Chapter 10 Measuring a Nation s Income 1 Economics Microeconomics study of how households and firms make decisions interact in markets Macroeconomics study of economy wide phenomena o Including inflation unemployment economic growth Economy s Income and Expenditure GDP Gross Domestic Product o Measures total income of everyone in economy o Measures total expenditures on economy s output of goods and Economy as a whole income expenditure Circular flow diagram assumptions services o Markets Goods services Factors of production land all natural resources labor human resources capital man made resources o Households Spend all of their income Buy all goods and services o Firms Pay wages rent profit to resource owners Seasonal adjustment looks beyond seasonal changes that reveal the economy s production of more goods and services during certain times of the year i e Holiday season Chapter 10 Measuring a Nation s Income 2 Circular Flow Diagram Households buy goods and services from firms and firms use their revenue from sales to pay wages to workers rent to landowners and profit to firm owners GDP total amount spent by households in the market for goods and services total wages rent and profit paid by firms in the markets for the factors of production GDP Market value of all final goods services produced within a country within a given time yr or quarter o Market prices are reflected o Sold legally in markets o Excludes most items goods produced sold illicitly at home sold for free o Value of intermediate foods already included in price of final goods o Tangible goods intangible services o Goods service currently produced used goods are not included not produced in current period o Government also adds up total income of economy statistical discrepancy difference between these two differences of GDP Components of GDP Y C I G NX Chapter 10 Measuring a Nation s Income 3 GDP Consumption Investment Government Spending Net Exports Exports Imports GDP per capita per person benchmark for comparing wealth between countries based on an avg Neg exports more imports than exports Total spending increases from yr to yr econ Producing larger output of goods services or goods services are sold at higher prices Private Consumption spending by households on goods services o Except purchases of new housing Private Investment future use purchases of new housing Government spending local state fed Expenditures gross investment o Does not include transfer payments outflow w o inflow giving something out for free e g social security Real vs Nominal GDP Real GDP production of goods and service valued at price of constant yr not affected by current prices o Uses base price determined by government updated periodically to produce real price At base price nominal GDP real GDP o Discounts price increases o best to gauge economy at the specific period overall growth Nominal GDP current level of production x current prices o Assumed by default o Production of goods and services valued at current price Chapter 10 Measuring a Nation s Income 4 GDP Deflator Measures current level of prices relative to level of prices in the base year GDP Deflator Ratio of Nominal GDP Real GDP x 100 Use 100 for bases yr Can be used to take inflation out of nominal GDP deflates nominal GDP Inflation Economy s overall price level increases Inflation rate change in measure of price level from one period to the next new old old x 100 o o Inflation in Yr 2 GDP deflator in Yr 2 GDP deflator in Yr 1 x 100 GDP deflator in Yr 1 Real GDP Over Recent History GDP data o Real GDP increases over time age 3 per year since 1965 o Growth not steady interrupted by recessions Recession two consecutive quarters of falling real GDP o Lower income o Rising Employment o Falling profits o Increasing bankruptcies o some benefit from recessions bankruptcy lawyers doctors insurance GDP best single measure of econ Well being of a society o Econ s total income and total expenditures o Best measurement real GDP per capita Chapter 10 Measuring a Nation s Income 5 o Measures ability to obtain many of the inputs into a worthwhile life o Larger GDP Higher quality of life better healthcare edu HOWEVER GDP is not the perfect measure of econ Well being because it excludes o Leisure value of all activity outside the market quality of environment cost of environment distribution of income International Differences GDP Quality of Life Richer countries higher GDP per person longer life expectancy rates literacy rates internet usage Poorer countries more infants with lower birth weights increased infant mortality rates maternal mortality child malnutrition limited access to safe drinking water less school attendance Purchasing power valued amount at which money is worth ability to buy goods