Introduction & Chapter 23-Measuring a Nation’s Income

What Economics is All About?

• All major economic problems faced by a society arise from
the fact of scarcity and choice.
• Scarcity: the limited nature of society’s resources.
 It is not possible to produce all the goods and services
people wish to have (supply of them is limited in relation
to demand).
• A resource is anything that can be used to produce something
else.
 There are three broad types: human resources (labour),
natural resources (land and raw materials) and manufactured
resources (capital).
• A resource is scarce when it is not freely available-that is,
when its price exceeds zero.
• Scarce resources (demand > supply) + Unlimited wants
and needs
• =
• The need to make rational decisions between competing
choices
• Wants – things people would like to have but are not
essential for life
• Needs – the essentials of life
• Competing choices – limited incomes mean all wants
and needs cannot be satisfied
• Choices have to be made which involve costs & benefits.
• Without scarcity, there would be no economic problem and
no need for prices.
• Because resources are scarce, you must make choices between
various alternatives, and whenever you choose, you must
sacrifice other second best alternatives (to choose is to lose!).
• Economics: the study of how society (individuals, businesses
& government) allocates its scarce resources among
alternative uses.
• If resources were not scarce, Economics would not exist
as a discipline.
• Choices involve sacrifice. An alternative that we sacrifice
when we make a decision is called trade-off.
• Rational choices is the weighing-up of the marginal costs and
marginal benefits of any activity while making decisions.
• Scarce goods produced from scarce resources are called
economic goods. These goods are desirable but limited in
amount.
• In contrast to economic goods, “bads” are those items
that are not desirable. For most people, garbage,
pollution, crime, terrorism, weeds, etc. are “bads”.

• People tend to eliminate or minimize “bads”, and the

elimination of the bad-garbage removal, for example-is
an economic good.
Question: Does everyone face scarcity?
 A child in developing country may face a scarcity of
food and clean drinking water; while a rich man may
face a scarcity of garage space for his various types of
cars collection.

Question: Will scarcity ever be eradicated?

 Because of humans’ unlimited wants but limited
resources, we can never eliminate scarcity, but it can
be reduced by the right choices.
 Trade-offs Creates Opportunity Cost
• An opportunity cost is defined as the value of the second best
alternative when another item or activity is chosen.
• Trade-offs create opportunity costs.

• The opportunity cost of a person attending college is the value

of the best alternative use of that person's time, as well as the
additional costs the person incurs by making the choice to
attend college.

• This includes the income of the student gives up by not

working plus the cost of tuition and books, and any other costs
they incur by attending college that they would not incur if
they chose not to attend college.
 Opportunity Cost and Comparative
Advantage
• If a party (an individual, a firm, or a country) is able to
produce a particular good or service at a lower
opportunity cost, that gives the party a comparative
advantage.

• It can be contrasted with absolute advantage which

refers to the ability of a party to produce a particular
good at a lower absolute cost than another. 
 Comparative advantage versus Competitive Advantage

