Lecture_3 - Measuring a Nations Income Measuring a Nations...

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Measuring a Nation’s Income Measuring a Nation’s Income Macroeconomics answers questions like the following: 0. Why is average income high in some countries and low in others? 1. Why do prices rise rapidly in some time periods while they are more stable in others? 2. Why do production and employment expand in some years and contract in others? THE ECONOMY’S INCOME AND EXPENDITURE 0. When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. THE ECONOMY’S INCOME AND EXPENDITURE 1. For an economy as a whole, income must equal expenditure because: 0. Every transaction has a buyer and a seller. 1. Every dollar of spending by some buyer is a dollar of income for some seller. Figure 1 The Circular-Flow Diagram THE MEASUREMENT OF GROSS DOMESTIC PRODUCT 2. Gross domestic product (GDP) is a measure of the income and expenditures of an economy. 3. GDP is the total market value of all final goods and services produced within a country in a given period of time. THE MEASUREMENT OF GROSS DOMESTIC PRODUCT 4. The equality of income and expenditure can be illustrated with the circular-flow diagram.
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THE COMPONENTS OF GDP 5. GDP includes all items produced in the economy and sold legally in markets. 6. What Is Not Counted in GDP? 2. GDP excludes most items that are produced and consumed at home and that never enter the marketplace. 3. It excludes items produced and sold illicitly, such as illegal drugs. THE COMPONENTS OF GDP GDP ( Y ) is the sum of the following: 3. Consumption (C) 4. Investment (I) 5. Government Purchases (G) 6. Net Exports (NX) Y = C + I + G + NX THE COMPONENTS OF GDP 7. Consumption (C) : 0. The spending by households on goods and services, with the exception of purchases of new housing. 8. Investment (I) : 1. The spending on capital equipment, inventories, and structures, including new housing. THE COMPONENTS OF GDP 9. Government Purchases (G) : 4. The spending on goods and services by local, state, and federal governments. 5. Does not include transfer payments because they are not made in exchange for currently produced goods or services. 10. Net Exports (NX): 6. Exports minus imports. Table 1 GDP and Its Components GDP and Its Components (2004) REAL VERSUS NOMINAL GDP
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11. Nominal GDP values the production of goods and services at current prices . 12. Real GDP values the production of goods and services at constant prices . Other Measures of Income 13.Gross National Product: total income earned by a nation’s permanent residents 14.Net National Product: Total income of a nation’s residents – losses from depreciation 15.National Income: total income earned by a nation’s residents in the production from goods and services 16.Personal Income: income that households and noncorporate business receive 17.Disposable personal income: personal income - taxes REAL VERSUS NOMINAL GDP 18.An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator. Table 2 Real and Nominal GDP
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Lecture_3 - Measuring a Nations Income Measuring a Nations...

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