Chapter 5 (Measuring a Nations Income) Flashcards
when would you prefer to enter the labor force?
in a year of economic expansion
The statistic might measure the ( All of the 6 statistics of macroeconomics).
total income of everyone in the economy (GDP), the rate at which average prices are rising or falling (inflation/deflation), the percentage of the labor force that is out of work (unemployment), total spending at stores (retail sales), or the imbalance of trade between Canada and the rest of the world (the trade deficit).
economics is divided into
two branches:
microeconomics and macroeconomics
Microeconomics is the study of
how individual households and firms make decisions and how they interact with one
another in markets
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 simultaneously.
What is GDP?
gross domestic product, or simply GDP, which measures the total income of a nation.
GDP is the most closely watched economic statistic because
it is thought to be the best single measure of a society’s economic well-being
GDP measures two things at once:
the total income of everyone in the economy
and the total expenditure on the economy’s output of goods and services.
The reason that GDP can perform the trick of measuring both total income and total
expenditure is that
these two things are really the same. For an economy as a whole, income must equal expenditure
An economy’s income is the same as its expenditure because
every transaction has two parties: a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.
Suppose, for instance, that Karen pays Doug $100 to mow her lawn. In this case, Doug is a seller of a service, and Karen is a buyer. Doug earns $100, and Karen spends $100. Thus, the transaction contributes equally to the economy’s income and to its
expenditure
GDP, whether measured as total income or total expenditure, rises by $100.
Circular flow diagram
Is the diagram showing income equals expenditure
We can compute GDP for this economy in one of two ways:
by adding up the total expenditure by households or by adding up the total income (wages, rent, and profit) paid by firms. Because all expenditure in the economy ends up as someone’s income, GDP is the same regardless of how we compute it.
Do households spend all their income?
No, they pay taxes and save for the future
• Gross domestic product (GDP) is the
market value of all final goods and services produced within a country in a given period of time.
GDP adds together many different kinds of products into a single measure of the value of economic activity.
To do this, it uses market prices.
Because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods. If the price of an apple is twice the price of an orange, then an apple contributes twice as much to GDP as does an orange.
GDP tries to be comprehensive
It includes all items produced in the economy
and sold legally in markets. GDP excludes most items produced and sold illicitly.
intermediate good
the paper made that’s used to make a card
final good
the final product, card made from paper
GDP includes only the value of blank goods.
final. It excludes double counting, the exception is when it’s added to inventory to sell in the future.
GDP includes?
All good and services that are currently produced within a given country and within a given time period (usually 3 month interval).
When the government reports the GDP for a quarter
it usually presents GDP “at an annual rate.” and making seasonal adjustment removing say holiday cycle
Therefore GDP is the
total expenditure of the economy
statistical discrepancy
is the difference in calculating total income in the economy vs. total expenditure, where they should be the same but data sources are not perfect
To do this, GDP (which we denote as Y) is divided into four components:
consumption (C), investment (I), government purchases (G), and net exports (NX)
This equation is an identity—an equation that must be true by the way the variables in the equation are defined
Y = C + I + G + N X
because each dollar of expenditure included in GDP is placed into one of the four components of GDP
the total of the four components must be equal to GDP
Consumption
is spending by households on goods and services.
Investment
is the purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of capital equipment, inventories, and structures.
Government purchases
include spending on goods and services by local, territorial, provincial, and federal governments. It includes the salaries of government workers and spending on public works.
Government payments on social assistance or pension plans?
Not part of GDP because GDP only measures production, things produced
Net exports
equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports)
net exports include goods and services produced abroad (with a minus sign) because
these goods and services are included in consumption, investment, and government purchases (with a plus sign) & it does not affect GDP.
net exports turned out to be a negative
value, it reflects the difference between two very large amounts
International trade is therefore very important to the Canadian economy
If total spending rises from one year to the next, one of
two things must be true:
(1) The economy is producing a larger output of goods
and services, or (2) goods and services are being sold at higher prices.
economists use a measure called real GDP
In particular, they want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services.
nominal GDP
the production of goods and services valued at current prices: 100 hot dogs x $1.00 = 100 and 50 hamburgers x $2.00 = 100 so total expenditure is
$200. We do this for every year
real GDP
the production of goods and services valued
at constant prices. first chose one year as a base year, we then use the price of the base year and multiply it by the quantity of the years. This gives us a measure of the amount produced that is not affected by changes in
prices, reflecting the economy’s ability to satisfy people’s needs and desires
Which GDP is a better gauge of economic well-being
real GDP
the GDP deflator
reflects the prices of goods and services but not the quantities produced
GDP deflator calculation
GDP deflator = (Nominal GDP /Real GDP) x 100
Because nominal GDP and real GDP must be the same in the base year, the GDP deflator for the base year always equals
100
The GDP deflator measures
the current level of prices relative to the level of
prices in the base year.
