Download Measuring a Nation's Income: Understanding Gross Domestic Product (GDP) and more Study notes Introduction to Macroeconomics in PDF only on Docsity! CHAPTER 5 MEASURING A NATION’S INCOME Review Problems: 1, 7, 11, 12 Introduction Macroeconomics is the study of the economy as a whole. The goal of macroeconomics is to explain the economic changes that affect many households, firms, and markets at once. Collecting data and keeping track of statistics helps economists monitor what is happening in the macroeconomy. 1 Definition of microeconomics - the study of how households and firms make decisions and how they interact in markets Definition of macroeconomics - the study of economy-wide phenomena, including inflation, unemployment, and economic growth 10-1 The Economy's Income and Expenditure Definition of Gross Domestic Product - the market value of all final goods and services produced within a country in a given period of time. It not only measures the total income of everyone in the economy but the total expenditure as well. 2 FYI: Three Other Measures of Income These three are other common measures of income. For monitoring the general economy it doesn't really matter which measure of income is used since all fluctuate together. 1.Net National Product - the total income of the residents of a nation subtracting losses from depreciation. Depreciation is the wear and tear on the capital stock, sometimes called "consumption of fixed capital." 2.Personal Income - the income that households and noncorporate business receive. 5 It does not include corporate retained earnings since that money hasn't yet been paid out to stockholders, but it does include the interest income that households receive from holding government debt and income received as transfer payments from government programs like welfare and Social Security. 3.Disposable Personal Income – Personal Income less taxes 6 10-3 The Components of GDP Consider GDP as the sum of all the expenditures in the economy. GDP (which is denoted Y) is divided into four components: 1. Consumption, 2. Investment 3. Government Purchases 4. Net Exports Y = C + I + G + NX 7 Real GDP answers the question: What would be the value of the goods and services produced this year if we valued these goods and services at the prices that prevailed in some specific year (the base year) in the past? Definition of nominal GDP - the production of goods and services valued at current prices Definition of real GDP - the production of goods and services valued at constant prices; it is sometimes called constant GDP or GDP adjusted for inflation; it is a better gauge than nominal GDP of how the economy is doing since it measures production changes only and no price changes. 10 Definition of GDP deflator - a measure of the price level calculated as the ratio of nominal GDP to real GDP. We decompose nominal GDP changes into changes in real GDP and changes in the GDP deflator. The first measures production changes and the latter measures changes in prices. Case Study: Real GDP over Recent History Real GDP grows over time but not steadily. The interruptions in the trend increase are called recessions. Macroeconomists attempt to explain both long-run growth and short-run fluctuations in real GDP. 11 10-5 GDP and Economic Well-Being GDP is an indirect measure of the quality of life of a nation's society. It leaves some things out though: leisure quality of the environment the value of activities that take place outside a market like child-rearing and volunteer work. 12