• A competitive advantage is an advantage over competitors

gained by offering consumers greater value, either by means of
lower prices or by product differentiation.
• Michael Porter identified two basic types of competitive
advantage cost advantage and differentiation advantage.
• A competitive advantage exists when the firm is able to deliver
the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage).
• Thus, a competitive advantage enables the firm to create
superior value for its customers and superior profits for itself.
• Economics: the study of how society manages its scarce resources
(allocates its scarce resources among alternative uses), e.g.
– how people decide what to buy,
how much to work, save, and spend.
– how firms decide how much to produce,
how many workers to hire
– how society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other
needs.
– Time is scarce resources- there’s just not enough time to do
everything we’d like to do.
– Economics is everywhere!
• Individuals and firms allocate their limited resources to make
themselves better off.
 Microeconomics Vs. Macroeconomics
• Microeconomics looks at some portion of the economy.
 It studies how households and firms make decisions and
interact in markets.
 It examines how consumers choose between goods, how
workers choose between jobs, how a business decides
what to produce and what production method to use.
• Macroeconomics looks at totals for the economy as a
whole.
– Study of economy-wide phenomena including inflation,
unemployment, and economic growth.
 Whereas microeconomics examines the output in one
market, macroeconomics examines the total output of
the economy.
 Macroeconomics
 Macroeconomic forces affect all of us in our daily
lives.
 Inflation rates influence the prices we pay for goods
and services and, in turn, the value of our incomes
and our savings.
 Interest rate determine the cost of borrowing and the
yield on bank accounts and bonds.
 Exchange rates affect our command over foreign
products as well as the value of our foreign assets
 Numerous macro variables-ranging from
unemployment to productivity-are equally important
in shaping the economic environment in which we
live.
 Which is the Focus of Microeconomics?
Macroeconomics?
1. Why in 2010 did ‘Country A’ produce 20 million tones
of wheat and 90 million tones of steel?
2. Why did the wheat sell for $300 per ton and the steel for
700 per ton?
3. Why was United States output 3 percent higher in 2011
than in 2010?
4. Why did employment rise by 2 million in that one year’s
time?
5. Why did plumbers earn, on the average, $18 per hour,
steelworkers earn $14 per hour, typists $8 per hour?
 What is an economy?
• An economy is a complex entity made up of various decision
makers making choices and bargaining with others to find a
deal.
• These choices involve how the nation will use its resources to
produce and distribute goods and services.
• There are four elements (economic agents) to an economy
that interact via markets:
 households that provide the workforce and who consume
products;
 businesses that employ and produce;
 governments that regulate and intervene;
 trade-markets abroad that influence production and
consumption
 Therefore, economics studies the way in which choices are
made within an economy.
The economy
 Chapter 23: Measuring a Nation’s Income
The Measurement of GDP
• The most widely accepted measure of national output is
gross domestic product (GDP).
• GDP refers to the market value of all final goods and
services produced within a country in a given period of
time.
• “GDP is the market value…”
– Market prices - reflect the value of the goods
• GDP measures the total income of everyone in the
economy.
• GDP measures the total expenditure on the economy’s
output of goods and services.
 Because every transaction has a buyer and a seller,
the total expenditure in the economy must equal the
total income in the economy.
 This implies that every dollar of expenditure by a
buyer must become a dollar of income to a seller.
 When Joe paints Jane’s house for $1,000, that $1,000
is income to Joe and expenditure by Jane.
 Therefore, GDP can be measured by using either the
expenditures approach, which sums the amount
paid for final goods and services, or the income
approach, which measures the income received for
producing products and services.
 Economy’s Income & Expenditure
• The circular flow model can help us to understand the two
approaches used to measure GDP: expenditures approach &
income approach.
• Circular-flow diagram – assumptions:
– Markets
• Goods and services
• Factors of production
– Households
• Spend all of their income
• Buy all goods and services
– Firms
• Pay wages, rent, profit to resource owners
Figure 1: The Circular-Flow Diagram

Households buy goods

and services from firms,
and firms use their
revenue from sales to
pay wages to workers,
rent to landowners, and
profit to firm owners.
GDP equals the total
amount spent by
households in the market
for goods and services. It
also equals the total
wages, rent, and profit
paid by firms in the
markets for the factors of
production.
• The central challenge in measuring GDP is to avoid double
counting the same output more than once.
Example 1:
• Imagine that Company A, a forestry company, cuts trees in
a forest it owns and sells the wood to company B for $1000.
Company B, a furniture company used the wood and
produced tables and chairs, which it then sells to a retailer
(Company C) for $2,500. Company C ultimately sells the
tables and chairs to consumers for $3000. Calculate total
output.
• One may add up the sales price of every transaction ($1000
+$2500+$3000)=$6500 (?) Or
• One may sums the value added at each stage ($1000+1500+
$500)=$3000 (?)
• Value added refers to new output created at each
stage of production
• More precisely, value added (or output created)
equals the value of production at each stage minus
the value of intermediate goods that used to produce
it.
• Another way of avoiding the over-counting problem
is to focus exclusively on final sales.
• Since consumers paid Company C, the retailer, $3000
for the final furniture, we can conclude that $3000
worth of total output was created.
• GDP is the market value of all final goods and
services produced within a country over a given year.
 Example 1: Calculating total output Using Value Added

Sales Cost of Value

price - material inputs added
Company A (Forestry $1000 $0 $1000
Company)
Company B (furniture $2500 $1000 $1500
company)
Company C (retailer, $3000 $2500 $500
to consumer )
Total $6500 $3500 $3000
 Example 2: Calculating total output Using Value Added