First, imagine that the quantities produced in the economy rise over time but prices remain the same.
In this case, both nominal and real GDP rise together, so the GDP deflator is constant
Now suppose, instead, that prices rise over time but
the quantities produced stay the same.
In this second case, nominal GDP rises but
real GDP remains the same, so the GDP deflator rises as well
Notice that, in both cases, the GDP deflator reflects
what’s happening to prices, not quantities.
The inflation rate
is the percentage change in some measure of the price level from one period to the next
inflation calculation is
inflation= [(nomial GDP/real GDp)-1] x 100, The deflator for current year/by base year-1 x100. 171/100-1 x 100 = 71%
The most obvious feature of these data is
real GDP grows over time.
the output of goods and services produced in Canada
has grown on average about
the output of goods and services produced in Canada
has grown on average about
The second feature of the GDP data is that
growth is not steady. The upward climb of real GDP is occasionally interrupted by periods during which GDP
declines, called recessions
(There is no ironclad rule for when we say that a recession has occurred, but a good rule of thumb
is two consecutive quarters of falling real GDP
Much of macroeconomics is aimed at explaining the long-run growth and short-run fluctuations in real GDP
So we need different models for the two purposes
The bars show the net amount of foreign direct investment in Canada. The fact that the bars have in recent years fallen below zero is an indication
that Canadians now own more of foreign firms than foreigners own of Canadian firms
foreign direct investment (FDI) is a measure of how much of
Canadian industry is owned by non-Canadians.
Canadian direct investment abroad (CDIA)
show how much Canadians own and control
of industry in the rest of the world.
GDP measures both the economy’s total income and the economy’s total expenditure on goods and services. Thus, GDP per person tells us the income and expenditure of the average person in the economy
Because most people would prefer to receive higher income and enjoy higher expenditure, GDP per person seems a natural measure of the economic well-being of the average individual
GDP is not, however, a perfect measure of well-being.
Some things that contribute to a good life are left out of GDP.
GDP uses market prices to value goods and services, it excludes the value of almost all
activity that takes place outside of markets
Another thing that GDP excludes is the quality
of the environment (pollution harms people)
GDP also says nothing about the distribution of income. A society in which 100 people have annual incomes of $50 000 has GDP of $5 million and, not surprisingly, GDP per person of $50 000. So does a society in which 10 people earn $500 000 and 90 suffer with nothing at all. Few people would look at those two
situations and call them equivalent.
GDP per person tells us what happens to the
average person, but behind the average lies a large variety of personal experiences. The “In the News” feature that appears later in this chapter addresses the question of whether the distribution of income has become too skewed toward the rich. The suggestion is that a focus on GDP has caused society to fail to
appreciate the importance of how aggregate income is distributed across society.
Researchers Lars Osberg and Andrew Sharpe of the Centre for the Study of Living Standards have taken account of the criticisms of GDP as a measure of well-being to produce what they consider to be a preferred
measure. Their index identifies the measure of GDP as just one of a long list of indicators of well-being.
Also included in their index are measures of poverty,
human capital, income inequality, natural resource consumption, and environmental degradation, in addition to other factors
Tire table also shows life expectancy (the expected life span at birth) and a measure of “human development” developed by researchers at the United Nations. The Human Development Index (HDI) provides a summary measure of
the quality of life enjoyed by people living in each country. The HDI ranking depends on measures of years of education, inequality of income, gender equality, employment levels, measures of
poverty, and many more. The HDI emphasizes that there is more to human development than simply GDP; that a country with high GDP may nonetheless be “poor” if, for example, life expectancy is short and the distribution of income is very uneven
Countries with low GDP per person tend to have more
infants with low birth weight, higher rates of infant mortality, higher rates of maternal mortality, higher rates of child malnutrition, and less common access
to safe drinking water. In countries with low GDP per person, fewer school-aged children are actually in school, and those who are in school must learn with fewer teachers per student. These countries also tend to have fewer televisions, fewer telephones, fewer paved roads, and fewer households with electricity.
In rich countries, such as Norway, the United
States, Canada, and Japan, people can expect to live into, or nearly into, their eighties, and citizens enjoy the benefits summarized by high values of the HDI.
the correlation between real GDP per person and the HDI is very high at
73 percent
Quantifying the behavior of the economy with statistics such as GDP is, therefore,
the first step to developing a science of macroeconomics
