Lec-2 - Chapter 23 - Nation’s Income.ppt

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Gross domestic product (GDP) is the total market value of newly produced, final goods and services within a country in a given period of time (which is generally one year).

Gross Domestic Product


GDP Calculation: An economy produces three products GDP Calculation: An economy produces three products A,A, II and and S S

Pa Qa Pi Qi Ps Qs

10 10 12 10 08 10

How can we calculate the total market value?

Total market value = Pa.Qa + Pi.Qi + Ps.Qs = 10*10 + 12*10 + 08*10 = 100 + 120 + 80 = 300


GDP Calculation: In reality, A, I and S is the output of Agriculture sector, Industrial sector and Services sector

How can we calculate the share of a particular sector in total GDP?

• Share of Agriculture sector = Value of Agricultural output/GDP*100

• Share of Industrial sector = Value of Industrial output/GDP*100

• Share of Services sector = Value of Services sector output/GDP*100

For real data and chart, see ES-2011-12,

Chapter 1, P11 Fig 1.4 and P16 Table 1.1.


Intermediate Vs Final goods and “Value added”

A farmer produces wheat which are sold to a miller at Rs100.

The miller processes the wheat into flour, which he then sells to a baker for Rs.180.

The baker uses the flour to bake bread which is then sold to shops for Rs.250.

The shopkeeper then sell the bread to final consumers for Rs.300.

Value addition

Farmer’s Rs. 100

Miller’s Rs. 80

Baker’s Rs. 70

Shopkeeper’s Rs. 50

Total Rs. 300

Any step in the production process that improves the product for the customer and results in a higher net worth.


Which of these activities should be recorded in GDP?Which of these activities should be recorded in GDP?

A person purchases a locally produced, brand new BMW 316i in Rs

2,800,000.

2 months later, he sells the BMW 316i in Rs 2,400,000.

James works in a Car Washing center. He washes a client’s car.

James washes his father’s car at home.

Mr. Naveed (A real estate agent) sells a New Bungalow worth Rs. 35

million to a client and charges Rs. 1 million as commission.

03 months later, he re-sale the same Bungalow in Rs. 40 million to

another party and receives Rs. 1.2 million as commission.

Pension, Unemployment payment, Cash transfer in Income support

schemes.


The Circular-Flow Diagram

The equality of income and expenditure can be illustrated with the circular-flow diagram.

Circular Flow – 2 Sector model

ConsumersConsumers ProducersProducers

Consumption spending (C)

Income (Y) – Wages, Rent, Interest & Profit

Labour, Land, Capital and Enterprise

Goods and Services

Factors of production

2 Sector modelSaving and Investment

ConsumersConsumers ProducersProducers


Income (Y) – Wages, Salaries, Rent, Interest & Profit

Savings (S)Savings (S) Investment (I)Investment (I)

Financial Sector

Circular Flow of Income

Three Sector Model Consumers, Producers, Financial and Government Sectors

Consumers Producers

Savings (S)

Government Sector

Investment (I)


Income (Y)

Taxes (T)

GovernmentSpending (G)

Taxes (T)

Direct transfers

Circular Flow of Income

Four Sector Model Consumers, Producers, Financial and Government Sectors

Consumers Producers

Savings (S)

Government Sector

Investment (I)


Income (Y)

Taxes (T)

GovernmentSpending (G)

Taxes (T)

Direct transfers

External Sector Imports


There are three approaches to measuring GDP: the expenditure approach (final sales), the production approach (value added) and the income approach (incomes of the factors of production).

Expenditure approach: We add the expenditures of final consumers on products and services.

Income /Cost approach: In this approach, consideration is given to the costs incurred by the producer within his own operation.

Value added approach: It measures the contribution to output made by each producer.

