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MEASURING A NATION’S INCOMEETP Economics 102
Lecturer: Jack Wu
RECENT HOT MACROECONOMIC ISSUES
Sovereign Bond Crisis in Europe QE policy in America Fiscal Cliff in USA Depreciation of Japanese Yen (Abenomics) Soft Landing in China Taiwan’s recession
MAJOR MACROECONOMIC CONCERNS
National Income: Low Economic Growth Rate Employment Opportunity: High Unemployment
Rate Cost of Living: High Inflation Rate Trade: High Trade Deficit Direct Investment: Low FDI (Foreign Direct
Investment) Income Distribution: High Gini Coefficient Foreign Reserve: Shortage of foreign reserve
MAJOR ECONOMIC INDICATOR OF TAIWAN
YearGDP Per
Capita(US$)
GDP Growth Rate(%)
Average GDP
Growth Rate(10 year,%)
Unemployment Rate(%)
CPI Growth Rate(%)
AverageCPI Growth Rate(%)
Gini coefficient
Foreign reserve(billio
n US$)
1970 393 11.40 9.4 1.70 3.60 3.4 0.2941975 978 4.90 - 2.40 5.20 - 0.3121980 2385 7.80 9.8 1.23 19.00 10.4 0.2771985 3290 13.50 - 2.91 -0.20 - 0.290 225.61990 8124 3.80 7.7 1.67 4.10 3.1 0.312 724.41995 12918 6.38 - 1.79 3.70 - 0.317 903.12000 14704 5.80 6.2 2.99 1.30 2.6 0.326 1067.42001 13147 -1.65 - 4.57 -0.01 - 0.350 1222.12002 13404 5.26 - 5.17 -0.20 - 0.345 1616.62003 13773 3.67 - 4.99 -0.28 - 0.343 2066.32004 15012 6.19 - 4.44 1.62 - 0.338 2417.42005 16051 4.70 - 4.13 2.30 - 0.340 2532.92006 16491 5.44 - 3.91 0.60 - 0.339 2661.52007 17154 5.98 - 3.91 1.80 - 0.340 2703.02008 17399 0.73 - 4.14 3.53 - 0.341 2917.12009 16359 -1.87 3.2 5.85 -0.87 0.9 0.345 3482.02010 18503 4.72 - 5.21 -0.96 - 0.342 3820.12011 20006 4.07 - 5.39 1.42 - 0.342 3855.52012 20386 1.32 - 4.24 1.93 - - 4031.7
Source: Directorate-General of Budget, Accounting and Statistics, Statistic Abstract of National Income, Executive Yuan, Taiwan.
EXAMPLES OF MACROECONOMIC QUESTIONS
Macroeconomics answers questions like the following:Why is average income high in some
countries and low in others? Why do prices rise rapidly in some time
periods while they are more stable in others?
Why do production and employment expand in some years and contract in others?
ECONOMY’S INCOME AND EXPENDITURE
When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.
For an economy as a whole, income must equal expenditure because:Every transaction has a buyer and a seller.Every dollar of spending by some buyer is
a dollar of income for some seller.
GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is a measure
of the income and expenditures of an economy.
It is the total market value of all final goods and services produced within a country in a given period of time.
The equality of income and expenditure can be illustrated with the circular-flow diagram.
DEFINITION OF GDP
“GDP is the Market Value . . .”Output is valued at market prices.
“. . . Of All Final . . .” It records only the value of final goods, not
intermediate goods (the value is counted only once).
“. . . Goods and Services . . . “ It includes both tangible goods (food,
clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).
DEFINITION OF GDP “. . . Produced . . .”
It includes goods and services currently produced, not transactions involving goods produced in the past.
“ . . . Within a Country . . .” It measures the value of production within the
geographic confines of a country. “. . .
“. . . In a Given Period of Time.” It measures the value of production that takes
place within a specific interval of time, usually a year or a quarter (three months).
