23,Measuring a Nations Income,ECON2010 Lecture 1,CHAPTER 23 MEASURING A NATIONS INCOME,In this chapter, look for the answers to these questions:,What is Gross Domestic Product (GDP)? How is GDP related to a nations total income and spending? What are the components of GDP? How is GDP corrected for inflation? Does GDP measure societys well-being?,CHAPTER 23 MEASURING A NATIONS INCOME,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 countrys total income and expenditure.,CHAPTER 23 MEASURING A NATIONS INCOME,Income and Expenditure,Gross Domestic Product (GDP) measures total income of everyone in the economy. GDP also measures total expenditure on the economys output of g&s.,For the economy as a whole, income equals expenditure, because every dollar of expenditure by a buyer is a dollar of income for the seller.,CHAPTER 23 MEASURING A NATIONS INCOME,The Circular-Flow Diagram,is a simple depiction of the macroeconomy. illustrates GDP as spending, revenue, factor payments, and income. First, some 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),CHAPTER 23 MEASURING A NATIONS INCOME,FIGURE 1: The Circular-Flow Diagram,Households: own the factors of production, sell/rent them to firms for income buy and consume g&s,CHAPTER 23 MEASURING A NATIONS INCOME,FIGURE 1: The Circular-Flow Diagram,Households,Firms: buy/hire factors of production, use them to produce g&s sell g&s,CHAPTER 23 MEASURING A NATIONS INCOME,FIGURE 1: The Circular-Flow Diagram,CHAPTER 23 MEASURING A NATIONS INCOME,What This Diagram Omits,The government collects taxes purchases 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 countrys residents,CHAPTER 23 MEASURING A NATIONS INCOME,the market value of all final goods & services produced within a country in a given period of time.,Gross Domestic Product (GDP) Is,Goods are valued at their market prices, so:,GDP measures all goods using the same units (e.g., dollars in the U.S.), rather than “adding apples to oranges.” Things that dont have a market value are excluded, e.g., housework you do for yourself.,CHAPTER 23 MEASURING A NATIONS INCOME,the market value of all final goods & services produced within a country in a given period of time.,Gross Domestic Product (GDP) Is,Final goods are intended for the end user.,Intermediate goods are used as components or ingredients in the production of other goods. GDP only includes final goods, as they already embody the value of the intermediate goods used in their production.,CHAPTER 23 MEASURING A NATIONS INCOME,the market value of all final goods & services produced within a country in a given period of time.,Gross Domestic Product (GDP) Is,GDP includes tangible goods (like DVDs, mountain bikes, beer),and intangible services (dry cleaning, concerts, cell phone service).,CHAPTER 23 MEASURING A NATIONS INCOME,the market value of all final goods & services produced within a country in a given period of time.,Gross Domestic Product (GDP) Is,GDP includes currently produced goods, not goods produced in the past.,CHAPTER 23 MEASURING A NATIONS INCOME,the market value of all final goods & services produced within a country in a given period of time.,Gross Domestic Product (GDP) Is,GDP measures the value of production that occurs within a countrys borders, whether done by its own citizens or by foreigners located there.,CHAPTER 23 MEASURING A NATIONS INCOME,the market value of all final goods & services produced within a country in a given period of time.,Gross Domestic Product (GDP) Is,usually a year or a quarter (3 months).,CHAPTER 23 MEASURING A NATIONS INCOME,The Components of GDP,Recall: GDP is total spending. Four components: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) These components add up to GDP (denoted Y):,Y = C + I + G + NX,CHAPTER 23 MEASURING A NATIONS INCOME,Consumption (C),is total spending by households on g&s. 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.,CHAPTER 23 MEASURING A NATIONS INCOME,Investment (I),is total spending on goods 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),Note: “Investment” does not mean the purchase of financial assets like stocks and bonds.,CHAPTER 23 MEASURING A NATIONS INCOME,G