Sales Cost of Value

price- material inputs added
Firm A (Metal Mining) $90 $0 $90
Firm B (Metal $150 $90 $60
Processing)
Firm C (Firm Creation) $400 $150 $250
Firm D (Bicycle $500 $400 $100
Wholesaler)
Bike Shop $700 $500 $200
Total $1,840 $1,140 $700
 The Measurement of GDP
“… of all…”
–All items produced in the economy
• And sold legally in markets
–Excludes most items
• Produced and sold illicitly
• Produced and consumed at home
 The Measurement of GDP
• “… final…”
– Value of intermediate goods is already included in
the prices of the final goods
• “… goods and services…”
– Tangible goods & intangible services
• “… produced…”
– Goods and services currently produced
 Transactions that don’t generate output either as a
good or service (i.e. the transaction doesn’t produce
anything) won’t count towards GDP.
 This is confusing!
• The tires that come
with the car is not
counted as a final
good
• However if you get a
flat and buy the same
tire it is counted as a
final good
 The Measurement of GDP
• “… within a country…”
– Goods and services produced domestically
• Regardless of the nationality of the producer
• “… in a given period of time”
– A year or a quarter

 GDP sums the dollar value of what has been produced in

the economy over the year, not what was actually sold.
 Class Exercises
1. In 2014, Mr. Kim bought a used Hyundai Equus from his local automobile dealer.
The Hyundai Equus was originally produced in the year 2010 and sold for $45,000
to the first owner who bought the car in 2010. The used car dealer bought the car in
2014 for $6000 from the original owner. Then, the dealer washed and waxed the car
right before selling it to Mr. Kim. Which of the following is counted towards GDP
in 2014?
a. The total price paid by Mr. Kim for the car.
b. The original market price of the car.
c. The amount the dealer paid the previous owner for the car.
d. The value of the wash and wax right before selling the car.

2. Which of the following would be counted in 2007’s GDP?

e. The value of a refrigerator manufactured in 2007 but not sold in 2007.
f. The 2007 salary of a used motorcycle salesperson.
g. The commissions earned by a real estate agent in 2007 in selling
condominiums built in 1997.
h. All of the above
i. None of the above
Case: Who said crime doesn’t pay? Counting prostitution and
drugs in the GDP figure has seen the UK’s economy overtake
France as fifth largest in the world

Source:

https://www.dailymail.co.uk/news/article-2888416/Who-said-crime-doesn-t-pay-Counting-prostitution-
drugs-GDP-figure-seen-UK-s-economy-overtake-France-fifth-largest-world.html
 The Components of GDP
• Y = C + I + G + NX
• Identity
• Y = GDP
• C = consumption
• I = investment
• G = government purchases
• NX = net exports
 The Components of GDP
Consumption (Consumer Purchases), C
• Consumption refers to the amount consumed by
private domestic residents.
– Spending by households on goods and services
– Exception: purchases of new housing
• Consumer purchases are usually subdivided into
durable goods, such as automobiles, furniture,
kitchen appliances;
Nondurable goods, such as food and clothing are;
Services, such as travel, recreation, beauty care,
hotels, and restaurants.
Investment Expenditures (Business Purchases, I)
• Investment refers to the amount put aside by private firms to
build new plant and equipment for future production.
• Investment expenditure can be divided into two categories:
expenditures on fixed investment goods and inventory
investment.
• Fixed investment goods are those that are useful over a long
period of time.
• Also included in fixed investment expenditures is the cost of
replacing existing investment goods that have become worn out
or obsolete.
• The market value of all investment goods that must be replaced
in a single year is referred to as the depreciation for that year.
• Inventory goods are final goods waiting to be sold that firms
have on hand at the end of the year.
Investment (Business Purchases), I
– Spending on new capital equipment, and structures (business
fixed investment)
– Household purchases of new housing (Residential fixed
investment)
– Inventory accumulation (inventory investment).
– Inventory investment is the increase in firms’ inventories of
goods.
– It doesn’t include raw materials and intermediate goods.
– Financial securities such as stocks and bonds don't
represent real production, but simply represent a transfer of
claims (ownerships).
– Financial securities are means of financing production.
• In macroeconomics, the term investment doesn’t include
purchases that merely reallocate existing assets among different
individuals.
• Investment, as macroeconomists use the term, creates new
capital.
• “Investment” in GDP does not mean purchases of financial
products.
• It is important to note that buying financial products is classed as
‘ saving,’ as opposed to investment.
Lets consider some examples. Suppose we observe these two
events:
 Smith buys for himself a 100-year old Victorian house.
 Jones builds for herself a brand-new contemporary house.
 What is total investment here?
• A product will only be counted in GDP one time in its life.
• Smith’s transaction has not created new housing for the
economy; it has merely reallocated existing housing.
• Smith’s purchase is investment for Smith, but it is
disinvestment for the person selling the house.
• By contrast, Jones has added new housing to the economy; her
new house is counted as investment.