Reference for Real methodology

Pbs.gov.pk….Sections…National accounts….Methodology…P2

The Measurement of GDP


Farmer (Oranges) Juice seller

Transactions of Mr. A Transactions of Mr. B

Wages paid (Rs.200)

Oranges purchased (Rs.500)

Taxes (Rs.150)

Wages (Rs.150)

Oranges sold to Mr. B Rs.500 Taxes (Rs.100)

Oranges sold to public Rs.500 Juice sold to public Rs.1000

Calculate GDP in an economy, having two producers only…


What Is Not Counted in GDP?

GDP excludes most items that are produced and consumed at home and that never enter the marketplace.

It excludes items produced and sold illicitly, such as illegal drugs.


Other Measures of Income

Gross National Product (GNP) Net National Product (NNP) National Income Personal Income Disposable Personal Income


Gross National Product

Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals).

It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here.


Net National Product (National Income at market price)

Net National Product (NNP) is the total income of the nation’s residents (GNP) minus losses from depreciation.

Depreciation is the wear and tear on the economy’s stock of equipment and structures.


National Income (at factor cost)

National Income is the total income earned by a nation’s residents in the production of goods and services.

It differs from NNP by excluding indirect business taxes (such as sales taxes) and including business subsidies.

ES 2011-12, chapter 1, p-16, table 1.1


Personal Income

Personal income is the income that households and noncorporate businesses receive.

Unlike national income, it excludes retained earnings, which is income that corporations have earned but have not paid out to their owners.

In addition, it includes household’s interest income and government transfers.


Disposable Personal Income

Disposable personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government.

It equals personal income minus personal taxes and certain nontax payments.


The Components of GDP

GDP (Y ) is the sum of the following:

Consumption (C ) Investment (I ) Government Purchases (G ) Net Exports (NX )

Y = C + I + G + NX



Consumption (C): The spending by households on goods and

services, with the exception of purchases of new housing.

Investment (I): The spending on capital equipment,

inventories, and structures, including new housing.



Government Purchases (G): The spending on goods and services by local,

state, and federal governments. Does not include transfer payments because

they are not made in exchange for currently produced goods or services.

Net Exports (NX): Exports minus imports.


Real versus Nominal GDP

Nominal GDP values the production of goods and services at current prices.

Real GDP values the production of goods and services at constant prices.


Real versus Nominal GDP

An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.


GDP Deflator

The GDP deflator measures the current level of prices relative to the level of prices in the base year.

It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.


GDP Deflator

100GDP Real

GDP Nominal=deflator GDP

The GDP deflator is calculated as follows:


100X )deflator (GDP) GDP (Nominal

=GDP Real20xx

20xx20xx

Converting Nominal GDP to Real GDP

Nominal GDP is converted to real GDP as follows:


GDP and Economic Well-Being

GDP is the best single measure of the economic well-being of a society.

GDP per person tells us the income and expenditure of the average person in the economy.


GDP and Economic Well-Being

Higher GDP per person indicates a higher standard of living.

GDP is not a perfect measure of the happiness or quality of life, however.


GDP, Life Expectancy, and Literacy

Country Real GDP perPerson (1997)

LifeExpectancy

AdultLiteracy

United States $29,010 77 years 99%

Japan 24,070 80 99

Germany 21,260 77 99

Mexico 8,370 72 90

Brazil 6,480 67 84

Russia 4,370 67 99

Indonesia 3,490 65 85

China 3,130 70 83

India 1,670 63 53

Pakistan 1,560 64 41

Bangladesh 1,050 58 39

Nigeria 920 50 59


Summary

Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy.

Gross Domestic Product (GDP) measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.


Summary

GDP is the market value of all final goods and services produced within a country in a given period of time.

GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports.


Summary

Nominal GDP uses current prices to value the economy’s production. Real GDP uses constant base-year prices to value the economy’s production of goods and services.

The GDP deflator--calculated from the ratio of nominal to real GDP--measures the level of prices in the economy.

Documents

Lec-2 - Chapter 23 - Nation’s Income.ppt