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1、8 THE DATA OF MACROECONOMICSCopyright 2004 South-Western23Measuring a Nations Income Copyright 2004 South-WesternMeasuring a Nations IncomeMicroeconomicsMicroeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.MacroeconomicsM
2、acroeconomics is the study of the economy as a whole.Its goal is to explain the economic changes that affect many households, firms, and markets at once.Copyright 2004 South-WesternMeasuring a Nations IncomeMacroeconomics answers questions like the following:Why is average income high in some countr
3、ies and low in others? Why do prices rise rapidly in some time periods while they are more stable in others? Why do production and employment expand in some years and contract in others? Copyright 2004 South-WesternTHE ECONOMYS INCOME AND EXPENDITUREWhen judging whether the economy is doing well or
4、poorly, it is natural to look at the total income that everyone in the economy is earning.Copyright 2004 South-WesternTHE ECONOMYS INCOME AND EXPENDITUREFor an economy as a whole, income must equal expenditure because:Every transaction has a buyer and a seller.Every dollar of spending by some buyer
5、is a dollar of income for some seller. Copyright 2004 South-WesternTHE MEASUREMENT OF GROSS DOMESTIC PRODUCTThe equality of income and expenditure can be illustrated with the circular-flow diagram.Figure 1 The Circular-Flow DiagramSpendingGoods andservicesboughtRevenueGoodsand servicessoldLabor, lan
6、d,and capitalIncome = Flow of inputs and outputs = Flow of dollarsFactors ofproductionWages, rent,and profit FIRMSProduce and sellgoods and servicesHire and use factorsof production Buy and consumegoods and servicesOwn and sell factorsof productionHOUSEHOLDS Households sellFirms buyMARKETSFORFACTORS
7、 OF PRODUCTION Firms sellHouseholds buyMARKETSFORGOODS AND SERVICESCopyright 2004 South-WesternCopyright 2004 South-WesternTHE MEASUREMENT OF GROSS DOMESTIC PRODUCTGross domestic product (GDP) is a measure of the income and expenditures of an economy.It is the total market value of all final goods a
8、nd services produced within a country in a given period of time.Copyright 2004 South-WesternTHE MEASUREMENT OF GROSS DOMESTIC PRODUCT“GDP is the Market Value . . .”Output is valued at market prices.“. . . Of All Final . . .”It records only the value of final goods, not intermediate goods (the value
9、is counted only once).“. . . Goods and Services . . . “It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). Copyright 2004 South-WesternTHE MEASUREMENT OF GROSS DOMESTIC PRODUCT“. . . Produced . . .”It includes goods and services cu
10、rrently produced, not transactions involving goods produced in the past.“ . . . Within a Country . . .”It measures the value of production within the geographic confines of a country.Copyright 2004 South-WesternTHE MEASUREMENT OF GROSS DOMESTIC PRODUCT“. . . In a Given Period of Time.”It measures th
11、e value of production that takes place within a specific interval of time, usually a year or a quarter (three months). Copyright 2004 South-WesternTHE COMPONENTS OF GDPGDP includes all items produced in the economy and sold legally in markets.Copyright 2004 South-WesternTHE COMPONENTS OF GDP What Is
12、 Not Counted in GDP?GDP excludes most items that are produced and consumed at home and that never enter the marketplace.It excludes items produced and sold illicitly, such as illegal drugs.Copyright 2004 South-WesternGross Domestic Product The circular flow diagram shows the transactions among house
13、holds, firms, governments, and the rest of the world.Copyright 2004 South-WesternGross Domestic Product These transactions take place in factor markets, goods markets, and financial markets.Copyright 2004 South-WesternGross Domestic Product Firms hire factors of production from households. The blue
14、flow, Y, shows total income paid by firms to households.Copyright 2004 South-WesternGross Domestic Product Households buy consumer goods and services. The red flow, C, shows consumption expenditure. Copyright 2004 South-WesternGross Domestic Product Households save, S, and pay net taxes, T. Firms bo
15、rrow some of what households save to finance their investment.Copyright 2004 South-WesternGross Domestic Product Firms buy capital goods from other firms. The red flow I represents this investment by firms.Copyright 2004 South-WesternGross Domestic Product Governments buy goods and services, G, and