Similarly, consider these two events:

 Gates buy $5 million in IBM stock from Buffett on New York
Stock Exchange.
 General Motors sells $10 million in stock to the public and
uses the proceeds to build a new car factory.
 What is total investment?
 Capital Gains
• Say you buy 100 shares of Samsung for $10 each at the
beginning of the year. You sell them for $20 on December
31, for a gain of $1000. What was produced?
• There was no tangible product or service that was produced
as a result of your buying, holding, or selling those shares.
• And the  $1000 profit you made came from someone else's
pocket. So Capital Gains, by their definition, are a zero-sum
transaction.
• Financial securities do not represent real production, but
simply represent the means to finance production.
 The Components of GDP
• Government purchases, G
• Government purchases refer to the amount used by the
government.
– Government consumption expenditure and gross investment
– Spending on goods and services
– By local, state, and federal governments
– Government makes two kinds of purchases. It buys labor
services from households and goods from business concerns.
– These purchased goods and hired labor are combined to
produce a variety of public goods such as public education,
police and fire protection, national defense.
– Does not include transfer payments such as social security,
Medicare, unemployment benefit (they are not production
transactions!).
 The Components of GDP
• The current account balance (net export) refers to the
amount of net exports of goods and services to
foreigners.
• Net exports, NX = Exports - Imports
– Exports
• Spending on domestically produced goods by
foreigners
– Imports
• Spending on foreign goods by domestic
residents
 Class Exercise
Place each of the following transactions in one of the
four components of expenditure: consumption,
investment, government purchases, and net exports:

a. Boeing sells an airplane to the Air Force

b. Boeing sells an airplane to American Airlines
c. Boeing sells an airplane to Air France.
d. Boeing sells an airplane to Amelia Earhart.
e. Boeing builds an airplane to be sold next year.
 Why are net exports (X-IM) included in the GDP
definition?
• GDP is supposed to capture the total value added of items
produced in the domestic economy during the relevant
accounting period.
• In principle, then, what GDP should measure is the total of
C plus I plus G all produced domestically, plus the value of
exports (X).
• However, in practice, the statistics for consumption,
investment, and government spending do not specify
whether any individual item purchased was produced
domestically or abroad.
• That is why it is necessary to subtract the total value of
imports (IM) to arrive at the correct figure.
 The Components of U.S. GDP
2015, GDP of the U.S.: almost $18 trillion
• GDP per person = $55,822
– Consumption = $38,218 per person
• 68% of GDP
– Investment = $9,402 per person
– Government purchases = $9,919 per person
– Net exports = - $1,657 per person
• Americans spent more on foreign goods than
foreigners spent on American goods
 Table 1: GDP and Its Components

This table shows total GDP for the U.S. economy in 2015
and the breakdown of GDP among its four components.
When reading this table, recall the identity
Y = C + I + G + NX.
 Measuring GDP from the Income-Side
 Another way of calculating GDP is by calculating the
national income.
• The income approach to measuring GDP is to add up all
the income earned by households and firms in a single
year.
• The rationale behind the income approach is that total
expenditures on final goods and services are eventually
received by households and firms in the form of wage,
profit, rent, and interest income.
• Therefore, by adding together wage, profit, rent, and
interest income, one should obtain the same value of GDP
as is obtained using the expenditure approach.
• The national income approach yields a figure which is
less than the expenditure approach, because indirect
business taxes are added to the expenditures approach.

• For example, if a consumer purchases for something one

dollar and there is a 6% sales tax, then the consumer will
have to pay $1.06 total.

• This $1.06 is added as a whole to the expenditure

approach.
• Hence, indirect business taxes must be added to national
income to more accurately compare it to the expenditure
approach.
• There are two types of expenditures, however, that are
included in the expenditure approach to GDP measurement but
do not provide households or firms with any form of income:
depreciation expenditures and indirect business taxes.

• The difference between the expenditure and income

approaches is illustrated in Figure illustrated next page.

