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1、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 inflat
2、ion?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 w
3、ith 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 expendit
4、ure,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 produc
5、tion 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 incomebuy and consum
6、e 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&ssell 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 go
7、vernmentcollects taxespurchases g&sThe financial systemmatches savers supply of funds with borrowers demand for loansThe foreign sectortrades 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 wi
8、thin 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
9、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 oth
10、er 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 includ
11、es 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 curre
12、ntly 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
13、 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
14、,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
15、: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 go
16、ods.includes spending oncapital 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,Government Purchases(G)
17、,is all spending on the g&s purchased by govt at the federal,state,and local levels.G excludes transfer payments,such as Social Security or unemployment insurance benefits.These payments represent transfers of income,not purchases of g&s.,CHAPTER 23 MEASURING A NATIONS INCOME,Net Exports(NX),NX=expo
18、rts importsExports represent foreign spending on the economys g&s.Imports are the portions of C,I,and G that are spent on g&s produced abroad.Adding up all the components of GDP gives:,Y=C+I+G+NX,CHAPTER 23 MEASURING A NATIONS INCOME,U.S.GDP and Its Components,2009,CHAPTER 23 MEASURING A NATIONS INC
19、OME,Countries with the Highest GDP,2008,A C T I V E L E A R N I N G 1:GDP and its components,22,In each of the following cases,determine how much GDP and each of its components is affected(if at all).A.Debbie spends$200 to buy her husband dinner at the finest restaurant in Boston.B.Sarah spends$1800
20、 on a new laptop to use in her publishing business.The laptop was built in China.C.Jane spends$1200 on a computer to use in her editing business.She got last years model on sale for a great price from a local manufacturer.D.General Motors builds$500 million worth of cars,but consumers only buy$470 m
21、illion worth of them.,A C T I V E L E A R N I N G 1:Answers,23,A.Debbie spends$200 to buy her husband dinner at the finest restaurant in Boston.B.Sarah spends$1800 on a new laptop to use in her publishing business.The laptop was built in China.,A C T I V E L E A R N I N G 1:Answers,24,C.Jane spends$
22、1200 on a computer to use in her editing business.She got last years model on sale for a great price from a local manufacturer.D.General Motors builds$500 million worth of cars,but consumers only buy$470 million of them.,CHAPTER 23 MEASURING A NATIONS INCOME,Real versus Nominal GDP,Inflation can dis
23、tort economic variables like GDP,so we have two versions of GDP:One is corrected for inflation,the other is not.Nominal GDP values output using current prices.It is not corrected for inflation.Real GDP values output using the prices of a base year.Real GDP is corrected for inflation.,CHAPTER 23 MEAS
24、URING A NATIONS INCOME,EXAMPLE:,Compute nominal GDP in each year:2002:2003:2004:,Increase:,CHAPTER 23 MEASURING A NATIONS INCOME,EXAMPLE:,Compute real GDP in each year,using 2002 as the base year:,Increase:,2002:2003:2004:,CHAPTER 23 MEASURING A NATIONS INCOME,EXAMPLE:,In each year,nominal GDP is me
25、asured using the(then)current prices.real GDP is measured using constant prices from the base year(2002 in this example).,CHAPTER 23 MEASURING A NATIONS INCOME,EXAMPLE:,The change in nominal GDP reflects both prices and quantities.,The change in real GDP is the amount that GDP would change if prices
26、 were constant(i.e.,if zero inflation).,CHAPTER 23 MEASURING A NATIONS INCOME,Nominal and Real GDP in the U.S.,1965-2005,Real GDP(base year 2000),Nominal GDP,CHAPTER 23 MEASURING A NATIONS INCOME,The GDP Deflator,The GDP deflator is a measure of the overall level of prices.Definition:,One way to mea
27、sure the economys inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.,CHAPTER 23 MEASURING A NATIONS INCOME,EXAMPLE:,Compute the GDP deflator in each year:,2002:,2003:,2004:,A C T I V E L E A R N I N G 2:Computing GDP,33,Use the above data to solve the
28、se problems:A.Compute nominal GDP in 2004.B.Compute real GDP in 2005.C.Compute the GDP deflator in 2006.,A C T I V E L E A R N I N G 2:Answers,34,A.Compute nominal GDP in 2004.B.Compute real GDP in 2005.,A C T I V E L E A R N I N G 2:Answers,35,C.Compute the GDP deflator in 2006.Nom GDP=Real GDP=GDP
29、 deflator=,CHAPTER 23 MEASURING A NATIONS INCOME,GDP and Economic Well-Being,Real GDP per capita is the main indicator of the average persons standard of living.But GDP is not a perfect measure of well-being.Robert Kennedy issued a very eloquent yet harsh criticism of GDP:,Gross Domestic Product,“do
30、es not allow for the health of our children,the quality of their education,or the joy of their play.,It does not include the beauty of our poetry or the strength of our marriages,the intelligence of our public debate or the integrity of our public officials.,It measures neither our courage,nor our w
31、isdom,nor our devotion to our country.,It measures everything,in short,except that which makes life worthwhile,and it can tell us everything about America except why we are proud that we are Americans.”-Senator Robert Kennedy,1968,CHAPTER 23 MEASURING A NATIONS INCOME,GDP Does Not Value:,the quality
32、 of the environmentleisure timenon-market activity,such as the child care a parent provides his or her child at homean equitable distribution of income,CHAPTER 23 MEASURING A NATIONS INCOME,Then Why Do We Care About GDP?,Having a large GDP enables a country to afford better schools,a cleaner environ
33、ment,health care,etc.Many indicators of the quality of life are positively correlated with GDP.For example,GDP and Life Expectancy in 12 Countries,Life expectancy(in years),Real GDP per capita,2002,U.S.,Germany,Japan,Nigeria,Mexico,Russia,Brazil,China,Pakistan,Bangladesh,India,Indonesia,GDP and Adul
34、t Literacy in 12 Countries,Adult Literacy(%of population),Real GDP per capita,2002,U.S.,Germany,Japan,Russia,Nigeria,Mexico,Brazil,China,Pakistan,Bangladesh,India,Indonesia,GDP and Internet Usage in 12 Countries,Internet Usage(%of population),Real GDP per capita,2002,U.S.,Germany,Japan,Mexico,Russia
35、,Brazil,China,CHAPTER 23 MEASURING A NATIONS INCOME,CHAPTER SUMMARY,Gross Domestic Product(GDP)measures a countrys total income and expenditure.The four spending components of GDP include:Consumption,Investment,Government Purchases,and Net Exports.Nominal GDP is measured using current prices.Real GD
36、P is measured using the prices of a constant base year,and is corrected for inflation.GDP is the main indicator of a countrys economic well-being,even though it is not perfect.,CHAPTER 23 MEASURING A NATIONS INCOME,Practice Questions,Ch 23 Questions for Review:8.Ch 23 Problems&Applications:1,4,9.Add
37、itional Questions:GDP figures are often subsequently revised,as is the case with the figures in Table 1 of the textbook.Go find the revised figures in www.bea.gov and prepare the revised Table 1.It is often claimed by economists that investment component of Chinas GDP is too high.Search on the internet for the Chinas GDPs and its investment components for the most recent three years,and then calculate the percentage of investment in GDP of these years to verify the claim.,