16、borrow or repay debt if spending exceeds or is less than net taxes.Copyright 2004 South-WesternGross Domestic Product The rest of the world buys goods and services from us, X, and sells us goods and services, M. Net exports are X M.Copyright 2004 South-WesternGross Domestic Product And the rest of t
17、he world borrows from us or lends to us depending on whether net exports are positive or negative.Copyright 2004 South-WesternGross Domestic Product The blue and red flows are the circular flow of expenditure and income. The green flows are financial flows.Copyright 2004 South-WesternGross Domestic
18、Product The sum of the red flows equals the blue flow.Copyright 2004 South-WesternGross Domestic Product That is: Y = C + I + G + X MCopyright 2004 South-WesternTHE COMPONENTS OF GDPGDP (Y) is the sum of the following:Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)Y = C + I
19、+ G + NXCopyright 2004 South-WesternTHE COMPONENTS OF GDPConsumption (C):The spending by households on goods and services, with the exception of purchases of new housing.Investment (I):The spending on capital equipment, inventories, and structures, including new housing.Copyright 2004 South-WesternT
20、HE COMPONENTS OF GDPGovernment Purchases (G):The spending on goods and services by local, state, and federal governments.Does not include transfer payments because they are not made in exchange for currently produced goods or services.Net Exports (NX):Exports minus imports.Table 1 GDP and Its Compon
21、entsCopyright2004 South-WesternCopyright 2004 South-WesternGDP and Its Components (2001)Consumption 69%Government Purchases18%Net Exports -3 %Investment16%Copyright 2004 South-WesternREAL VERSUS NOMINAL GDPNominal GDP values the production of goods and services at current prices.Real GDP values the
22、production of goods and services at constant prices. Table 2 Real and Nominal GDPCopyright2004 South-WesternTable 2 Real and Nominal GDPCopyright2004 South-WesternTable 2 Real and Nominal GDPCopyright2004 South-WesternCopyright 2004 South-WesternREAL VERSUS NOMINAL GDPAn accurate view of the economy
23、 requires adjusting nominal to real GDP by using the GDP deflator.Copyright 2004 South-WesternThe GDP DeflatorThe GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.It tells us the rise in nominal GDP that is attributable to a rise in prices rat
24、her than a rise in the quantities produced. Copyright 2004 South-WesternThe GDP DeflatorThe GDP deflator is calculated as follows:Copyright 2004 South-WesternThe GDP DeflatorConverting Nominal GDP to Real GDPNominal GDP is converted to real GDP as follows:Table 2 Real and Nominal GDPCopyright2004 So
25、uth-WesternFigure 2 Real GDP in the United StatesBillions of1996 Dollars$10,0009,0008,0007,0006,0005,0004,0003,0001970197519801985199020001995Copyright 2004 South-WesternCopyright 2004 South-WesternGDP AND ECONOMIC WELL-BEINGGDP is the best single measure of the economic well-being of a society. GDP
26、 per person tells us the income and expenditure of the average person in the economy.Copyright 2004 South-WesternGDP AND ECONOMIC WELL-BEINGHigher GDP per person indicates a higher standard of living.GDP is not a perfect measure of the happiness or quality of life, however.Copyright 2004 South-Weste
27、rnGDP AND ECONOMIC WELL-BEINGSome things that contribute to well-being are not included in GDP.The value of leisure.The value of a clean environment.The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of
28、volunteer work.Table 3 GDP, Life Expectancy, and LiteracyCopyright2004 South-WesternCopyright 2004 South-WesternSummaryBecause 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 economys
29、 total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.Copyright 2004 South-WesternSummaryGDP 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
30、 components of expenditure: consumption, investment, government purchases, and net exports.Copyright 2004 South-WesternSummaryNominal GDP uses current prices to value the economys production. Real GDP uses constant base-year prices to value the economys production of goods and services.The GDP defla
31、torcalculated from the ratio of nominal to real GDPmeasures the level of prices in the economy.Copyright 2004 South-WesternSummaryGDP 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, arent measured by GDP.
