Measuring a Nation's Income

Measuring a Nation's Income - Chapter15:Measuringa...

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Chapter 15:Measuring a  Nation’s Income Lectures Supratim Das Gupta
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Key Questions to address: What is 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 the well-being of a  society?
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3 Micro vs. Macro 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 the country’s total income and  expenditure. 
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4 Income and Expenditure Gross Domestic Product (GDP)   measures  total income of everyone in the economy.   (this is not the formal defn. of GDP, we’ll  come to it later) GDP also measures total expenditure on  the economy’s output of goods and  services.  Thus for the economy as a whole we  have the identity:  income equals  expenditure , as every dollar that a buyer  spends is a dollar of income for the seller. 
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Circular-Flow Diagram We already introduced the circular-flow  diagram: Two parties: households and firms Households: own the factors of production,  sell/rent them to firms for income and buy  goods and services Firms: buy the factors of production, use  them to produce goods and services and  sell goods and services
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6 The Circular-Flow Diagram Markets for  Factors of  Production Households Firms Income (=GDP) Wages, rent,  profit (=GDP) Factors of  production Labor, land,  capital Spending (=GDP) G & S  bought G & S  sold Revenue (=GDP) Markets for  Goods &  Services
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7 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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8 GDP  is the market value  of all final goods  & services produced within a country  in a given period of time.                    Formal definition of GDP 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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9 …the market value of all final  goods & 
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