.0
Japan 36,927 83 12 5.9
Russia 22,352 70 12 6.0
Mexico 16,056 77 9 6.7
Brazil 15,175 74 8 7.0
China 12,547 76 8 5.2
Indonesia 9,788 69 8 5.6
India 5,497 68 5 4.4
Nigeria 5,341 53 6 4.8
Pakistan 4,866 66 5 5.4
Bangladesh 3,191 72 5 4.6

The table shows GDP per person and three other measures of the quality of life for twelve
major countries.

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 SU MMA RY

• Gross Domestic Product (GDP) measures a

country’s total income and expenditure.
• The four 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.
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