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Chapter 5 Measuring a Nation’s Income

Chapter 5 Measuring a Nation’s Income. Content of this chapter. A nation’s income and expenditure The measurement of Gross Domestic Product (GDP) Real GDP vs. Nominal GDP Evaluation of GDP. The Economy’s Income and Expenditure.

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Chapter 5 Measuring a Nation’s Income

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  1. Chapter 5Measuring a Nation’s Income

  2. Content of this chapter • A nation’s income and expenditure • The measurement of Gross Domestic Product (GDP) • Real GDP vs. Nominal GDP • Evaluation of GDP

  3. The Economy’s Income and Expenditure • How to measure a country’s economic wellbeing and living standard? • GDP • Should we measure total income? • Should we measure total expenditure?

  4. Measure income?How about a drug mafia?

  5. Measure Expenditure? • Does expenditure tell us a country’s total income? • Yes, every expenditure has two parties: buyers spend money and sellers earn money • What’s the exact relationship between expenditure and income?

  6. Relationship between expenditure and income

  7. Conclusion • They are the same for a country • Expenditure = Income

  8. The Measurement of Gross Domestic Product • GDP is the market value of all final goods and services produced within a country in a given period of time.

  9. Market value… • Of all… • Homeowner • Drug smuggling • Services produced at home (Annual salary for a stay-home housewife)

  10. Final… • Intermediate goods don’t count except…

  11. Goods and services… • Produced… • Goods produced in the past don’t count… used car

  12. Within a country… • GM sales in China don’t count • In a given period of time

  13. The Components of GDP • GDP (Y) Y = C + I + G + NX

  14. Consumption • Spending by households on goods and services. But not your house

  15. Investment • Purchase of goods that will be used in the future to produce more goods and servics. • inventory

  16. Government purchase • Not your social security check

  17. Government spending

  18. Net Export • Export – Import, Why?

  19. Real vs. Nominal • GDP measure the total spending => wellbeing of this country’s economy • So, if GDP has increased, what does this increase imply?

  20. Two possibilities • We work hard • Prices have increased

  21. We have to separate the price effect from real GDP number. • Real GDP: the production of goods and services valued at constant price. • Nominal GDP: the production of goods and services valued at current price.

  22. GDP deflator • Reflect the prices of goods and services but not the quantities produced. • GDP deflator = Nominal GDP/Real GDP (%) • Base year deflator = 100

  23. Real GDP of U.S.

  24. In the rest of this semester • Study the long-term trend of GDP • Study the short-term fluctuations of GDP

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