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%eventh &dition
Macroeconomics
Principles of
N. Gregory Mankiw
CHAPTER
10
Measuring a
Nations Income
W
ojciechGerson(1831-1
901)
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In this chapter,
look for the answers to these questions
What is Gross Domestic Product (GDP)?
How is GDP related to a nations total incomeand spendin!?
What are the components of GDP?
How is GDP corrected for inflation?
Does GDP measure societ"s well#$ein!?
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%icro &s' %acro
Microeconomicshe stud" of how indi&idual households andfirms make decisions, interact with one anotherin markets'
Macroeconomicshe stud" of the econom" as a whole'
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Income and *+penditure
Gross Domestic Product (GDP)measurestotal income of e&er"one in the econom"'
GDP also measures total e+penditure on theeconom"s output of !s'
For the economy as a whole,
income equals expenditure
because every dollar a buyer spends
is a dollar of income for the seller.
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he -ircular#.low Dia!ram
a simple depiction of the macroeconom" illustrates GDP as spendin!, re&enue,
factor pa"ments, and income
Preliminaries Factors of productionare inputs like la$or,
land, capital, and natural resources'
Factor paymentsare pa"ments to the factors
of production (e'!', wa!es, rent)'
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6
he -ircular#.low Dia!ram
Households
own the factors of production,sell/rent them to firms for income
$u" and consume !oods ser&ices
Households.irms
Firms
$u"/hire factors of production,
use them to produce !oodsand ser&ices
sell !oods ser&ices
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he -ircular#.low Dia!ram
%arkets for.actors ofProduction
Households.irms
Income (0GDP)Wa!es, rent,profit (0GDP)
.actors ofproduction
1a$or, land,capital
2pendin! (0GDP)
G 2$ou!ht
G 2sold
3e&enue (0GDP)%arkets for
Goods 2er&ices
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What his Dia!ram 4mits
he !o&ernment collects ta+es, $u"s !s
he financial s"stem matches sa&ers suppl" of funds with
$orrowers demand for loans
he forei!n sector trades !s, financial assets, and currencies
with the countr"s residents
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"
5the market &alue of all final !oods
ser&ices produced within a countr"
in a !i&en period of time'
Gross Domestic Product (GDP) Is5
Goods are valued at their market prices, so:
All goods measured in the same units
(e.g., dollars in the U..!
"hings that don#t have a market value aree$cluded, e.g., housework you do for yourself.
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#$
5the market &alue of all final !oods
ser&ices produced within a countr"
in a !i&en period of time'
Gross Domestic Product (GDP) Is5
Final goods:intended for the end user
Intermediate goods: used as components
or ingredients in the production of other goods
G%& only includes final goods'they already
embody the value of the intermediate goods
used in their production.
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##
5the market &alue of all final !oods
ser&ices produced within a countr"
in a !i&en period of time'
Gross Domestic Product (GDP) Is5
G%& includes tangible goods
(like %%s, mountain bikes, beer!
and intangible services
(dry cleaning, concerts, cell phone service!.
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#2
5the market &alue of all final !oods
ser&ices produced within a countr"
in a !i&en period of time'
Gross Domestic Product (GDP) Is5
G%& includes currently produced goods,
not goods produced in the past.
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#3
5the market &alue of all final !oods
ser&ices produced within a countr"
in a !i&en period of time'
Gross Domestic Product (GDP) Is5
G%& measures the value of production that occurs
within a country#s borders, whether done by its own
citi)ens or by foreigners located there.
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#4
5the market &alue of all final !oods
ser&ices produced within a countr"
in a !i&en period of time'
Gross Domestic Product (GDP) Is5
Usually a year or a *uarter (+ months!
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#5
he -omponents of GDP
3ecall GDP is total spendin!'
.our components -onsumption (C) In&estment (I)
Go&ernment Purchases (G) 6et *+ports (NX)
hese components add up to GDP (denotedY)
Y = C + I + G +
NX
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-onsumption (-)
is total spendin! $" households on !s' 6ote on housin! costs
.or renters,
consumption includes rent pa"ments'
.or homeowners,
consumption includes the imputed rental &alue
of the house, $ut not the purchase price or
mort!a!e pa"ments'
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In&estment (I)
is total spendin! on !oods that will $e used inthe future to produce more !oods'
includes spendin! on capital equipment (e'!', machines, tools) structures (factories, office $uildin!s, houses) in&entories (!oods produced $ut not "et sold)
ote: Investmentdoes notmean the purchase of financial
assets like stocks and bonds.
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Go&ernment Purchases (G)
is all spendin! on the !s purchased $" !o&tat the federal, state, and local le&els'
Ge+cludes transfer payments, such as2ocial 2ecurit" or unemplo"ment insurance$enefits'
he" are not purchases of !s'
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6et *+ports (67)
NX0 e+ports 8 imports
*+ports represent forei!n spendin! on theeconom"s !s'
Imports are the portions ofC
,I, and
Gthat are spent on !s produced a$road'
9ddin! up all the components of GDP !i&es
Y = C + I + G +
NX
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2$
:'2' GDP and Its -omponents, ;
8=,@@
A,BA
B,C>@
>C,>A
E>,>C + =
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GDP and *conomic Well#Fein!
$eal !P per capita is t%e main indicator o"t%e average person&s standard o" living#
Fut GDP is not a perfect measure ofwell#$ein!'
3o$ert Kenned" issued a &er" eloquent"et harsh criticism of GDP
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36
Gross %omestic Pro&uct'
(' &oes not allow for t)e )ealt) of our
c)il&ren* t)e +uality of t)eir e&ucation*
or t)e ,oy of t)eir play.It &oes not
inclu&e t)e -eauty of our poetry or
t)e strengt) of our marriages* t)e
intelligence of our pu-lic &e-ate or
t)e integrity of our pu-lic officials.It measures neit)er our courage* nor our wis&om*
nor our &eotion to our country.It measures eeryt)ing* in s)ort* e/cept
t)at w)ic) makes life wort)w)ile* an& it can tell us
eeryt)ing a-out 0merica e/cept w)y we are prou& t)at
we are 0mericans.1
-Senator Robert Kennedy, 1968
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GDP Does 6ot Lalue
the qualit" of the en&ironment leisure time
non#market acti&it", such as the child care
a parent pro&ides at home an equita$le distri$ution of income
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hen Wh" Do We -are 9$out GDP?
Ha&in! a lar!e GDP ena$les a countr" to afford$etter schools, a cleaner en&ironment,health care, etc.
%an" indicators of the qualit" of life are
positi&el" correlated with GDP' .or e+ample5
GDP d 1if * t i =; t i
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E< E=
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GDP and 9&era!e 2choolin! in =; countries