• GDP=Wages (salaries, wages, fringe benefits, unemployment

insurance)+ Interest + Rent (income received from property,
royalties from patent and copy right) + profits (corporate
profits)+Capital Consumption Allowance (depreciation) +
Indirect Business Taxes (sales tax plus excise tax).
 If one subtracts depreciation and indirect business taxes from
these expenditures, one arrives at national income, which is
the sum of all wage, profit, rent, and interest incomes earned
in the same year.

 Corporate Profits = Corporate Income Taxes + Dividends + Undistributed

Corporate Profits (Retained Earnings).
 Estimate GDP Using the Expenditure and Income Approach
Items Value ($)
Transfer Payments 54
Interest Income 150
Depreciation 36
Wages 67
Gross Private Investment 124
Business Profits 200
Indirect Business Taxes 74
Rental Income 75
Net Exports 18
Net Foreign Factor Income 12
Government Purchase 156
Household Consumption 304

GDP (Expenditure)= $124+18+156+304=602

NI = W + R + i + PR =$67 + $75 + $150 + $200 =492
GDP (Income)= NI + Indirect Business Taxes + Depreciation = $492 + $74 + $36 =602
 Which of the following are actually included in this
year’s GDP? Explain your answer in each case
a. Social security payments received by a retired factory worker.
b. The unpaid services of a family member in painting the family
home.
c. The income of a dentist.
d. The money received by Smith when she sells her economics
textbook back to the bookstore.
e. The monthly allowance a college student receives from home.
f. Rent received on a two-bedroom apartment.
g. The money received by Josh when he resells his current-year-
model Honda automobile to Kim.
h. The purchase of 100 shares of GM common stock.
 Answers
a. Excluded. - A transfer payment from taxpayers for which no service is
rendered (in this year).
b. Excluded. - Not a market transaction. If any payment is made, it will
be within the family.
c. Included. - Payment for a final service. You cannot pass on a tooth
extraction!
d. Excluded. - Secondhand sales are not counted; the textbook is
counted only when sold for the first time.
e. Excluded. - A private transfer payment; simply a transfer of income
from one private individual to another for which no transaction in the
market occurs.
f. Included. - Payment for the final service of housing.
g. Excluded. - The production of the car had already been counted at the
time of the initial sale.
h. Excluded. - Merely the transfer of ownership of existing financial
assets.
 Calculating GDP: Summary
GDP can be calculated three ways:
 add up the value added of all producers;
 add up all spending on domestically produced final goods
and services, leading to the equation:
GDP = C+I+G+X-IM;
 add up the all income paid to factors of production
 Real versus Nominal GDP
• Total spending rises from one year to the next
– Economy-producing a larger output of goods and
services.
– And/or goods and services are being sold at
higher prices.

• Nominal GDP
– Production of goods and services valued at
current prices
 Real versus Nominal GDP
• Real GDP
– Production of goods and services valued at constant
prices.
– Designate one year as base year.
– Not affected by changes in prices.

• For the base year

– Nominal GDP = Real GDP
 Table 2: Real and Nominal GDP

This table shows how to calculate real GDP, nominal GDP, and the GDP deflator
for a hypothetical economy that produces only hot dogs and hamburgers.
 Real versus Nominal GDP
• The GDP deflator
– Ratio of nominal GDP to real GDP times 100
– Is 100 for the base year
– Measures the current level of prices relative to the
level of prices in the base year.
– Can be used to take inflation out of nominal GDP
(“deflate” nominal GDP).
– RGDP= NGDP/GDP deflator
 Real versus Nominal GDP
• Inflation
– Economy’s overall price level is rising
• Inflation rate
– Percentage change in some measure of the price
level from one period to the next

=(171-100) X100 = 71 %
100
 Real GDP over recent history
• The GDP data
– Real GDP grows over time
– Growth – average 3% per year since 1965
– Growth is not steady
• GDP growth interrupted by recessions
 Real GDP over recent history
• The business cycle is the downward and upward movement of
GDP around its long term growth trend.
• It is irregular and largely unpredictable fluctuations in
employment and output of goods and services.
• Recession
– Two consecutive quarters of falling GDP
– Real GDP declines
– Lower income
– Rising unemployment
– Falling profits
– Increased bankruptcies
• The business cycle is the pattern of expansion, contraction
and recovery in the economy.
 Figure 2: Real GDP in the Unites States