COMPONENTS OF GDP GDP includes all items produced in the
economy and sold legally in markets. 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.
FORMULA 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
COMPONENTS: C AND I 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.
COMPONENTS: G AND NX
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.
TAIWAN’S GDP (2012)
Consumption 8465030 (Million)
Investment 2795080 (Million)
Government Purchase 1746482 (Million)
Export 10325648 (Million)
Import 9254141 (Million)
GDP 14077099 (Million)
Net Income from Abroad 454191 (Million)
GNP 14531290 (Million)
NOMINAL VERSUS REAL 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.
EXAMPLE
Copyright©2004 South-Western
EXAMPLE: CONTINUED
Copyright©2004 South-Western
EXAMPLE: CONTINUED
Copyright©2004 South-Western
GDP DEFLATOR An accurate view of the economy requires
adjusting nominal to real GDP by using the GDP deflator.
The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.
THE GDP DEFLATOR The GDP deflator is calculated as follows:
G D P d efla to r =N o m in a l G D P
R eal G D P 1 0 0
EXAMPLE: CONTINUED
Copyright©2004 South-Western
THE GDP DEFLATOR Converting Nominal GDP to Real GDP
Nominal GDP is converted to real GDP as follows:
R eal G D PN o m in a l G D P
G D P d efla to r2 0 X X2 0 X X
2 0 X X
1 0 0
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.
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 AND ECONOMIC WELL-BEING Some things that contribute to well-being are
not included in GDP. The value of leisure. The value of a clean environment. The value of almost all activity that takes place
outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
OTHER MEASURES OF INCOME
Gross National Product (GNP) Net National Product (NNP) National Income (NI) Personal Income (PI) Disposable Personal Income (DPI)
GROSS NATIONAL PRODUCT
GNP is the total income earned by a nation’s permanent residents. It differs from GDP by including income that citizens earn abroad and excluding income that foreigners earn here.
NET NATIONAL PRODUCT
NNP is the total income of a nation’s residents (GNP) minus losses from depreciation (“consumption of fixed capital).
NATIONAL INCOME
NI 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 subsidy.
PERSONAL INCOME
PI is the income that households and non-corporate businesses receive.
Unlike NI, it excludes retained earnings and subtracts corporate income taxes and contributions for social insurance. It also includes interest incomes from holding government bonds and government transfer payments.
DISPOSABLE PERSONAL INCOME
DPI is the income that households and non-corporate businesses have left after satisfying all their obligations to the government (such as personal taxes).
GREEN GDP
Green GDP is an index of economic growth with the environmental consequences of that growth factored in.
Green GDP=Traditional GDP- environmental/ecological costs
GDP(PPP)
Gross Domestic Product (GDP) at Purchasing Power Parity (PPP)
GDP PER CAPITA 2012GDP per capita (nominal)
GDP per capita(Purchasing Power Parity)
Singapore 51162 60410
Japan 46736 36266
Hong Kong 36667 51494
South Korea 23113 32272
Taiwan 20328 38749
Malaysia 10304 16922
China 6076 9162
Thailand 5678 10126
GDP PER CAPITA (PPP) WORLD RANKING
Ranking GDP (PPP) Ranking GDP(PPP)
3. Singapore 60410 19. Taiwan 38749
5. Hong Kong 51494 20. Belgium 37883
6. USA 49922 21. Denmark 37657
8. Switzerland 45418 22. UK 36941
9. Canada 42734 23. Finland 36395
10. Australia 42640 24. Japan 36266
11. Austria 42409 25. France 35548
15. Sweden 41191 26. Israel 32312
18. Germany 39028 27. Korea 32272
DISCUSSION QUESTIONS Identify the immediate effect of each of the
following circumstances on U.S. GDP and its components.
a. James receives a unemployment compensation check.
b. John buys an Italian sports car. c. Henry buys domestically produced
tools for his construction company.