Chap 10, Mankiw – Measurement of national incomeSlide 2Slide 3Slide 4III.The Circular-Flow Diagram – equivalence of the 2 methods of measuring GDPIII. Other ways of defining National IncomeSlide 7Slide 8Slide 9Slide 10Real and Nominal GDPSlide 12Slide 13Slide 14Slide 15GDP and Its Components (1998)1Chap 10, Mankiw – Measurement of national income •Introduction and definition of the GDP•Gross domestic product – meaning of the term•Circular flow diagram and the methods of calculating GDP•Other measures of national income•Quality of life and GDP2I. Introduction and definition of the GDPNational income can be defined in various ways. The GDP defintion is the most usual. GDP =• market value • marketed goods vs. non-marketed goods: • final goods and services• produced •within a country:3II. 2 ways of measuring GDP: 1. expenditure method of calculating GDP: GDP = Y = C = consumption expenditure, I = investment expenditure, G = Government expenditure, X = exports, M = imports42. income method of calculating GDPadd “value-added” by all firms together; value-added = sum of value added by all firms = Why?5III.The Circular-Flow Diagram – equivalence of the 2 methods of measuring GDPFirmsHouseholdsMarket for Factors of ProductionMarket for Goods and ServicesSpendingRevenueWages, rent, and profitIncomeGoods & Services soldGoods & Services boughtLabor, land, and capitalInputs for production6III. Other ways of defining National Income•Gross National Product (GNP)•Net National Product (NNP)•National Income•Personal Income•Disposable Personal Income7•Gross national product (GNP) is the total income •It differs from GDP by •Net National Product (NNP) is the total income of •Depreciation is the wear and tear on the economy’s NNP is an useful measure because8•National Income (NI) is the total income earned by a nation’s •It differs from NNP by excluding this is excluded because•Personal income (PI) is the total earnings that Unlike national income, it excludes In addition, it includes9•Disposable personal income (DI) is the income It equals personal income minus10IV. Adjusting GDP for inflationRecap: GDP is measured at market prices which fluctuate form period to periodReal GDP: Nominal GDP: GDP deflator =11Real and Nominal GDPYearPrice ofHot dogsQuantity ofHot dogsPrice of HamburgersQuantity ofHamburgers2001 $1 100 $2 502002 $2 150 $3 1002003 $3 200 $4 15012Real and Nominal GDPCalculating Nominal GDP:2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $2002002 ($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $6002003 ($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) = $120013Real and Nominal GDPCalculating Real GDP (base year 2001):2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $2002002 ($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $3502003 ($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $50014Real and Nominal GDPCalculating the GDP Deflator:2001($200/$200) x 100 = 1002002($600/$350) x 100 = 1712003($1200/$500) x 100 = 24015V. Quality of life vs. GDPGDP is positively correlated with but not identical to economic well-being.Factors that creates a difference between the two:16Net Exports -2 %GDP and Its Components (1998)Consumption 68 %Investment16%Government
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