This figure shows quarterly data on real GDP for the U.S. economy since 1965.
Recessions—periods of falling real GDP—are marked with the shaded vertical bars.
 Business
Business Cycle-one
Real GDP Cycle-one cycle
cycle through
through 44 phases
phases

Peak
Peak
per year

rye
ov
Re

c
Re
c
Expansion
es
si
on

Trough

One cycle Time

 Business Cycle-one cycle through 4 phases

 The trended level of output is the highest level of production an

economy can sustain (the “maximum sustainable level of output”).
Causes of Fluctuations
Innovation
Random events
Wars ; political events
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable and non durable
 Example: The Russian Economic Recession
• The Russian economy grew rapidly between 2000 and 2007,
but growth decelerated after the 2008-09 global financial
crisis, and since mid-2014 Russia has moved into recession.
• A number of short-term factors have caused recession: lower
oil prices, the conflict with Ukraine, European Union and
United States sanctions against Russia and Russian counter-
sanctions.
• However Russia’s negative output trends have deeper
structural and institutional roots.
• These include oil and commodity dependence and an
unfriendly business and investment climate underpinned by
poor governance.
 GDP
• GDP–“the best single 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.
 GDP
• 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
 Income Inequality in OECD Countries, 2011

Notes: The Gini coefficient ranges from 0 (when all people have identical incomes) to 1 (when the richest person
has all the income). Market incomes are labor earnings, capital incomes and savings. Disposable income is market
income plus social transfers less income taxes
• GDP only counts the value of final products produced within a
geographical boundary of a country.
• If U.S. citizens are working in Canada, they do not contribute to
the U.S. GDP, but Canada’s GDP and U.S. GNP.
• Gross National Product (GNP)is the total market value of all
final goods and services produced annually by the citizens of a
country.
• GDP sums the dollar value of what has been produced in the
economy over the year, not what was actually sold. For
example, used car sales are not included.
• GNP equals GDP plus net receipts of factor income from the rest
of the world.
• For instance, for the U.S., these net receipts are primarily the
income domestic residents earn on wealth they hold in other
countries less the payments domestic residents make to foreign
owners of wealth that is located in the domestic country.
• When you purchase a new book from the publisher,
the value of your purchase enters GDP.
• The paper and ink purchased by the publishing house
to produce the book are not counted separately in
GDP because their contribution to the value of
national output is already included in the book’s
price.
• Notice also that the sale of a used textbook does not
enter GDP , since it was counted in GDP at the time it
was first sold.
• Non-marketable goods and services that do not
involve market transactions, such as subsistence
production are not part of GDP.
• Some unpaid employment such as baby-sitting, house
cleaning are not counted in GDP.
• Underground activities: illegal or cash transactions
have no record. Government’s estimates on these
transactions are not accurate.
• Transfer payments: either government or private
transfer payments are not included because goods and
services are not produced in this process. Examples
are social security benefits or kid’s allowances.
Table 4:International differences in the underground
economy
Country Underground economy (% of GDP)
Bolivia 68
Zimbabwe 63
Peru 61
Thailand 54
Mexico 53
Argentina 29
Sweden 18
Australia 13
UK 12
Japan 11
Switzerland 9
USA 8
Source: Friedrich Schneider, Figures are for 2002
International differences: GDP & quality
of life
• Rich countries - higher GDP per person
– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries - lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
 International differences: GDP & quality
of life
• 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
 International differences: GDP & quality
of life

• Low GDP per person

– Fewer teachers per student
– Fewer televisions
– Fewer telephones
– Fewer paved roads
– Fewer households with electricity
 Table 3: GDP and the Quality of Life

The table shows GDP per person and three other measures of the
quality of life for twelve major countries.
 Think about it!
 According to the IMF, Luxembourg had the
2nd highest GDP per person in 2011, but its
total income ranked it 93rd in the world.
China was second in the world for national
income, but 92nd for income per person. How
can this be?
 Summary
• Because every transaction has a buyer and a
seller, the total expenditure in the economy
must equal the total income in the economy.
• Gross Domestic Product (GDP) measures an
economy’s total expenditure on newly produced
goods and services and the total income earned
from the production of these goods and services.
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
• GDP is divided among four components of
expenditure: consumption, investment,
government purchases, and net exports.
• GDP is a good measure of economic well-
being because people prefer higher to lower
incomes.
• It is not a perfect measure of well-being
because some things, such as leisure time and
a clean environment, aren’t measured by GDP.